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

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companies, should be definitely closed and settled in such manner
that no possible question concerning the same or the amounts or
profits involved can be raised in the future. We desire, if prac-
ticable, that such a final settlement, which it seems to us should
be by way of mutual releases, be had before we distribute the
' profits of the syndicate among its members.

Such an arrangement was entered into and formally approved by
the directors of the Steel Corporation on February 14, 1902. At that
time, it may be noted, the profits of the syndicate were estimated by
the syndicate managers at about $56,000,000. This proved to be an
underestimate, and, as above shown, the total profits actually real-
ized were about $62,500,000.

In addition to the importance of this payment to the underwriting
syndicate itself as indicating overcapitalization, this transaction may
also fairly be given weight in discussing evidence of excessive issue
of securities with respect to the purchase of properties. A corpora-
tion which issued roughly $130,000,000 of its securities for a cash
consideration of $25,000,000 plus such underwriting and promotion
services and expenses as were involved in this case may fairly be re-
garded as disposed to issue its capital stock on an exceedingly liberal


basis for the acquisition of properties. This syndicate arrangement,
therefore, may properly be construed a,s confirming other evidence
that the capitalization of the Corporation far exceeded the true value
of its assets.

At the invitation of the Bureau, the syndicate managers in 1911
submitted a statement concerning this compensation of the syndicate.
Their statement on this point follows :

As stated in the first preliminary report of this company,
submitted to its stockholders at the first annual meeting upon
February IT, 1902, and then and there unanimously approved,
there was allowed to the underwriting syndicate as its compensa-
tion 049,987 shares of the preferred stock and 049,988 shares of
the common stock of the new corporation, out of which the syndi-
cate provided the corporation with $25,000,000 cash and dis-
tributed approximately $3,000,000 for other syndicate obligations
and expenses.

We inclose a copy of the printed syndicate agreement of
February 26, 1901, under which the net profits of the syndicate
were distributaljlc, and they were distributed one-fifth to the
syndicate managers and the remaining four-fifths to the syndicate
subscribers, including our firm.

Inasmuch as these commissions and their iDayment were unan-
imously- approved by the stockholders of the corporation, we
should assume that your view (which we regret) that they were
excessive in amount has regard, not to the parties immediately
concerned, but to what you may consider to be a public interest.
In this aspect it would seem to us that, if, as we believe, and as
we have above stated, the properties acquired by the Steel Corpo-
ration were and are fully worth the par of the entire block of
securities by it issued to the syndicate managers in payment
therefor, no public injury could or would result from any sub-
division between the syndicate managers and their associates of
the securities so issued.

We would suggest further that, as the transaction was unique,
not only in character, but in immensitj% it is possible that any
standard short of that furnished by practical experience of
necessity must be imaginary and perhaps illusory. Contingen-
cies and reasons involved in this so large a transaction require
and justify compensation at a rate which in lesser matters might
seem excessive. No ordinary experience can supply a measuring
stick for either the purchase price of the properties of the new
corporation or the payment of the compensation for such

We would call attention also to the fact that the purchase price
of the properties transferred under the first contract of March 1,
1901, covered the entire compensation received by the syndicate.
The subsequent acquisition under the contract oi April 1, 1901,
of the so-called Eockefeller properties, the Pittsburo- Steamship
Company, and the Oliver Iron Mining Company were made by
the syndicate managers not on their own account but for and in
behalf of the new company, the United States Steel Corporation,
and no commissions or compensation for this acquisition was
asked or received by the syndicate managers.


