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Report of the commissioner of corporations on the steel industry ... online

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dicate, however, secured most of this cash from the stockholders of
the constituent concerns of the Federal Steel Company in the manner
already described, so that the actual amount of cash raised by the
sj^ndicate, as such (as distinct from any amounts which syndicate
members may have subscribed as stockholders in the acquired con-
cerns), was apparently but $4,823,373. In return for this cash pay-
ment and its services the syndicate received a residue of Federal Steel
stocks amounting, at par, to about $5,680,565 preferred and $8,422,992
common. Assuming that for the cash provided the syndicate received
100 per cent in preferred and a bonus of 100 per cent in common,
there would be left, roughly, $850,000 of Federal Steel preferred and
$3,600,000 Federal Steel common stock, which may be regarded as the
compensation of the syndicate for its services and profit as distinct
from any payment for the new cash capital provided, as follows :



Stock received by syndicate

Amount allowed to cover cash raised by syndicate.

Balance to cover "services" of syndicate

4, 823, 373



1 Includes 93,000 incorporators' stock.

While, however, the syndicate commission in the case of this com-
pany apparently included a small amount of preferred stock, it will
be recalled that the common stock of the company had some tangible
property back of it at the start.

American Steel and Wire Company of New Jersey. — As shown
on page 132, at the organization of this company a syndicate raised
$28,000,000 of cash, for which it received $28,000,000 of preferred
stock and $28,400,000 of common stock, or the entire issues of each
class over and above the amounts paid for the old American Steel
and Wire Company of Illinois. Subscribers to the syndicate re-
ceived with each $100 preferred stock paid for at par a bonus of
$60 in common stock, or in the aggregate $16,800,000. This left a


balance of $11,600,000 of common stock unaccounted for, as shown

below :

Total amount issued to the syndicate

Paid syndicate subscribers tor 328,000,000 ot cash .







This residue of $11,600,000 — which, it will be seen, is entirely dis-
tinct from the common-stock bonus jD^id in connection with cash
subscriptions to preferred stock — went to those who managed the
organization of the company as their compensation or commission.

Ajiericax Tin Plate Company. — Testimony before the Indus-
trial Commission (see p. 135) showed that $10,000,000 of the com-
mon stock of this company went to the organizers as their compen-
sation, this being over and above the $18,000,000 of common stock
issued as a bonus with the preferred stock for property and cash. It
is possible that not all of this $10,000,000 commission was retained
by the promoters, since they had to meet certain expenses of organi-
zation — usually small — and, moreover, it is possible that in some
cases the promoters offered certain of the concerns entering the con-
solidation a special bonus in common stock in order to secure such
concerns. Such special allowances may have reduced the net amount
of the commission.

National Steel Company. — It appears from the testimony before
the Industrial Commission (see p. 137) that $5,000,000 of the com-
mon stock was issued for the "expenses of organization"; in other
words, that it went to the promoters for their services and expenses.

American Steel Hoop Company. — In the case of this concern also
it appears that at least $5,000,000 of common stock was retained by
the organizers as their commission. (See p. 139.)

American Sheet Steel Company. — As already stated the exact
facts concerning the promotion of this company are not obtainable.
However, the evidence (see p. 140) indicates that the properties and
cash acquired by this company probably did not exceed $16,000,000
(although the Bureau has allowed $17,000,000), for which apparently
$16,000,000 preferred and $16,000,000 common stock were issued, so
that possibly there is ground for the assumption that the remaining
issued amounts of each class of stock may have been retained by
the promoters as their compensation. This can not, however, be
stated as a definite fact. Therefore, nothing has been included for
that company in this computation.



National Tube Cojipaxy. — In the promotion of this company it
appears that $20,000,000 of the $40,000,000 common stock issued was
given as a bonus with the $40,000,000 of preferred stock in payment
for properties or for cash. The remaining $20,000,000 of common
stock apparently went to the organizers as a commission, although
a part of this may have been distributed by them to banking interests
as commissions for assisting in raising cash capital.

