On this day in economic and business history …
The Dow Jones Industrial Average closed over 9,000 points for the first time in its history on April 6, 1998. The 9,033.23 close was reached largely on news of a merger between Citicorp — now Citigroup Inc (NYSE:C) — and Dow component Travelers Companies Inc (NYSE:TRV), the largest corporate tie-up in history to that time, defying the weakness in other, broader indexes. Travelers Companies Inc (NYSE:TRV) soared 21% on news of the deal, and non-component Citigroup Inc (NYSE:C) rose 16%. The divergence between the Dow and other indexes prompted Charles Pradilla of Cowen to tell The New York Times that “this market is probably a little ahead of itself.”
It was a big year for big deals in 1998. At that point in the year, more than 2,500 deals worth more than $316 billion had already been announced, a 50% increase over 1997’s total for the comparable period. Stock-based transactions in an environment of ballooning stock prices surely helped to drive the year-over-year growth in deal value. The path to 9,000 also saw divergence in the Dow’s components — nine components, primarily heavy-industry and commodity stocks, were lower when the index reached 9,000 than they had been at Dow 8,000. This was offset by big gains of at least 30% in eight other Dow stocks, during that period. This group included all of the Dow’s financially focused components, including Travelers Companies Inc (NYSE:TRV), American Express Company (NYSE:AXP), and JPMorgan Chase & Co. (NYSE:JPM).
The Citigroup Inc (NYSE:C) deal, however, was far and away the largest of the year’s deals to date. Announced at a value of $70 billion, the stock-based merger swelled to $84 million during the day as investors bid up shares of the two companies, anticipating a clear path through regulatory hurdles that at that point would have made such a deal technically illegal. The Gramm-Leach-Bliley act had yet to be proposed, and a similar Glass-Steagall-destroying effort had died in the House of Representatives not a week before the deal was proposed. To become Citigroup Inc (NYSE:C), with an estimated $50 billion in revenue, $700 billion in assets, and $140 billion in market cap, the two companies would have to work hard to undo decades of regulatory precedent. Victory would have gained the new company top ranking among the world’s largest financial-services companies. Ultimately, they succeeded, ushering in a new era of financial consolidation — but talk of records would fade as the dot-com bubble produced ever more outlandish merger valuations, culminating in the disastrous AOL, Inc. (NYSE:AOL) and Time Warner Cable Inc (NYSE:TWC) tie-up that wound up destroying the vast majority of its shareholders’ wealth after the bubble popped.
One man’s junk …
Drexel Burnham Lambert created the junk bond in 1977, and it found great success when offered for the first time on April 6, 1977. Drexel’s rise and fall would become the stuff of Wall Street legend (you can read more on its collapse by clicking here), and it all began on that April day. Harlan D. Platt recounts the path of that first junk bond in a book titled, appropriately enough, The First Junk Bond:
Having exhausted its regular sources of finance (bank loans and private placements), [Texas International] relied on Drexel Burnham Lambert, then an inconsequential investment banking house, to raise new cash. Drexel and its guiding spirit, Michael Milken, were to pioneer the notion that the capital market could accommodate more than just the largest 500 companies. …
Drexel offered investors a $30 million Texas International bond issue in April 1977. To attract buyers for the unknown company’s debt, the bond paid interest at 11.5%, nearly 150% of the prevailing prime interest rate. Following a warm investor response, an additional $20 million tranche of the note was sold in July 1978. Texas International’s 11.5% subordinated debenture was the first junk bond. Its sale began a beautiful relationship between the company and Drexel that endured for more than a decade and encompassed every aspect of the investment banking function, as Drexel grew into a financial powerhouse and Texas International emerged on the international oil scene.
