At the end of 1924, International Match was a strange-looking operation. Ivar had produced two financial statements for the company: a “Statement of Assets and Liabilities” and a “Consolidated Profit and Loss Account.” These two statements corresponded to what investors generally knew as the balance sheet and income statement. The balance sheet was a snapshot of the value of a company’s assets and liabilities at a particular time, such as the end of a year or quarter. Typically, the values of assets were recorded at their original cost on the balance sheet. For example, if a company bought a building for 1 million dollars, it would record the value at 1 million dollars at the end of the period, even if the value of the building had gone up or down.
If the balance sheet was a snapshot, the income statement was a moving picture. It depicted how much money the company earned and spent during a particular year or quarter. The income statement typically would include a list of how much revenue a company generated, as well as expenses such as salaries, rent, interest payments, and taxes.
International Match’s 1924 Statement of Assets and Liabilities - the balance sheet - was a snapshot that could easily fit in a wallet. There were no detailed entries. The vast majority of the company’s assets - 26 million dollars out of 33 million dollars total - consisted of a single line item for “Land, Buildings, Machinery & Equipment.”18 There was no mention of the cash Lee Higginson had raised from investors just a year earlier, or any clues about where that money had gone.
The 1924 Consolidated Profit and Loss Account - the income statement - was an even less illuminating motion picture. The statement was not even typed, but instead was written out in longhand. All of the information came from Ivar. The company’s income was broken into just two items: “Sales” and “Income from Other Sources.”19 The bulk of the income was from foreign companies, but there was no explanation of what the “other sources” might have been or of which companies the “income” might have come from. Indeed, there was no explanation at all.
The company’s expenses for 1924 were small - just over a million dollars - and almost all of that (975,000 dollars) was interest owed on the 15 million dollar gold debentures. The remaining expenses were paltry: a few thousand dollars for salaries, a thousand dollars to pay rent, and 100 dollars of office expenses.20
Few people seemed to care that the information was incomplete. Indeed, International Match’s cursory financial statements were typical of corporate disclosure at the time. Even companies with securities listed on the New York Stock Exchange gave up scant detail. Fewer than one-third of Stock Exchange companies published quarterly reports, and those reports were brief. Another third of Stock Exchange companies didn’t publish any reports at all. There was even less disclosure from companies, such as International Match, with shares traded on the Curb Exchange.21 Anyone who wanted to invest in those companies did so in the dark, or not at all.
Even without detail, anyone who carefully examined the limited information in the income statements of International Match would have seen some strange early signs. International Match reported net profit for 1924 as 2.2 million dollars. Its net profit for 1923 had been just a little less: 2.1 million dollars.22 1922 was 2.0 million dollars, and 1921 was 1.9 million dollars.23
These numbers flashed two red lights. First, the steady increase in earnings suggested that International Match was engaging in earnings management, that is, manipulating earnings to smooth them over time. The match business was highly volatile, particularly during and after the world war. Prices were fluctuating, moving up in areas where Ivar had acquired a dominant share of the market, and moving down where competition still raged. Yet International Match reported steadily increasing income during these volatile periods. Of course, Ivar wasn’t alone. Earnings management was widespread during the 1920s, and even if investors noticed the smoothing it didn’t seem to bother them.
But International Match’s financial statements contained a second, more fundamental, warning. If International Match did not exist before 1923, how could it have had income during 1922 and 1921? Perhaps Ivar had included income from some predecessor companies. Perhaps the numbers were from American Kreuger & Toll, the failed effort led by Anders Jordahl that had focused more on being close to Broadway theaters than on negotiations with the American match industry. Investors could not tell which of Ivar’s other companies might have been responsible for International Match’s alleged income. Instead, they were led to believe that International Match had consistently been making money since 1921, more than a year before Ivar had sailed to New York to meet Donald Durant. Anyone who checked the dates would have known those numbers were wrong.
The partners at Lee Higginson weren’t bothered by these details any more than the people who invested in International Match. On October 29, 1924, the directors of International Match, including Donald Durant, Percy Rockefeller, and Frederic Allen, the Lee Higginson partner who served as Director of War Savings and head of Yale’s rowing committee, held a special meeting. But instead of questioning Ivar, or reining him in, they voted to give him new extraordinary powers. They formally authorized Ivar to transfer any amount of money out of International Match and to permit him to limit transfers into International Match to no more than necessary to meet the company’s quarterly dividend payments.24 Ivar had argued that they should keep all surplus profits outside of International Match, and therefore out of America, to avoid paying tax on those profits. The directors accepted that rationale and gave him the authority. They seemed unconcerned about where the money might go or what Ivar might do with it.
In December 1924, Lee Higginson arranged for International Match to raise more money, this time by selling an innovative financial instrument: participating preferred shares. Like gold debentures, participating preferred shares were a hybrid investment, part conservative and part aggressive. The “preferred” part meant that the investor would have seniority over “common” shares, which were still held by Swedish Match and the Swedish bank syndicate. This preference meant that if International Match became bankrupt, the preferred shares would be paid before the common shares. Thus, preferred shares were less risky than common shares.
