United States Steel: A Corporation with a Soul. Arundel Cotter
Open Pit Mining—Canisteo Mine
The absorption of this entirely solvent and “going” competitor has been criticized on the allegation that its only purpose could have been to strengthen the larger company’s supposed control of the industry, and to eliminate competition. The reasons for the purchase, testified to by Judge Gary, in the Government suit were twofold. The Union Steel Co., he said, owned blast and open-hearth furnaces the securing of which obviated the necessity of the Corporation building others in the same territory, which it needed, and its wire mill was particularly well located for export business, a prime consideration with the Steel Corporation; and perhaps a more cogent reason was to be found in the desire of the Corporation’s management to centre the interests of H. C. Frick in the Corporation. Mr. Frick was heavily interested in the Union-Sharon concern and on this account, although a director of the Corporation, he did not take a prominent part in the big company’s affairs. His experience and ability made his full coöperation in the directorship desirable and this had a great deal to do with the purchase.
Seventeen months later, in May, 1904, the Clairton Steel Co., which operated three blast and fifty open-hearth furnaces, a rolling mill, billet mill, and blooming mill at Clairton, Pa., was absorbed. The company, controlled by the Crucible Steel Co., was then in the hands of a receiver and its stock was acquired by the payment to the owners of $1,000,000 in U. S. Steel bonds (bought in the open market and costing the Corporation $813,850), and the guaranteeing of bonds to the amount of $10,230,000 outstanding against the Clairton company and its subsidiaries. The purchase also brought to the Corporation a half interest in one ore mine and a lease of another in the Mesaba Range, about 20,000 acres of mineral lands in the Marquette Range, 2,644 acres of coking coal lands, and working assets of nearly $3,000,000.
Smaller acquisitions by the Corporation in the early years of its existence included the Troy Steel Products Co., which owned works at Troy, N. Y., with a capacity of about 200,000 tons of slabs and skelp a year, and the Trenton Iron Co., operating a rod mill with a capacity of some 18,000 tons. The Troy company was bought in 1902 and operated a very short time, it having proved unprofitable.
Hardly had the United States Steel Corporation commenced operations than the directors found themselves faced with the necessity of raising additional working capital. The $25,000,000 cash provided by the under-writing syndicate proved insufficient for the needs of the giant industry. Obligations entered into by the constituent companies before the merger, it was discovered, called for the expenditure of approximately $15,000,000, and fully $10,000,000 was needed to refund what were classified as “purchase money obligations.” It was also thought desirable that expenditures should be made for improvements and additions which, it was estimated, would increase the big company’s earning power at least $10,000,000 a year. Furthermore, it was deemed advisable to add from $10,000,000 to $15,000,000 to the Corporation’s fluid assets to provide for further expansion and to strengthen reserves, as it was obvious that if the Corporation were to need ready cash in a time of stress the amount wanted would not be a matter of a million or so but of many millions and it would be impossible to obtain a very large sum at such a time except at a great loss. By increasing fluid assets the probability of the need for borrowing would be minimized.
The issuance of $15,000,000 new preferred stock or second mortgage bonds was discussed at length, but these courses were not favored as either, aside from initial expense in commissions to underwriters, would have increased fixed charges against earnings—a stock issue permanently and a bond issue for the term of its life—while an increase in capital in either of these two ways so shortly after the formation of the Corporation would almost certainly have attracted unfavorable comment and might have severely affected the value of their holdings to owners of its stock.
Eventually what was known as the Bond Conversion Plan was adopted and promulgated. It provided for the issuance of $250,000,000 new second mortgage bonds and the redemption of $200,000,000 of the outstanding preferred stock, holders of the stock being given the opportunity to subscribe for the bonds to the extent of 50 per cent. of their holdings, 40 per cent. through deposits of stock and 10 per cent. in cash. A syndicate, headed by the Morgan firm, was formed and guaranteed to turn in not less than $80,000,000 in stock and $20,000,000 in cash in exchange for $100,000,000 of the bonds to be issued. For its work the syndicate was to receive 4 per cent. on the total value of the bonds actually issued under the plan, the house of Morgan receiving one fifth of the commission, or four fifths of one per cent.
An actual, though not immediate, money saving, it was pointed out, would be effected under the plan. Although the commissions to be paid the syndicate, $10,000,000, would be larger than in the case of either of the two other ways suggested for raising the new capital required, the net saving in annual interest charges would be $1,500,000, which would not only refund the commission in a comparatively short time but would be more than sufficient to meet sinking-fund requirements for paying off the entire second mortgage issue when it became due, or in sixty years. The actual gain in working capital, should the plan prove a success, would be $40,000,000.
(Redeeming $200,000,000 of 7 per cent. preferred stock would save dividend charges of $14,000,000 yearly, for which would be substituted a charge of 5 per cent. on $250,000,000 bonds, or $12,500,000. The amount required for the sinking fund would be slightly more than $1,000,000 or less than the net annual saving. And a permanent capital reduction would be effected at the end of sixty years.)
No other action of the Corporation’s management, it would be safe to say, has met with such widespread disapproval as did the bond conversion plan, much of the criticism coming from financial experts who questioned the propriety of increasing the bonded debt of the company to so great an extent with so small an actual gain in working capital or resources. It was characterized as dangerous financing and it is known that not all the Corporation’s directors were themselves in full accord with the operation. At a meeting held on May 19, 1902, the plan was submitted to a vote of the stockholders and here considerable opposition developed which led later to the bringing of four suits to prevent its consummation. One of these suits which attracted a good deal of attention was brought by J. Aspinwall Hodge, a New York lawyer. But the Court of Errors and Appeals of New Jersey eventually dismissed these suits and the offer to exchange stock for the bonds—delayed by the suits—was finally made to stockholders in the spring of 1903.
In view of the fact that its avowed object was the raising of $40,000,000 new cash capital, said to be necessary, the plan can hardly be said to have been an eminent success. Exclusive of the syndicate operations only $45,200,000 of preferred stock was exchanged by stockholders for the bonds and the cash subscriptions for the issue from the same source amounted to the insignificant sum of $12,200. The syndicate, at its dissolution, turned in a total of $150,000,000 in preferred stock and $20,000,000 in cash (this, of course, included the $45,200,000 stock and $12,200 cash of the outside stockholders), a total of $170,000,000, and instead of the desired $40,000,000, the actual cash gain to the Corporation from the transaction was $20,000,000 less a syndicate commission of $6,800,000, or $13,200,000 net.
As the Corporation has been able to meet its full preferred dividend requirements since its formation, however, it is obvious that as matters turned out it has saved $2,000,000 a year in interest charges or in eighteen years since elapsed $36,000,000, more than five times the commission paid the syndicate. The yearly saving is also approximately double the $1,010,000 which the sinking fund calls for, so that the net gain to stockholders from the reduction of the preferred capital is $990,000 a year. Looking into the distant future the saving after the bonds are paid off in forty-two years will be $10,500,000 annually.
One of the criticisms hurled at the plan was that its real object was to enable the syndicate, and especially the banking house of J. P. Morgan & Co., to make a profit at the expense of the stockholders. The facts were that the syndicate took a big risk of the bonds selling at less than par after issuance, which they did, and while it is impossible to ascertain the exact gains or losses incurred, the understanding is that Mr. Morgan and his associates in the syndicate actually suffered a loss of something like $8,000,000 from the deal.
It was perhaps natural that the management of the Steel Corporation, in its early existence, should have been more or less divided against itself. This danger was one of the factors urged by