Matchstick Monopoly1

Anindya Sen and Archana Sethia

In the first half of the twentieth century, one mans vision led to the creation of a global
organization that held a world-wide monopoly in that most humble of products
matchsticks. That visionary was Ivar Kreuger, known as the Swedish Match King. His
manipulations in the matchstick industry at first yielded him success beyond dream. He
became famous as an international financier bailing out governments in distress in the
interwar period and was even eulogized by John Maynard Keynes as maybe the greatest
financial intelligence of his time.2
Within three years after the start of the Great Depression, Kruegers sins caught up with
him; his holding company became bankrupt and Kreuger himself committed suicide in
his luxury Paris apartment in 1932. At first his suicide was viewed as a tragedy worthy to
be penned by the great Greek writers like Aeschylus, particularly in the light of his
support to beleaguered governments.3 But soon thereafter emerged details about
deception and manipulation of accounts, forgery and assets inflated by double-counting.
Kreuger's businesses were found to owe more than Swedens national debt. In America
shares of his international holding company collapsed, taking with them the life savings
of thousands. Investigators took five years to disentangle the accounts of his 400
companies and estimated that in a 15-year career he had burned through about $400m of
his investors' money. Directly in response to the Kreuger experience, America's
Securities Act was passed in 1933 to strengthen disclosure requirements for all
companies selling stock. With the advantage of hindsight, the Economist describes him as
. arguably the most brilliant and ambitious swindler who ever lived4.
The story of the rise of the Swedish match empire under Kreugers direction gives us
many insights into the process of creation of what turned out to be almost a global
monopoly. Kreugers success lay in consolidating a fragmented international match
industry. Match production was a relatively simple process and capital requirements were
not substantial, which meant that the industry had low barriers to entry. The task of
creating a global monopoly in this situation would have appeared hopeless.
Kreuger was born in Kalmar, the eldest son of the banker, industrialist and Russian
consul Ernst August Kreuger and his wife Jenny. He had 5 brothers and sisters. Kreugers
family owned two small match factories near Kalmar on the southwest coast of Sweden.5
A Swedish scientist had invented the safety match in 1844. Earlier, it was dangerous to
produce matches because of the poisonous yellow phosphorus used in matches. By
1

In writing this case, I have benefited significantly from the following: Geoffrey Jones and Ingrid Vargas,
Ivar Kreuger and the Swedish Match Empire, Harvard Business School, Case No. 9-804-078.
2
Robert Shaplen, Kreuger: Genius and Swindler, New York, Alfred A. Knopf, 1960, p. 98.
3
The match king, The Economist, Dec 19th 2007
4
The match king, The Economist, Dec 19th 2007
5
http://en.wikipedia.org/wiki/Ivar_Kreuger

substituting red phosphorus for the yellow phosphorus, the scientist solved this problem.
Sweden quickly introduced the modern matchbox with the phosphorus striking surfaces
on both sides. The matchmaking machine was also invented by a Swede and by the
beginning of the 20th century, the entire process of matchmaking had been mechanized.
Swedens match industry relied on inputs from abroad to produce matches. Even though
Sweden had vast forests, wood was imported from Russia; potassium chlorate,
phosphorus and paraffin were imported from Germany and Great Britain. Sweden was
also heavily reliant on export markets for its matches. At the time of the beginning of the
First World War, Sweden was the largest exporter of matches, with about 85% of the
match production being exported.6
The match industry was also witnessing consolidation. In 1903, six Swedish match
producers merged to form Jonkoping och Vulcans Tandsticksfabriks AB (J &V), which
would control about 80% of the match production of the country. J&V both integrated
vertically and internationalized itself, becoming Swedens first multinational match firm.
On the one hand, it integrated backwards by purchasing forest property, chemical
distributors and machine manufacturers. Since it was exporting 90% of its produce, it
integrated forwards by establishing its own sales office in London, replacing British
agents. On the other hand, J & V established factories in Great Britain and Russia, in the
first case to circumvent import tariffs, and in the second to take advantage of close
location of aspen forests.
In 1913, the remaining independent match producers joined together to form AB
Forenade Svenska Tandsticksfabriker (Forenade). Under Kreugers leadership, Forenade
would quickly overtake its initially far larger domestic rival.
Kreuger, however, did not enter the matchstick industry immediately after graduating as a
mechanical engineer from the Royal Technical University in Sweden. He went abroad to
gain experience and came back to Sweden only in 1908. He went first to New York and
tried to find employment with construction firms but was unsuccessful. He then moved to
Chicago where he worked for a real estate firm as a salesman trying to sell lots to
European immigrants. He was paid only a commission and made few sales, but learnt to
negotiate and conclude sales deals. He went back to New York in 1901, finding a job as
an engineer in a steel construction firm, and then moved first to Germany and later to
South Africa. In Johannesburg, Kreuger earned quite a bit of money in gold speculation,
but left it again for New York. During 1907, as a manager and vice president of New
Yorks Consolidated Engineering Company, he learnt new construction technologies
using reinforced concrete. He met the patent holder for reinforced concrete and entered
into an agreement to promote his methods in Europe. In 1908 Kreuger returned to
Sweden bursting with ideas..7