But these were “participating” preferred shares, which meant they also participated in dividend payments along with common stock. Unlike the gold debentures, participating preferred shares could receive more than a 6.5 percent interest payment. If the common shares received dividends of, say, 12 percent, then so would the preferred shares - that was what it meant to “participate.” This new hybrid investment had substantial upside.
Most investors had never seen participating preferred shares. Nor were they aware of anyone using new participating preferred issues to refinance or recapitalize by paying off previously issued debentures. Such a new issue didn’t change the nature of Ivar’s business or make more money available. Instead, it simply reallocated the financial claims to future profits, giving investors more risk and upside, but a less secure claim on corporate assets.
In 1923, when Ivar and Lee Higginson had closed the gold debenture deal, many investors were still conservative, particularly when they were considering America’s first experience with a securities issue from Ivar. They had insisted on debentures, whose principal payment International Match was obligated to repay at a fixed rate during a fixed period of time. A year later, even the conservative investors had joined the mania coursing through the markets. Given their optimism, Ivar was able to switch to a more flexible capital base by refinancing. Unlike debentures, the 15.7 million dollars of participating preferred shares did not require repayment on a particular date. Effectively, International Match had shifted from a strict debt obligation to a more flexible equity obligation.
Ultimately, Lee Higginson sold nearly half a million participating preferred shares for $35 each, to raise a total of 15.7 million dollars. This time, though, Ivar kept the money in the country. International Match used the proceeds to pay off most of the outstanding gold debentures,
at a price of $105.25 The original investors in gold debentures had expected to receive a price of $100 (not $105) in twenty years (not one year). Not only did they receive the promised interest payments, but they also made an extra 5 percent return on their investment. These investors were ecstatic, and they spread word about Ivar in the same way early investors in the postal reply coupon scheme had spread word about Charles Ponzi.
Now that Ivar had converted his debentures into more flexible obligations, he was free to plan his future monopoly-for-loan transactions without a ticking clock. He had added to his track record of impressive returns for investors by giving American holders of gold debentures 5 percent more money than they expected, faster than they expected it. And he had demonstrated to Lee Higginson, and other bankers, that he was a sophisticated financier. The bankers were impressed by his new recapitalization technique.
Of course, Ivar still needed to raise new money, not just to pay off International Match’s previously issued obligations, but to meet the very large dividends that his European companies soon would owe. Swedish Match was scheduled to pay its investors a hefty double-digit dividend. Kreuger & Toll had promised 25 percent. Nevertheless, with the increased flexibility of financing in America, Ivar was confident in his ability to generate enough cash to make those payments.
He also was confident about where that money would go. His brother, Torsten, had been in Poland for more than a year, and that government seemed close to a deal.
6
POLAND FIRST
For centuries European governments had granted monopolies on all kinds of production and trade to their loyal subjects. These weren’t gifts; the governments required payment in return, in the form of cash, interest, or a share of profits. These “fiscal monopolies” were an alternative to state control: industry remained in private hands, but governments received a steady stream of revenue, a kind of selective tax. The early fiscal monopolies included cigarettes, flax, gunpowder, liquor, petrol, playing cards, salt, and tobacco. For many countries, the tax revenues from fiscal monopolies were significant, as much as one-third or more of the overall government budget.1
France created one of the first match monopolies, in 1872, not long after the invention of strike-on-the-box Swedish matches. The transaction was straightforward: the French government simply leased the right to make and sell matches within France to a private corporation. Other countries soon followed France’s lead. Belgium, Bulgaria, Greece, Portugal, Romania, Serbia, and Spain all established fiscal match monopolies during the late nineteenth century.2 In France, when government officials finally realized how much money the private sector was earning from the match monopoly, they nationalized the industry. But elsewhere, the monopolies stuck.
Germany and Italy, two of the dominant economies in Europe, were late to the monopoly game. Germany taxed match sales, but didn’t even try to establish a monopoly until after the world war and the Weimar Republic hyperinflation, when the currency markets finally stabilized. The German match industry was stagnant, match factories were in disrepair, machinery was obsolescent, and raw materials, including aspen trees and chemicals, were scarce. In 1924, Ivar and Oscar Rydbeck, his lead banker, met with Dr Hjalmar Schacht, the Governor of the Reichsbank, Germany’s central bank, and Dr Schacht requested a concrete proposal. Ivar agreed to work with the central bank to prepare one, but he correctly anticipated that the process in Germany would not gain momentum until the economy recovered and consumer demand returned.3
Italy also started late, and with far too much bureaucracy. The government created a public match monopoly, but refused to cede any control to the private sector. The Italian finance minister set prices, and a government agency controlled production and export. The costs of government control were too high, and the government dismantled the match monopoly in 1923.4 By the time Ivar sent Torsten to focus on Poland, he had made no progress with the Italian government.