The Bureau does not regard the above statement as an adequate
defense of the enormous commission obtained by this underwriting
syndicate. Undoubtedly the transaction was exceptional with respect
to magnitude. This would undoubtedly justify a larger commission
in the aggregate than would be justified in the case of a very small
underwriting operation. Moreover, the magnitude of the operation
might justify a somewhat greater allowance for contingencies, al-
though, as already pointed out, every underwriting syndicate must
run the risk of certain contingencies, such, for instance, as a violent
disturbance in the stock market, or, on the other hand, a period of
continued depression. So far as the above explanation of the syndi-
cate payment rests on the assumption that the properties were worth
the par value of the entire amount of stock issued therefor, it is ob-
vious that this view can not be accepted. As a matter of fact, if the
properties themselves were regarded by the vendors as worth par, it
can not be conceded that those vendors would have been willing to
surrender $130,000,000 of the entire capital stock to an underwriting
syndicate, except on the ground that they expected to make such
extraordinary profits out of the merger that they would thereby be
reimbursed. In any event, it is obvious that any such large commis-
sion to an underwriting syndicate is a matter of vital importance
from a public standpoint.

It may be noted that this statement of the syndicate managers calls
attention to the fact that the entire commission was allowed under
the first contract, which did not include the acquisition of the Eocke-
feller properties (the Lake Superior Consolidated Iron Mines and
the Bessemer Steamship Company) , the American Bridge Company,
and the one-sixth interest in the Oliver Iron Mining Company and in
the Pittsburg Steamship Company, but that no compensation was re-
ceived by the syndicate managers for these later acquisitions. This
simply means, however, that this syndicate commission covered the
acquisition of only a part of the properties of the Steel Corporation.
It may be noted in this connection that the second syndicate agree-
ment — that of April 1, 1901 (a copy of this agreement appears
on pp. 386-390) — contained a provision that the Steel Corporation, in
addition to reimbursing J. P. Morgan & Co. for actual expendi-
tures incurred in the acquisition of these properties thus subsequently
brought in, should pay that firm " fair compensation for their serv-
ices." AAliile, according to the above statement, no such compensa-
tion was received under this second contract, this can hardly be
regarded as remarkable, in view of the fact that the compensation
under the first contract netted the syndicate the enormous sum of
roughly $02,500,000, of which the syndicate managers received one-
fifth, this not including any amount which they may have received
as members of the syndicate.
4525°— 11^ 18


Section 4. Summary of underwriting commissions in the organization of
the Steel Corporation and its constituent concerns.

Another way of looking at this large compensation to the under-
writing syndicate is that $28,000,000 of the preferred and $28,000,000
of the common stock were issued to cover the $28,000,000 cash lia-
bility and expenses of the syndicate, the common stock being regarded
as a 100 per cent bonus with the preferred, as was so often done in
organizing the constituent concerns. On this basis there would be
left $36,998,700 of preferred stock and $36,998,800 of common stock
as a " commission " in the strict sense, merely for the services of the
underwriting syndicate as distinct from any cash consideration or

This enormous commission to the underwriting syndicate of the
Steel Corporation, it will be recalled, followed other heavy commis-
sions of the same sort paid by most of the constituent concerns of
the Corporation. The facts concerning the payments of such com-
missions l)y the subsidiary companies have already been summarized
in Chapter II. (See p. 179.) It was there shown that the total
amount of stock issued by seven of the constituent concerns (this
not including the American Sheet Steel Company or the Shelby Steel
Tube Company) as commissions to promoters of underwriting syn-
dicates, exclusive of bonus stock issued for property or cash, aggre-
gated no less than $63,306,811, of which $02,449,612 was common stock
and $8.")7,199 was preferred.

The amounts of stock thus issued as commissions by the subsidiary
companies received, of course, the same terms of exchange in the
acquisition of these concerns by the Steel Corporation as the other
stocks of the same class. As already shown (see Table 4, p. 113),
the rates of exchange in most instances were at more than par. By
adding tlie amounts of United States Steel Corporation stock thus
issued in exchange for these amounts of the stock of the constituent
companies which were originally issued for commissions to the
amount of the Steel Corporation's stock above, which maj' be regarded
as such a commission in the strict sense (after deducting $28,000,000
of each class to cover the cash raised or expended by the syndicate),
a total is reached which may be regarded as the amount of the Steel
Corporation's stock issued directly or indirectly for promotion and
organization profits. A summary of such total commissions is given
in the following table :





of stock
issued to
cover pro-

Rates of exchange
into U. S. Steel

Total amount of U. S.
Steel stocks issued
in this exchange.