Hakan Lindgren, Corporate Growth: The Swedish Match Industry in its Global Setting, The Swedish
Match Company, 1917-193, Studies in Business Internationalism, Stockholm: Liber Tryck, 1979, pp.43-45
7
Robert Shaplen, Kreuger: Genius and Swindler, New York, Alfred A. Knopf, 1960, pp. 33-34.

Immediately after he returned to Sweden, Kreuger set up a construction company. The

Kreuger & Toll partnership quickly gained a reputation as the best construction firm in
Sweden and built the country's first skyscraper. By 1911, the company was incorporated
with a stock capital of 1 million Swedish kronor. Kreuger had also established important
contacts with the banking community.
Kreugers first foray into the matchsticks industry came when a banker, Oscar Rydbeck,
manager of the Stockholm branch of Skandinaviska Banken, suggested that he could
increase the authorized shares in his fathers two factories and then use the shares as
collateral to acquire other match factories. Two large banks promised to back Kreuger in
his ventures. In 1913, Kreuger organized the independent match producers into Forenade.
He noticed how J&V had been able to eliminate the middlemen from its export
operations and with financing from his Swedish banking associates, acquired a number of
London sales agencies. He next approached J&V with a proposal to establish a minimum
price for sales to wholesalers, which was accepted, thereby eliminating price competition
in the home market. A similar deal was struck for the British market, and J&V and
Forenade came to dominate the match imports into Great Britain.
The other major match suppliers to Great Britain were two Norwegian companies. In
1914, these two companies along with the Swedish companies, reached an agreement
with the largest British manufacturer, Bryant and May, to set minimum prices in Britain.
When one of the Norwegian companies violated this price agreement, Kreuger secretly
bought majority interest in the company.
After the start of World War I, J&V ran into rough weather. In trying to run with the
hares and hunt with the hounds, i.e. provide supplies to both sides, it incurred the wrath
of the Allied powers that blocked its raw material import licenses. Forenade had been
smart enough not to trade with Great Britains enemies. It had also modernized its
factories and acquired additional Swedish manufacturers, while J&Vs traditional
conservatism had prevented it from capital investments. Finally, in 1916, J&V was forced
to merge with Forenade, giving birth to the Swedish Match Company. Forenade and J&V
continued to exist as independent companies with Swedish Match Company acting as a
holding and sales company for these two companies.
The postwar period witnessed a fragmented match industry, where most producers were
small and lacking in experience, sales and distribution networks and financing. It took
very little capital to run small, inefficient match factories that made just enough money to
survive. Kreuger saw opportunities for expansion in war-torn economies with low value
currencies that possessed cheap factories. He acquired a majority stake in a German
match factory and purchased valuable real estate in Berlin. Buying up prime European
property for a song and then selling them to rich Americans provided Kreuger with a
lucrative source of funds. Kreuger next turned his attention to Denmark, Norway and
Finland. The Swedish Match Company acquired majority stake in Denmarks three match
companies and thereby gained its first monopoly. In Norway and Finland, too, it
controlled 40-50% of the total production.