Ivar had been somewhat more successful with Spain, although competition, taxes, and restrictions on foreign investment were hurting Swedish Match’s export business there. When the Spanish government imposed strict preferences for local industry, Ivar marshaled some creative tactics to overcome those obstacles. Before 1922, the Spanish government had controlled the match monopoly, but still permitted Swedish Match to export matches to Spain. Then the government shifted course and signed a fifteen-year lease with a Spanish company, Compañia Arrendataria de Fosforos (CAF). It also began enforcing a decree that match interests could only be held by Spanish citizens or companies owned by Spanish citizens. From that time on, CAF would control all match production and sales within Spain. As a foreigner, Ivar was not permitted to own shares of CAF.
But Ivar refused to be locked out of the Spanish market. He began buying shares of CAF through Spanish intermediaries, and even created a front company in Spain, Sociedad Financiera de la Industria Española (SAFIE).5 The share purchases were time-consuming and expensive, and even by 1924 he was a long way from taking control of the Spanish match market. SAFIE gave Ivar a presence, so that Swedish Match could make some money from exports to Spain, but a Spanish match monopoly seemed unlikely anytime soon. Like Germany and Italy, Spain would have to wait.
By 1924, Ivar was in negotiations with a dozen governments, with little or no success. Ivar had tried for a monopoly in Turkey, but lost that bid to a small Belgian firm. His talks with the Bolivian president were at an impasse, and the Hungarians had suspended negotiations. Ivar was traveling constantly, yet even after logging all those miles, he had gotten nowhere on the path to match monopolies.
Ivar needed to forge much closer ties with government officials. Merely acquiring match factories, as he had done in Sweden, was not enough. Outside his home country, competition seemed to sprout quickly and from anywhere. Every time Ivar bought one factory, another competing factory sprung up in another location. For example, Ivar had managed to purchase every match factory in Belgium by 1920. Yet just a few years later, thirteen new factories had appeared.6
Just as businessmen realized it was cheap and easy to set up match factories, governments had seen that it was even cheaper and easier to adopt measures protecting local industry. Legislators raised tariffs on match imports, to stimulate local production. Many countries followed Spain’s lead and blocked foreigners from owning match factories. Now, both governments and private competition threatened the dominance of Swedish Match.
Swedish Match’s economic advantage also was deteriorating. Aspen, the wood most suitable for match production, was scarce in Germany but plentiful throughout eastern Europe. The demand for matches continued to grow outside of Sweden. Perhaps most importantly, as the value of many currencies fell, particularly in eastern Europe, exports became cheaper while imports became more expensive. There was no way Ivar’s companies could continue to pay high dividends if they didn’t overcome these problems.
Given the challenges elsewhere, Poland presented Ivar’s best opportunity. The population of almost 30 million was well educated and hard working. The economic minister had just established the zloty as a single common currency for the country. Poland had active ports and a history of prosperity and trade.
Before the world war, the match industry there had been small - just five match factories in the provinces that later united to form Poland. In 1921, these five factories produced just 2,000 cases of matches a month, barely enough to meet one-third of the area’s demand. Swedish Match had secured a toehold in the region by then, and it covered much of the remaining demand by exporting matches to Poland.
Then, suddenly, without any stimulation from external investment, Poland’s match factories began reproducing, just as private factories had sprouted up in Belgium. In 1922, this parthenogenesis led to seven new factories. A year later, there were seven more. By the time Torsten arrived, match production had grown to nearly 125,000 cases a year. There were four times as many factories as there had been before the war. Virtually overnight, Poland was exporting matches.
Ivar followed these developments closely. The new match factories were driving down prices and taking away Swedish Match’s export business. Ivar hired a few men to send him regular reports about developments in Poland. The competitive landscape there was rocky, and the threat to Swedish Match was serious. One expert called the situation “alarming.”7
There were too many independent Polish factories and too little government support. Ivar tried the approach he had mastered in Sweden, dramatically reducing the price of matches sold in Poland, to undercut competing local factories. He forced a few of the new factories out of business, and offered to buy others. But he and Torsten still needed to secure the assistance and trust of key government officials. Only then could they organize a sales cartel with local manufacturers, to maintain high prices and restrict production.
Poland’s political volatility made it a more attractive candidate for a monopoly.8 From the moment Torsten arrived, Polish officials faced so many crises that the right person would be able to slip them a match monopoly without much scrutiny. The government was in chaos. The final borders of the Second Polish Republic had been established two years earlier, and the new constitution just a year before that. The reborn interbellum Poland was fractured into competing sects. President Gabriel Narutowicz had been assassinated in late 1922, and the country had sworn in four different prime ministers that year (and another two the following year). At first, it wasn’t even clear to Torsten which officials he should approach, or who was in charge.
Then, through the bedlam, Torsten met Dr Marjam Glowacki, a senior finance ministry official. The two men immediately bonded and became friends. Torsten appeared to be a distinguished businessman with extensive experience in international finance. Their talks moved quickly. Dr Glowacki saw that a significant loan from International Match could resolve many of the country’s humanitarian and fiscal needs. Even a few million dollars would greatly assist Polish reparations from the world war.
The Match King Page 10