Federal Steel Company:

$857, 192



125. 00


American Steel and Wire Company, common







National Tube Company, common








Add for U. S. Steel Corporation, after deducting
$28,000,000 of each class to cover cash provisions ^


Grand total securities of U. S. Steel Corpora-
tion representing commissions to pro-
moters and bankers for the Coi-poration
and its constituent concerns combined. .


109, 120, 890

* In this table nothing is included for the American Sheet Steel Company, owing to the absence of accu-
rate information, although apparently there was a large issue of stock to the promoters of this concern.
Again, nothing has been included for the Shelby Steel Tube Company, because of the drastic reduction
'in capitalization effected in the acquisition of this concern.

2 The deduction of cash expenditures in arriving at the commission proper of the Steel Corporation is
Somewhat inconsistent with the method followed in the case of the other companies, where the commis-
sions in stock, as stated, are the gross amounts, out of which the respective syndicates had to meet some
expenses. In most cases, however, these expenses are believed to have been small, both actually and
relatively, and, moreover, the amounts are not known. The expenditures in the case of the Steel syn-
dicate, however, were definitely stated in the preltminary report of the Corporation, and, moreover, were
large ($1,200,000 of the expenditures of $3,000,000 appears to have been used to acquire securities of the
Carnegie Company). For these reasons it seemed fairer to make an allowance for these cash expendi-
tures in the case of the Steel Corporation syndicate.

From this table it appears, therefore, that more than $150,000,000
of the stock of the Steel Corporation (this including over $41,000,000
of preferred stock and $109,000,000 of common stock) was issued,
either directly or indirectly (through exchange) , for mere promotion
or underwriting services. This total, moreover, as noted, does not
include anything for the American Sheet Steel Company, although
presumably a large commission, possibly including some preferred
stock, was obtained by the promoters of this concern, nor is anything
added in the case of the Shelby Steel Tul^e Company.

It should be repeated that this enormous total of over $150,000,000
does not include common stock issued as a bonus with preferred for
property or for cash, but simply what may be termed the promotion
and organization commissions in the strict sense. In other words,
nearly one-seventh of the total capital stock of the Steel Corporation
appears to have been issued, either directly or indirectly, to promoters
for their services.




Section 1. Principal instances of this sort.

For some time after its organization, the United States Steel
Corporation apparently made no effort to secure control of any of the
large iron and steel concerns which competed with it. At the close of
1902, however, it made a ^ery important acquisition through the
purchase of the Union Steel Company, a merger of a former con-
cern of the same name and the Sharon Steel Company. In 1904 it
secured the Clairton Steel Company, a' fairly important concern,
while in 1007 the Tennessee Coal, Iron and Railroad Company was
acquired. An idea of the significance of these various acquisitions is
given briefly in the following sections.

Section 2. Piirchase of TJnion Steel Company in 1902.

The acquisition of this company, which, as stated above, had just
absorbed the Sharon Steel Company and the old Union Steel Com-
pany, is important, not only on account of its large production, but
also because both the constituent companies had been organized by
individuals who had previously been in the steel business, but who
had sold out their properties to one or the other of the various con-
solidations which later constituted the United States Steel Corpora-
tion. This purchase, moreover, Avas of particular interest because the
Union and Sharon steel companies were exceptionally aggressive
competitors, with strong financial backing.

