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controlled 98 % of the sugar refining capacity in the United States. This favorable ruling gave the green light to companies such as DuPont, Eastman Kodak, General Electric, International Harvester, Standard Oil, and U.S. Steel to engage in M&As without being concerned about legal interference.22 The courts initially saw the Sherman Act's focus to be on regulating stockholder trusts, in which investors would invest funds in a firm and entrust their stock certificates to directors, who would ensure that they received dividends for their “trust certificates.”

      With a misguided focus on trusts, the law was not applied to hinder the formation of monopolies in several industries in the first merger wave. The trusts were formed by dominant business leaders, such as J. P. Morgan of the House of Morgan and John D. Rockefeller of Standard Oil and National City Bank, as a response to the poor performance of many of the nation's businesses as they struggled with the weak economic climate. They saw the structure of many industries, which included many small and inefficient companies, as part of the reason for this poor performance. They reorganized failing companies in various industries by forcing shareholders to exchange their equity in troubled companies for trust certificates in a holding company that would control the business in question but also many other competitors. With such control, J. P. Morgan was able to rein in intense competition that he saw was rendering companies in many industries weak. In doing so he was able to give investors confidence in the soundness of companies for which he and others were seeking to market securities. His main initial focus was the railroad industry, which at that time accounted for the majority of stocks traded on the New York Stock Exchange. Being an industry with large demands for capital, railroad companies aggressively marketed stocks and bonds through investment bankers across the United States and Europe. However, railroad companies were prone to compete aggressively on rates and sought to drive each other to the brink of bankruptcy. Morgan hated such unrestrained competition and sought to reorganize this industry, and eventually others, using holding company trusts that would push aside aggressive competitor managers and replace them with those who would preside over a more orderly market. Morgan did not consider that consumers would suffer from these consolidations as his focus was on investors who would seek to benefit.

      Trusts grew and came to dominate many industries. Among them were the American Cottonseed Oil Trust and the National Lead Trust, which dominated their respective industries. Morgan Bank, in turn, controlled First National Bank, the National Bank of Commerce, the First National Bank of Chicago, Liberty National Bank, Chase National Bank, Hanover National Bank, and the Astor National Bank.23

      In addition to lax enforcement of federal antitrust laws, other legal reasons explain why the first merger wave thrived. For example, in some states, corporation laws were gradually relaxed. In particular, corporations became better able to secure capital, hold stock in other corporations, and expand their lines of business operations, thereby creating a fertile environment for firms to contemplate mergers. Greater access to capital made it easier for firms to raise the necessary financing to carry out an acquisition, and relaxed rules controlling the stockholdings of corporations allowed firms to acquire stock in other companies with the purpose of acquiring the companies.

      Not all states liberalized corporate laws. As a result, the pace of M&As was greater in some states than in others. New Jersey, in which the passage of the New Jersey Holding Company Act of 1888 helped liberalize state corporation laws, was the leading state in M&As, followed by New York and Delaware. The law enabled holding company trusts to be formed and the State of New Jersey became a mecca for this corporate form. This Act pressured other states to enact similar legislation rather than see firms move to reincorporate in New Jersey. Many firms, however, did choose to incorporate in New Jersey, which explains the wide variety of New Jersey firms that participated in the first merger wave. This trend declined dramatically by 1915, when the differences in state corporation laws became less significant.

      The development of the U.S. transportation system was another of the major factors that initiated the first merger wave. Following the Civil War, the establishment of a major railway system helped create national rather than regional markets that firms could potentially serve. Transcontinental railroads, such as the Union Pacific–Central Pacific, which was completed in 1869, linked the western United States with the rest of the country. Many firms, no longer viewing market potential as being limited by narrowly defined market boundaries, expanded to take advantage of a now broader-based market. Companies now facing competition from distant rivals chose to merge with local competitors to maintain their market share. Changes in the national transportation system made supplying distant markets both easier and less expensive. The cost of rail freight transportation fell at an average rate of 3.7 % per year from 1882 to 1900.24 In the early 1900s, transportation costs increased very little despite a rising demand for transportation services. It is interesting to note that the ability of U.S. railroads to continue to cost-effectively ship goods in a global economy impressed Warren Buffett so much that in 2009 he bid $26.3 billion in cash and stock for the remainder of the Burlington Northern railroad that he did not already own. Burlington Northern is actually a product of 390 different railroad M&As over the period 1850–2000.

      Several other structural changes helped firms service national markets. For example, the invention of the Bonsack continuous process cigarette machine enabled the American Tobacco Company to supply the nation's cigarette market with a relatively small number of machines.25 As firms expanded, they exploited economies of scale in production and distribution. For example, the Standard Oil Trust controlled 40 % of the world's oil production by using only three refineries. It eliminated unnecessary plants and thereby achieved greater efficiency.26 A similar process of expansion in the pursuit of scale economies took place in many manufacturing industries in the U.S. economy during this time. Companies and their managers began to study the production process in an effort to enhance their ability to engage in ever-expanding mass production.27 The expansion of the scale of business also required greater managerial skills and led to further specialization of management.

      As mentioned, the first merger wave did not start until 1897, but the first great takeover battle began much earlier – in 1868. Although the term takeover battle is commonly used today to describe the sometimes acerbic conflicts among firms in takeovers, it can be more literally applied to the conflicts that occurred in early corporate mergers. One such takeover contest involved an attempt to take control of the Erie Railroad in 1868. The takeover attempt pitted Cornelius Vanderbilt against Daniel Drew, Jim Fisk, and Jay Gould. As one of their major takeover defenses, the defenders of the Erie Railroad issued themselves large quantities of stock, in what is known as a stock watering campaign, even though they lacked the authorization to do so.28 At that time, because bribery of judges and elected officials was common, legal remedies for violating corporate laws were particularly weak. The battle for control of the railroad took a violent turn when the target corporation hired guards, equipped with firearms and cannons, to protect its headquarters. The takeover attempt ended when Vanderbilt abandoned his assault on the Erie Railroad and turned his attention to weaker targets.

      In the late nineteenth century, as a result of such takeover contests, the public became increasingly concerned about unethical business practices. Corporate laws were not particularly effective during the 1890s. In response to many anti-railroad protests, Congress established the Interstate Commerce Commission in 1897. The Harrison, Cleveland, and McKinley administrations (1889–1901) were all very pro-business and filled the commission with supporters of the very railroads they were elected to regulate. Not until the passage of antitrust legislation in the late 1800s and early 1900s, and tougher securities laws after the Great Depression, did the legal system attain the necessary power to discourage unethical takeover tactics.

      Lacking adequate legal restraints, the banking and business community adopted its own voluntary code of ethical behavior. This code was enforced by an unwritten agreement among investment bankers, who agreed to do business only with firms that adhered to their higher ethical standards. Today Great Britain relies on such a voluntary code. Although these informal standards

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