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- Spring Cleaning The Investment Pantry
- Does Corporate Memory Have A Role In Stockpicking?
- How Do You Harvest Your Returns?
- Why Avoiding the Herd is More Important than Ever
- Safe Bets In Turbulent Times
- History: First Multinational Renaissance Business
- How Bees Invest
History: First Multinational Renaissance Business
Andreas Rosenau, 16 November 2010
Some stories are old but can have some aspects that last through centuries. This may also be the case about the rise and decline of the first large conglomerate business in Europe about 500 years ago.
The Fugger Family of the German town of Augsburg built the first large trading group with operations spanning from Russia to Spain. Jakob was an outstanding business man who financed imperial thrones, minted coins for Popes and created a conglomerate including banking, mining, property and trading during a time of major changes across Europe. It was an era of discoveries, new developments in science, arts and social changes.
Jakob was the youngest son and should originally become a priest. But the death of his father and most of his older brothers opened a way for him into the growing spice and garment trade business. His mother Barbara sent him to Venice in 1478 when he was 19 years old to study with the most advanced merchants and traders of the time including double book keeping.
One of his first targets was the tightly controlled mining and metal trading in Austria. To get a foot in the growing iron, gold and silver mines, Jakob looked for under-capitalized mines and invested as a shareholder. Once he established a stronger position he forced them to transport and sell the ore through him in Venice. Step by step he established a monopoly in transport and sale of the Austrian mine output into Venice. The huge demand for metals was driven by demand for military and increasing power struggles over dominance in Europe.
In his early years he had established a close relationship with Austria’s Maximilian who became king in 1493. He saw in Maximilian the political potential to become emperor taking the leading role in Europe and undermining France’s ambitions. But while Maximilian spent large amounts on military and a luxurious lifestyle he always had issues with financing. One time the king was so desperate for money that he travelled to a trade fair to ask for more credit. But Jakob, knowing that Maximilian was on his way, left earlier to avoid a meeting, and the king had to go home empty. The rise of Jakob and Maximilian was deeply inter-connected and showed how powerful one business became and how much the political ruler depended on his financing.
The Fugger business grew and Jakob had established important business connections in all major cities of that time: Antwerp, Venice, Rome etc. He was determined to expand the company and traded with everything that promised good returns – silk, spices, copper etc. He preferred the less spectacular but more secure and still profitable trades. Jakob also recognized that timely information was crucial to gain advantage over competitors. He built the first private information service using his trading posts across Europe. Especially urgent messages were passed using mirrors and sunshine. Urgent messages from Spain reached the headquarters in Germany within 2 hours. Initially the system was only used internally but with the development of printing machines first “newspapers” were printed and distributed to business partners.
A unique family contract applied which ensured that all family capital was pooled together. Capital had to stay in the business, the boss ultimately decided how to use it, withdrawals were limited and in the event of death, the capital remained in the company.
In 1508 Jakob financed the election of Maximilian as Emperor. The electors were keen to receive some compensation for their vote and Maximilian’s huge procession with 30,000 soldiers was so large that even Fugger couldn’t finance it by himself. The time from 1500 to late 1520 is regarded as the most prosperous and influential for the Fugger dynasty.
After Maximilian’s death in 1519, it became more difficult for Jakob to deal with his young Spanish grandson. The young self-confident Charles tried to reduce the dominant influence of Jakob. He saw in Jakob only the merchant. But he also accepted the debt of his grandfather and set up a repayment schedule, with Jakob forced to take a ‘haircut’ – the original debt was reduced by about 1/3.
After Jakob’s death in 1525, his nephew Anton took over the business. The king requested more and more credit but had little security to offer. As the young king was militarily more successful, Anton was less influential. Competition increased and the balance of power shifted. Previously Maximilian depended on Jakob’s financing, now Anton became more and more dependent. The transactions got larger and King Charles requests for more credit forced Anton to take more debt himself. He had to provide more credit in the hope to see at least some of the previous loans back. The company grew rapidly between 1536 and 1546, but probably too rapidly.
Only a few years later, and not even 50 years after Spain set foot on South America, Spain declared its first official bankruptcy in 1557. King Charles had to step down, banks made huge losses and the empire from Vienna to the Atlantic fell apart. Not even 20 years later, in 1575 Spain again went bankrupt. Tons of gold and silver from South America caused huge inflation and were spent on wars across the continent.
So what can we learn from history?
- Trust is a prerequisite for prosperity
- Pooling of assets and timely information are important for growth
- Securities for credit should produce sufficient cash flow to pay interest and repay the principal. Once the assumption of repayment is no longer there, risk of a default increases
- Even countries flooded with gold can default and investors can also suffer
Buy yourself an emperor; by Gunter Ogger, Droemer Knaur, 1979