Shakon Steel Company. — The Sharon Steel Company was or-
ganized in October, 1899, to erect a steel plant at Sharon, Pa. Ap-
parently its original intention was to confine operations chiefly to
the manufacture of pig iron and heavy semifinished steel products.
The plans were soon changed, however, so as to include a rod mill, a
wire plant, wire-nail works, and auxiliary departments. Somewhat
later the company also commenced the construction of a tin-plate
plant of 10 mills, the number of which was subsequently to be in-
creased to 20; this department was handled through a separate or<^an-
ization, the Sharon Tin Plate Company. Other enlargements were
made from time to time.


The original capitalization of the Sharon Steel Company was
$3,000,000. This was later gradually increased to $(3,000,000, and in
addition the company had a small bond issue. However, a large part
of the enterprise was financed through subsidiary concerns, so that
the capitalization of the parent company does not fairly represent the

An account of the plant published in July, 1901, gave the capacity
of the completed blast furnaces at 200,000 tons, not including another
blast furnace then under construction. The company also had several
open-hearth furnaces under way. There were two continuous wire^
rod mills, with a capacity of 120,000 tons. The wire-nail plant was
credited with a capacity of 1,000,000 kegs per year, and the wire-
drawing plant with about 75,000 tons per year. The construction of
a wrought-steel pipe plant was also undertaken about this time, and
the capacities of other departments were increased.

It will be seen, therefore, that the company's operations were of a
character to bring it into sharp competition with the United States
Steel Corporation. It should be noted, moreover, tliat the company
had taken important steps toward securing a supply of raw materials.
It had acquired a valuable ore property on the Mesabi Range in the
Lake Superior region, while it had long-time contracts with the Min-
nesota Iron Company for a supply of ore. It had also secured a large
tract of coking-coal land in the Connells\-ille region, .while it had
other coal lands elsewhere; it also owned a limestone property very
close to its manufacturing plant at Sharon, Pa., as well as some
terminal railroad property. The company was, therefore, a well-
integrated concern.

Union Steel Company. — The Union Steel Company was organ-
ized in November, 1899, with $1,000,000 capital stock. The plant
was located at Donora, Pa., on the Monongahela River. The com-
pany was originally started for the purpose of manufacturing wire
rods, wire, and nails. It commenced operations in September, 1901,
with a capacity at that time of about 200,000 gross tons of wire rods,
200,000 net tons of wire, and 1,000,000 kegs of nails.

In the meantime it had been decided to construct blast furnaces
and an open-hearth steel plant. In connection with this integration
of its manufacturing operations, the company acquired a considerable
ore property through the Donora Mining Company, a subsidiary
company with $500,000 capital stock. It also secured large tracts of
coking and steam coal in the Connellsville region. In this connection
it may be noted that, as in the case of the Sharon Steel Company,
the Union Steel Company's extensions were largely financed through
subsidiary concerns, so that the capitalization of the parent company
itself in no way represented the investment in the property. (See
pp. 282-286.)


Among other influential interests back of the concern was H. C.
Frick. Mr. Frick at this time was also a director in the United
States Steel Corporation.

Merger of Union and Sharon concerns. — The strong backing of
the TTnion Steel Company, together with its extensive operations,
made it an important competitor of the T'nited States Steel Cor-
poration. Its operations assumed still greater significance when,
toward the end of November, 1902, announcement was made of the
merger of the company and the Sharon Steel Company, under the
name of the Union Steel Company, to be capitalized at about
$50,000,000, thus forming the largest consolidation in the steel indus-
try proper which had been effected since the organization of the
TTnited States Steel Corporation itself. The two concerns, together,
liad at this time a pig-iron capacity of about 750,000 tons yearly, and
an ingot capacity of about 850,000 tons — as against a capacity for
the Steel Corporation at this time of about 10,000,000 tons — while
they had greatly increased their outputs of finished products. (See
Table 29, p. 269. ) "With this announcement were coupled intimations
that plans were already projected for the construction of still further
important works, as well as the acquisition of one or two other con-
cerns then engaged in the manufacture of rods, wire products, sheets,
and pipe. Moreover, there were rumors that the new concern might
construct a railroad of its own from Lake Erie to the Connellsville
coke region, with connections to the company's manufacturing plants.
The impression was very general in steel circles that the consolidated
company would assume a position of rajiidly increasing importance
in the industry.