American Bridge Company. — In the case of this concern the exact
amount of stock issued as a commission is somewhat uncertain, owing
to somewhat unusual methods of financing. It seems, however, that
at least $7,250,000 of the common stock represented such a commis-
sion, and possibly a larger sum.

Shelby Steel Tube Company. — In the case of the Shelby Steel
Tube Company, as shown in note 1, page 144, $1,305,900 of the com-
mon stock was allotted for organization expenses. Just how much
of it represented a commission is not known, and as the total amount
is small in comparison with the other payments here discussed it has
been omitted.

Carnegie Cojipany. — In the organization of the Cainegie Com-
pany no promoters or bankers were employed and apparently no
stock was issued for commissions.

Lake Siperior Consolidated Iron Mines. — The Bureau secured
no information as to whether any of the stock of this concern was
issued to the promoters, and it has been assumed that despite the
heavy overcapitalization of the company at the time of its organiza-
tion no stock was issued for this particular purpose. The company,
it will be recalled, was organized in 1893.

The total of these various commissions, not including anything for
either the American Sheet Steel Company or the Shelby Steel Tube
Company, was $63,306,811, as follows:








Federal Steel

1 $4, 456, 811

National Tube



American Tin Plate

2 63,306,811

National steel

1 Includes 1857,192 of preferred stock.

2 No amounts are here entered for the American Sheet Steel Company, for reasons given in the text
nor is anything entered in the case of the Shelby Steel Tube Company.


It should once more be stated that this total does not include the
large amounts of common stock of these constituent companies issued
as a mere bonus with preferred stock for property or cash. Out of
the commissions above described the promoters sometimes had to
meet certain expenses, but in general such expenses were small, and
these commissions, or the proceeds realized therefrom, represented
the compensation of the promoters and organizers.



Section 1. Introductory.

In the preceding chapter the value of the property of the United
States Steel Corporation at the date of its organization has been
discussed by the first and second methods outlined on page 116,
namely, by historical study of the organization and investment of
the constituent concerns, and by the computation of the market
values of the securities of these concerns. It now remains to discuss
the value of the tangible property of the Corporation by the third
method referred to, namely, by departments of its business. Such
a valuation is taken up in the present chapter. With reference to
the properties other than ore, this discussion is in part a; summary
and reclassification of facts brought out in Chapter II. The valua-
tion of the ore property is approached by several different methods,
and, on account of its importance, is given a separate division of the

Section 2. Estimate filed by the Corporation in the Hodge suit in 1902.

In undertaking the valuation of the properties of the Corporation
by departments of its business for 1901, it will be found convenient
to refer to an estimate of the physical assets made by officials of the
Steel Corporation themselves in their defense of the so-called " Hodge
suit." This suit was brought in 1902 to prevent the company from
issuing $200,000,000 of bonds to retire a like amount of preferred
stock. The laws of New Jersey required a certificate from officers
of the Corporation to the effect that its assets were equal to the
preferred stock, after allowing for indebtedness, as a prerequisite to
such conversion of any part of the preferred stock into bonds. One
of the main points raised by the plaintiffs in this suit was that the
Corporation did not thus possess assets equal to the amount of its
preferred stock, after allowing for prior indebtedness.

In reply to the charge of deficiency of assets in this particular,
an estimate of the physical properties of the Corporation was filed
bj"^ Charles M. Schwab, then its president, these valuations being
subscribed to by several other prominent officials of the Corporation.



This estimate, which classified the property by the principal depart-
ments of the business, follows :


Ore properties $700, 000, 000

Plants, mills, fixtures, machinery, equipment, tools, and real estate 300, 000, 000

Blast furnaces 48, 000, 000

Coal and coke 100, 000, 000

Transportation properties ^ 80, 000, 000

Natural gas fields L 20, 000, 000

Limestone properties 4, 000, 000

Cash and cash assets 2 148, 291, 000

Total 1, 400, 291, 000

1 President Schwab stated that the Corporation's estimate for this item was the value
after allowing for .$40,340,000 of indehtedness. (See note, p. 197.)
= As of June 1, 1902. (See note 3 to Table 23, p. 234.)

