Read Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value for Free Online Page B
Authors: David L. Dodd
management without full disclosure of their extent to the stockholders.
Stock-option warrants (or long-term subscription rights) to buy shares at low prices, proved an excellent instrument for this purpose—as we have already pointed out in our discussion of stockholder-management relationships. In this field complete and continued publicity is not only theoretically desirable but of practical utility as well. The legislation of 1933–1934 marks an undeniable forward step in this regard, since the major facts of managerial compensation must now be disclosed in registration statements and in annual supplements thereto (Form 10-K). With publicity given to this compensation, we believe that the self-interest of stockholders may be relied on fairly well to prevent it from passing all reasonable limits.
Chapter 48
S OME A SPECTS OF
C ORPORATE P YRAMIDING
P YRAMIDING IN CORPORATE finance is the creation of a speculative capital structure by means of a holding company or a series of holding companies. Usually the predominating purpose of such an arrangement is to enable the organizers to control a large business with the investment of little or no capital and also to secure to themselves the major part of its surplus profits and increased going-concern value. The device is most often utilized by dominant interests to “cash in” speculative profits on their holdings and at the same time to retain control. With the funds so provided, these successful captains of finance generally endeavor to extend their control over additional operating enterprises. The technique of pyramiding is well illustrated by the successive maneuvers of O. P. and M. J. Van Sweringen, which started with purchase of control of the then relatively unimportant New York, Chicago, and St. Louis Railroad and rapidly developed into a far-flung railroad “empire.” 1
1 The complete story of how this pyramiding was effected is told in the
Hearings before the Committee on Banking and Currency, United States Senate
, 73d Congress, 1st Session, on Senate Resolution 84 of the 72d Congress and Senate Resolution 56 of the 73d Congress, Part 2, pp. 563–777, June 5 to 8, 1933—on “Stock Exchange Practices.” The story is also set forth in greater detail and with graphic portrayal in
Regulation of Stock Ownership in Railroads, Part 2
, pp. 820–1173 (House Report No. 2789, 71st Congress, 3d Session), especially the inserts at p. 878 thereof. For graphic and other presentation of the effects of pyramiding in the public-utility field see Utility Corporations (Sen. Doc. 92, 70th Congress, 1st Session, pt. 72-A), pp. 154–166.
Example:
The Van Sweringen Pyramid. The original transaction of the Van Sweringens in the railroad field took place in 1916. It consisted of thepurchase from the New York Central Railroad Company, for the sum of $8,500,000, of common and preferred stock constituting control of the New York, Chicago, and St. Louis Railroad Company (known as the “Nickel Plate”). This purchase was financed by giving a note to the seller for $6,500,000 and by a cash payment of $2,000,000, which in turn was borrowed from a Cleveland bank. Subsequent acquisitions of control of many other companies were effected by various means, including the following:
1. The formation of a private corporation for the purpose (
e.g.
, Western Corporation to acquire control of Lake Erie and Western Railroad Company, and Clover Leaf Corporation to acquire control of Toledo, St. Louis and Western Railroad Company—both in 1922).
2. The use of the resources of one controlled railroad to acquire control of others (
e.g.
, the New York, Chicago and St. Louis Railroad Company purchased large amounts of stock of Chesapeake and Ohio Railway and Pere Marquette Railway Company during 1923–1925).
3. The formation of a holding company to control an individual road, with sale of the holding company’s securities to the public (
e.g.
, Chesapeake Corporation, which took over control
Stock-option warrants (or long-term subscription rights) to buy shares at low prices, proved an excellent instrument for this purpose—as we have already pointed out in our discussion of stockholder-management relationships. In this field complete and continued publicity is not only theoretically desirable but of practical utility as well. The legislation of 1933–1934 marks an undeniable forward step in this regard, since the major facts of managerial compensation must now be disclosed in registration statements and in annual supplements thereto (Form 10-K). With publicity given to this compensation, we believe that the self-interest of stockholders may be relied on fairly well to prevent it from passing all reasonable limits.
Chapter 48
S OME A SPECTS OF
C ORPORATE P YRAMIDING
P YRAMIDING IN CORPORATE finance is the creation of a speculative capital structure by means of a holding company or a series of holding companies. Usually the predominating purpose of such an arrangement is to enable the organizers to control a large business with the investment of little or no capital and also to secure to themselves the major part of its surplus profits and increased going-concern value. The device is most often utilized by dominant interests to “cash in” speculative profits on their holdings and at the same time to retain control. With the funds so provided, these successful captains of finance generally endeavor to extend their control over additional operating enterprises. The technique of pyramiding is well illustrated by the successive maneuvers of O. P. and M. J. Van Sweringen, which started with purchase of control of the then relatively unimportant New York, Chicago, and St. Louis Railroad and rapidly developed into a far-flung railroad “empire.” 1
1 The complete story of how this pyramiding was effected is told in the
Hearings before the Committee on Banking and Currency, United States Senate
, 73d Congress, 1st Session, on Senate Resolution 84 of the 72d Congress and Senate Resolution 56 of the 73d Congress, Part 2, pp. 563–777, June 5 to 8, 1933—on “Stock Exchange Practices.” The story is also set forth in greater detail and with graphic portrayal in
Regulation of Stock Ownership in Railroads, Part 2
, pp. 820–1173 (House Report No. 2789, 71st Congress, 3d Session), especially the inserts at p. 878 thereof. For graphic and other presentation of the effects of pyramiding in the public-utility field see Utility Corporations (Sen. Doc. 92, 70th Congress, 1st Session, pt. 72-A), pp. 154–166.
Example:
The Van Sweringen Pyramid. The original transaction of the Van Sweringens in the railroad field took place in 1916. It consisted of thepurchase from the New York Central Railroad Company, for the sum of $8,500,000, of common and preferred stock constituting control of the New York, Chicago, and St. Louis Railroad Company (known as the “Nickel Plate”). This purchase was financed by giving a note to the seller for $6,500,000 and by a cash payment of $2,000,000, which in turn was borrowed from a Cleveland bank. Subsequent acquisitions of control of many other companies were effected by various means, including the following:
1. The formation of a private corporation for the purpose (
e.g.
, Western Corporation to acquire control of Lake Erie and Western Railroad Company, and Clover Leaf Corporation to acquire control of Toledo, St. Louis and Western Railroad Company—both in 1922).
2. The use of the resources of one controlled railroad to acquire control of others (
e.g.
, the New York, Chicago and St. Louis Railroad Company purchased large amounts of stock of Chesapeake and Ohio Railway and Pere Marquette Railway Company during 1923–1925).
3. The formation of a holding company to control an individual road, with sale of the holding company’s securities to the public (
e.g.
, Chesapeake Corporation, which took over control
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