But Kreuger found the profits from Swedish Match inadequate for his grand plans for
international expansion. In 1919, he persuaded five Swedish financial institutions to form
the Match Syndicate and place 60 million kronors at his disposal. In a 1920
memorandum, Kreuger set out the objectives of the syndicate:
The objectiveis to ensure the effective control of the Swedish match industry over those
match factories in Europe that may emerge as competitors on export markets. It is also
intended, in countries that are important markets and where there are large local
factories, to procure for Swedish match interests factories of such a size that they can
support the sale of imported Swedish matches, and in the event of increased custom
tariffs serve as the basis for an enlarged Swedish-owned match manufacturer in the
countries involved.8
In the next six years, Kreuger kept on buying match factories in different countries and
consolidating them. His control over the match industry grew in Belgium, Austria,
Hungary, Holland, Denmark and Switzerland. Kreugers strategy was to buy one or two
factories and then force competitors to sell out. The purchases were carried out in utmost
secrecy and appeared in Swedish Matchs accounts as sundry creditors. More
information about these acquisitions was available only to Kreuger and a few of his close
associates. Kreuger strongly rebuffed attempts by any outsiders to get this information.
He preferred employees and managers who were discreet and uninterested in anything
that did not directly concern them. His contempt for accounting norms also stands out. In
a rare interview in 1929, he told Isaac Marcosson of New York's influential Saturday
Evening Post that the key to his success was silence, more silence, and even more
silence.
The other significant feature of Kreugers international expansions was the subordination
of local firms interests to that of J&V and Forenade. For example, by 1927, Kreugers
Japanese company Daido Match accounted for almost three-fourths of Japanese match
exports. But Japanese managers complained that Kreuger was deliberately limiting
production in his Japanese factories to protect Swedish exports, forcing Daido into losses.
In the early 1920s, many European countries suffered from economic depression, and
match sales and prices dropped. The cartel of British match manufacturers allied with
Swedish match failed to effectively counter competition from firms outside the cartel.
However, Kreugers associates in the Match Syndicate wanted immediate returns on their
investment. Kreuger arranged for Swedish Match stock issues, over-valuing the assets of
the company to the public to mask the poor financial performance of the company. The
receipts from the stock issues were paid to existing creditors. To raise further funds from
a London share issue, Kreuger created the category of B shares, carrying only one onethousandth of a vote.

Karl-Gustaf Hildebrand, Expansion, Crisis, Reconstruction: The Swedish Match Company, 1917-1939,
Studies in Business Internationalism. Stockholm, Liber Tryck, 1985, pp. 20-22.

The United States, on the other hand, was experiencing an economic boom. Banks were
flush with funds, but businesses had their own resources and there was very little demand
for loans from them. To take advantage of this situation, Kreuger established the
International Match Corporation (IMCO) in New York in 1923. The Companys first $15
million bond issue was oversubscribed on the first day of issue. IMCO eventually raised
$150 million from U.S. Investors. The stockmarket value of IMCO kept on rising. Even
during the stockmarket crash of 1929, its value soared as investors were paid spectacular
returns.
But in order to keep on offering high returns to keep investors happy, Kreuger was
paying dividends out of capital, not earnings. He was, in effect, operating a giant
pyramid scheme, reliant on confidence to maintain a steady inflow of cash.9
From 1925, Kreuger found a new use for the funds raised in the bond market. He decided
to lend money to needy governments in exchange for monopoly control over the national
match market. The countries willing to strike such a deal with Kreuger included Poland,
Greece, Latvia, Hungary, Yugoslavia, Ecuador and Peru. When the French Government
turned down his proposal for a national monopoly, Kreuger exhibited his magnanimity
by still lending $75 million to France. Thus while prosperous United States was not
willing to come to the help of the war-damaged Old Continent, Kreuger was seen to be
the channel through which American dollars could be transferred to these economies.
Even in 1929, he lent $125 million loan to Germany, which helped that country to meet
war reparation payments and avoid a domestic crisis. In return, Kreuger obtained a 50%
share in the state match company and monopoly rights over the production, import and
sales of matches in Germany for 32 years.
Kreuger had become one of the most reputed international financiers of his time. His
picture appeared on the cover of the Time magazine in the very week that stock prices
collapsed on the Wall Street. In the spring of 1930 he visited America and held a lecture
about the situation in world economics at the Industrial Club of Chicago. He was invited
by President Hoover to the White House and in June he was awarded the title Doctor of
Business Administration at the Syracuse University, where he had worked as a young
chief engineer in 1907.
Few anticipated the prolonged severity of the Depression about to follow. Kreugers
securities at first lost value, but then climbed back when an increased dividend on IMCO
was announced. For the next couple of years, Kreuger continued to pay high interest and
dividends to try to keep the values high.
Kreuger had gained control of most of the forestry industry in northern Sweden and
planned to become a head of a cellulose cartel. After founding the pulp manufacturer
SCA in 1929 Kreuger was able to acquire the majority shares in the telephone company
Ericsson, the mining company Boliden (gold), major interests in the ball bearing
manufacturer SKF, the bank Skandinaviska Kreditaktiebolaget, as well as others. Abroad
9