Except in the case of the transportation properties, where, as noted,
the valuation of $80,000,000 was the estimated valuation after allow-
ing for indebtedness, the figures here given represent the Corpora-
tion's estimate of the entire value of the different classes of property
without respect to the securities issued against them; that is to say,
they do not represent merely the equity value in these properties for
the stockholders of the Corporation over and above bonded indebted-
ness. The valuations arrived at by the Bureau in this chapter like-
wise are for the total tangible property, without respect to the secu-
rities outstanding against it. In comparing its figures with those of
the Corporation, the Bureau has restored the indebtedness of rail-
road companies which was deducted by the Corporation's officials.

The main purpose of this chapter is to arrive at as accurate a
valuation of the properties of the Steel Corporation as is possible,
rather than to discuss at length the above estimate of the Steel
Corporation. It is, however, desirable to consider this estimate of the .
Corporation in connection with the following analysis by the Bureau;
an especial advantage in this method of treatment is that the figures
in the Corporation's estimate can be regarded as imariably fixing
maximum limits of valuation. The estimate of the Corporation in
connection with the Hodge suit was submitted at a time when there
was a powerful motive before its officers to overvalue its assets. It
is apparent that after placing liberal valuations upon all the prop-
erty other than ore the officers making this estimate credited the ore
with an amount sufficient to bring the Corporation's total assets up
to more than the total of its outstanding securities. As shown later,
this valuation for the ore was very excessive.

It should be kept in mind that this estimate by the Corporation
was made in July, 1902. By that time the property of the Corpora-
tion had been increased through surplus earnings and also, to a small


extent, by capital raised or property acquired through the issue of
additional securities, so that the total investment was somewhat
greater than it was in April, 1901. If a precise comparison of
the Bureau's estimate with these estimates of the Corporation was
desired, with a view to carefully reconciling differences between
them, it would be necessary to determine how this additional invest-
ment was distributed among the different departments of the Cor-
poration's business. For the present purpose this is not necessary.
It should, however, be kept in mind that the valuations of the Bureau
in this chapter are applicable as of the date of the company's organi-
zation on April 1, 1901, while those of the Corporation, above given,
were made in July, 1902.

Mr. Schwab, in his affidavit in behalf of the Corporation, said :

The foregoing items of valuation do not include any allowance
for the value of the good will and established businesses of the
various plants and properties, nor do they include anything for
the very valuable patents, trade-marks, and processes owned
or controlled, or anything for the large amount of orders for
manufactured goods which have been actually received and are
in process of filling.

In other words, Mr. Schwab claimed very emphatically that the
Corporation's estimate did not include an allowance for intangible
considerations, so that comparison may properly be made with the
Bureau's figures later presented, which are for tangible property


Section 3. Value of manufacturing plants, and connected real estate.

The manufacturing plants of the Steel Corporation (including
real estate for plant sites, etc.) other than coke properties and
blast furnaces, were entered in the Corporation's 1902 estimate at
$300,000,000, and the blast furnaces at $48,000,000, making a total
for what may be called the iron and steel works proper, and real es-
tate for plant sites, of $348,000,000.

