"How Financialization Destroyed Hercules Powder Co"

For over six decades from its founding in 1912 as a spinoff of DuPont, Hercules Powder Co. achieved steady growth in specialty chemicals through innovation and diversification. In the style of many successful “Chandlerian” firms, Hercules satisfied the need for financial commitment to innovation by utilizing a strategy of retaining profits and reinvesting in people, processes, and products. From the late 1980s, however, like many other U.S. corporations, Hercules turned from innovation to financialization, engaging in massive stock buybacks, justified by shareholder value ideology. This paper will document when, why, and how financialization destroyed a once successful U.S. business corporation. The paper employs the theory of innovative enterprise to bring to light substantial new research on Hercules’ history. It also builds on previous work by Edith Penrose, “The Growth of the Firm—A Case Study: The Hercules Powder Company”, Business History Review, which won the Newcomen Prize for best article in 1960. Her article presaged Chandler’s seminal study of multidivisionalization (including the case of DuPont) in Strategy and Structure, published in 1962. I also draw upon Davis Dyer and David Sicilia, Labors of a Modern Hercules (1990). In his 2004 book Shaping the Industrial Century, Chandler made use of Dyer and Sicilia to portray Hercules as a “niche core” chemical company. As I will analyze in my paper, Dyer and Sicilia’s volume was completed just as Hercules was beginning a transformation from innovation to financialization. In the preface to the 1995 edition of The Theory of the Growth of the Firm, Penrose recognized the current problem of corporate financialization. But neither Penrose (1914-1996) nor Chandler (1918-2007) would live to witness Hercules’ “death” in 2008 when, with its workforce substantially downsized, it was acquired by Ashland Corporation. My paper for this Business History Conference panel is the story of how financialization became the final chapter in Hercules’ long history as a productive U.S. firm taken over by what Lazonick and Shin have called “predatory value extractors”.