These plans for the merger of the Sharon and Union companies
had hardly been completed, however, before the further announce-
ment was made (in the latter part of November, 1902) that the
United States Steel Corporation had purchased the entire property,
payment to be made through the issue of $45,000,000 bonds of the
new Union Steel Company, to be guaranteed by the Steel Corpora-
tion.' The terms of purchase are discussed elsewhere. (See p. 282.)
There can be no doubt that the principal motive of the Steel Corpo-
ration was to prevent the competition which the rapidly extending
operations of the Union concern foreshadowed, and especially to
eliminate the rivalrj^ of Mr. Frick.

Section 3. Purchase of Clairton Steel Company.

On April 29, 1904, it was announced that the United States Steel
Corporation had purchased the entire capital stock of the Clairton
Steel Company; the property was turned over on the 18th of May.

1 A portion of this issue was reserved to complete improvements to the properties and
to retire prior Hens.


The Clairton Steel Company had been organized in 1901, as suc-
cessor to the St. Clair Steel Company, to construct a large plant for
the production of pig iron and semifinished steel products. A con-
trolling interest in the concern was owned by the Crucible Steel
Company, a consolidation of the leading crucible steel manufacturers
of the country. From a statement later issued by the Crucible Steel
Company it appeared that the Clairton company had been losing
money, and that it required several millions additional Avorking capi-
tal which the Crucible Steel Company apparently did not at that
time feel in a position to furnish; the Clairton concern was in the
hands of recei^•ers at the time of its transfer to the Steel Corporation.

The manufacturing plant of the Clairton concern included about
140 acres of mill property at Clairton, Pa., on the Monongahela
River, with three blast furnaces, twelve 50-ton open-hearth furnaces,
a rolling mill, with blooming mills and l)illet mills, and auxiliary
departments. The reported capacity of the jolant was about 475,000
tons of pig iron per annum, about 400,000 tons of ingots, and about
325,000 tons of billets and slabs.^

The Clairton concern also had important ore and coking-coal
properties. One of its ore properties was the St. Clair mine, on the
Mesabi Range, with an estimated deposit of about 4,000,000 tons.
It had a lease of the Little & Prindle iron mine, on the Mesabi Range,
with an estimated tonnage of 3,500,000 tons. In addition the com-
pany had extensive holdings on the Marquette Range, in Michigan,
the total of these being given in the annual report of the United
States Steel Corporation for 1904 at 20,000 acres, all owned in fee.

The coal lands of the Clairton concern comprised 2,644 acres of
coking coal in Fayette County, Pa.

The relative importance of the additions to the manufacturing
property of the Steel Corporation through the Union and Clairton
purchases is indicated in Table 29, on page 269. The cost of these
acquisitions is discussed in Chapter VI.

Section 4. Minor acquisitions of manufacturing property.

Other manufacturing properties acquired by the United States
Steel Corijoration during the first few years of its existence were the
Troy Steel Products Company and the Trenton Iron Company. Both
of these were small concerns.

Teoy Steel Products Company. — This concern was successor to
the Troy Steel and Iron Company, which owned steel works at Troy,
N. Y., and several blast furnaces at Breaker Island, N. Y. The com-
pany was unsuccessful, and in August, 1895, was sold to a reorganiza-

' The Crucible Steel Company, it may be noted, in transferring the property, made a
ten-year fontract with the United States Sti'Pl Corporation for a large amount of pig iron
and steel which it needed for its own business.


tion committee. In 1896 the steel works were removed to Breaker
Island ; the capacity of the plant at this time was about 200,000 tons
of slabs and skelp per annum. After this transfer of the steel

Online LibraryUnited States. Bureau of CorporationsReport of the commissioner of corporations on the steel industry ... → online text (page 32 of 70)