From the facts given in Chapter II, it is possible to present an in-
dependent estimate for these manufacturing properties as they were
in April, 1901. Thus, in the case of the Federal Steel Company, the
steel works, blast furnaces, and similar equipment were those of the
Illinois Steel Company and of the Lorain Steel Company (and the
Johnson Company), since the Minnesota Iron Company and other
subsidiary concerns of the Federal company had no property of this
character. The real estate and manufacturing plants of the Illinois
Steel Company were entered in its balance sheet of June 30, 1898, at
approximately $20,200,000. (See p. 121.) Since that balance sheet
stated separately the investment of the company in railroad stocks,


coke properties, and current assets, this book figure may be taken as
the investment in steel works, blast furnaces and similar plants, and
real estate at that date. As shown in Chapter II, there is good rea-
son for the opinion that all of the book valuations of the company
were sufficiently liberal.^

The properties of the Lorain and Johnson companies at the time of
their acquisition by the Federal Steel Company, it will be recalled,
were valued at approximately $4,000,000. This entire amount may be
credited to manufacturing plants.

The manufacturing properties and blast furnaces of the Carnegie
Steel Company (Ltd.) at the organization of the Carnegie Company
of New Jersey, in March, 1900, may be taken, as previously shown
(see p. 155), at the book value of $43,3.-)5,000.

In the case of the other constituent concerns, the values of the
manufacturing plants can not thus be directly taken from balance
sheets. However, as already shown in Chapter II, in the case of
nearly all these other companies the value of the entire property
did not exceed their respective issues of preferred stock, and, more-
over, such property at the dates of their organization consisted of
only two general classes, namely, manufacturing plants and working
capital. The workijig capital is known in practically every instance,
so that by deducting this from the amount of preferred stock issued
in each respective case there is obtained an approximate valuation of
the manufacturing plants. Thus, in the case of the American Steel
and Wire Company the value of all the tangible assets was placed
at $40,000,000 (see p. 131), the amount of preferred stock issued.
The company had $16,600,000 net working assets, leaving $23,400,000
as substantially the value of the plants.

The total value of the tangible assets of the American Tin Plate
Company (see p. 136) at its organization was approximately $18,-
000,000, the amount of preferred stock originally issued, to which
should be added $325,000 subsequently issued at par to acquire the
plant of the Canonsburg Iron and Steel Company. The company
started with about $4,500,000 of working capital. The difference of
$13,825,000, therefore, substantially represents the value of the manu-
facturing plants.

In the case of the National Steel Company, the value of the prop-
erty at the time of its organization — over and above $2,561,000 of
bonded indebtedness later allowed for — has been placed (see p. 137)
at $27,000,000, the amount of preferred stock issued (this including
$1,000,000 issued some time after the company's organization). The
company had $9,000,000 of current assets, thus leaving $18,000,000

1 The Illinois Stoel Company had a small amount of ore lands, but apparently this was
not included in the figure Just given. At any rate, any allowance for ore property in-
cluded in that figure would be so small that no deduction need be made for it here.


to cover the remaining property. This entire amount has been cred-
ited to the manufacturing properties of the company, since its other
fixed properties were not of sufficient importance to necessitate an
allotment of this bain nee.

A similar method of computation in the case of the American Steel
Hoop Companj' indicates that the value of the manufacturing plants
was the difference between $14,000,000, the total amount of preferred
stock issued, and the original working capital, $3,000,000, or a total
of $11,000,000. This A'aluation for the manufacturing plants is prob-
ably too lil)eral, for reasons already shown.

The valuation of the National Tube Company's manufacturing
plants may likewise be arrived at bj' deducting from $40,000,000, the
estimated total value of all its assets (as expressed by the par value
of the preferred stock), the $16,000,000 of net current assets with
which the company commenced business, the company having prac-
tically no other kind of property at its organization. This lea\'es
$24,000,000 for the manufacturing properties.

The property of the American Bridge Company likewise con-
sisted almost exclusively of manufacturing plants and current assets.
The coml)ined value of both has been taken at the par value of the
preferred stock issued, $31,374,000 (this including some stock issued
subsequent to the formation of the company). Since the company
had $11,500,000 of working capital at the start, $19,874,000 is left
for the manufacturing plants.