The match king, The Economist, Dec 19th 2007

he acquired Deutsche Unionsbank in Germany and Union de Banques Paris in France,

often with the acquired companies' own money. These maneuvers were made both
necessary and possible by his invention, decades ahead of his time, of Enron-style
financial engineering, which reported profits when there were none and paid out ever
increasing dividends by attracting new investment and/or looting the treasury of a newly
acquired company.10 By 1931 an estimated 200 companies were controlled by Kreuger.
But the end was near. As the Depression deepened, exports of Swedish matches dropped
drastically. Kreuger was forced to borrow $30 million from Scandinavbanken backed by
$50 million in German bonds. The bonds actually belonged to IMCO, but Kreuger kept
the bonds in his personal loan account. Then he used the same bonds as collateral to
borrow from another Swedish Bank.
Kreuger still was short of cash. In desperation, he forged Italian government bonds worth
$142 million and presented them to his banks as evidence of having secured yet another
national monopoly.
By 1930, Kreuger was also in control of LM Ericsson. He had helped it to fight off
several acquisition attempts by IT & T in the past. But now he proposed a merger of
Ericsson with IT & T, trading a majority stake in Ericsson for a block of IT &T shares
plus $11 million in cash. He now, for the first time, had to agree to an independent audit
of one his companies. Accountants started discovering various irregularities. Meanwhile,
Kreuger demanded more loans from Swedish banks. Before Kreugers return to
Stockholm, Swedish officials had raided his office and discovered the forged Italian
bonds. The final curtain fell on the drama when Kreuger took his own life on Marc 12,
1932.
The news of Kreugers death sent shockwaves in the stock markets. All stocks linked to
Kreuger collapsed. IMCO went bankrupt. Lee Higginson and Company, the brokerage
firm for Kreuger, disbanded. Claims on Kreugers estate exceeded $1 billion. Investors
and companies worldwide, but particularly in the U.S. and Scandinavia, were hit hard by
the crash.
Kreuger had not only created a global matchstick monopoly, he had also innovated
financial practices that are being used even today:
Long before modern financiers created a market in asset-backed securities (the source of
this year's turmoil) Kreuger was a master of the art. Effectively, the securities he sold to
investors provided loans for governments secured against assets that he himself
controlled. The assets were held offshore, which today's tax planners would welcome,
and mostly off-balance sheet, the custom at Enron and many of the banks that have
suffered this year. He invented the activist investor's dream of being able to control a
company's destiny without owning it, by separating A shares from B shares (a practice

10

http://en.wikipedia.org/wiki/Ivar_Kreuger

until recently still common in Sweden). That enabled him, in Shaplen's estimation, to
control a $600m empire with ownership of just 1% of the shares.11

11

The match king, The Economist, Dec 19th 2007