In the case of the .Vmerican Sheet Steel Company, it will be re-
called (see p. 140) that the tangible assets of every description were
not equal to the amount of preferred stock issued, and that the manu-
facturing plants apparently had been valued for purposes of con-
solidation at $12,000,000. From the evidence already given, it is
clear that such a valuation is suiRciently large. An addition of
$1,000,000 has, however, been made to cover certain detached real

The plants of the Shelby Steel Tube Company at the time of the
acquisition of that concern by the United States Steel Corporation
had suffered heavy depreciation. As shown in Table 4, on page 113,
the Steel Corporation issued, roughly, $1,800,000 of its preferred stock
and $2,000,000 of its common stock in exchange for the preferred
and common stock of the Shelby Steel Tube Company which it
acquired (this being the great bulk of the entire issue in each case).
The market value of United States Steel stock thus issued was about
$2,800,000, which would indicate a market valuation for the entire
Shelby Steel Tube property of, roughly, $3,000,000. An allowance of

1 The company also had natural-gas property valued at about .$2,000,000. This has been
considered as offsetting the .$2,000,000 bonded debt of the company, and this latter item,
therefore, does not require consideration here. The natural-gas property is valued later.
(See p. 200.)


$2,500,000 to cover the manufacturing properties alone might be con-
sidered reasonablej but since the entire amount is so small these
manufacturing properties have been credited in the Bureau's esti-
mate with a value of $3,000,000.^

The Lake Superior Consolidated Iron Mines had no manufac-
turing plants. Its railroad and ore properties, like those of the other
subsidiary concerns, are discussed elsewhere in this chapter.

The one-sixth interest in the Pittsburg Steamship Company and in
the Oliver Iron Mining Company likewise need i^ot be considered
here, since neither of these concerns had any manufacturing

It should be observed that in the case of a few of these concerns
the valuations arrived at by the Bureau represent the equity in the
property over and above certain bonded indebtedness. Thus, the
valuation of $18,000,000 for the manufacturing properties of the
National Steel Company represents the stockholders' equity in this
property, after allowing for $2,561,000 of outstanding bonds. A few
of the other subsidiary manufacturing companies likewise had small
amounts of underlying indebtedness. In an estimate of the value of
the manufacturing properties as distinct from the stockholders'
equity therein,, an amount equivalent to such indebtedness should be
added, since it may be assumed that such bonds represent a corre-
sponding investment in the property. The total addition on this
account is $3,000,000. In the case of the American Sheet Steel Com-
pany there were $2,000,000 of underlying bonds, but these, as already
noted, have been considered as representing an equivalent investment
in natural-gas j^roperty rather than in manufacturing plants; there-
fore no addition on this account need be made at this point.

The Illinois Steel Company also had a large issue of bonds, most of
which presumably were issued against manufacturing properties, and
a considerable part of the large issue of the Carnegie Company may
be considered as having been issued against such properties. In the
case of these companies, however, the bonded indebtedness need not
be considered, since the valuations above given were the full valua-
tions as shown in the balance sheets, and not merely an expression of
the stockholders' equity therein.

The other subsidiary manufacturing companies of the Steel Cor-
poration had no bonded indebtedness at their organization. In a
few cases additional bonds were subsequently issued or assumed, par-
ticularly by the American Steel and Wire Company and the National
Steel Company, but since practically all of the added investment

1 The use of the market value of the securities issued by the Steel Corporation as a
criterion for Judslng the value of the property acquired is as a rule incorrect, particularly
at the time of mersing various competins concerns (see p. 210), but in this inst.ince, owing
to the sharp reduction in capitalization and to the comparatively small amount involved,
it is justifiable.



represented by such increase in indebtedness was incurred in the
purchase of property other than manufacturing plants — principally
steamships, ore, and coke — such additional issues may be disregarded
in this discussion of the value of the manufacturing plants proper.

Online LibraryUnited States. Bureau of CorporationsReport of the commissioner of corporations on the steel industry ... → online text (page 24 of 70)