The Indianapolis journal. [volume] (Indianapolis [Ind.]) 1867-1904, 1903-05-24
It's Earnings Must Decline $2O,O0O,OO
u Year Before It's Preferred stock
Would BE in Peril.
UNDERWRITING SCHEME FAILS
A BIG CONVERSION PLAN THAT
BROUGHT BUT LITTLE PROFIT.
Secrecy with which. Standard Oil Pco-
pIe Conduct Speculative Plans
Calumet a. Hecla Dividend.
Special. to the indianapolis Journal.


and more thought about than any other five
stocks in the market. This is not to be
wondered at if one but stop to consider how
much bigger the United States Steel Cor
poration is than anything else ever attempt
ed in the line of trust finance, and how
much more widely its shares are distributed
than those of any other corporation on
earth. There is probably not town of 10000
inhabitants in the whole United States that
is without some Steel stock. The common
shares are more widely distributed than
the preferred. The subject is almost mex
haustible. Every other man you meet IN
Wall street has new arithmetic for United
States Steel. In this stock market COM
munity whenever you see two men on
street corner. in a brokerage office, or on
the floor of the Stock Exchange fiourishing
figures in each others faces, you may be
sure that United States Steel is the matter
of contention. All this has been more or
less true since the formation Of the steel
combine, but the irrepressible discussion
has seemed, during the past few weeks, to
be more active than ii formerly was, owing,
perhaps, to certain vague apprehensions OF
a reaction in the steel trade. The various
trade incidents that have given rise to these
apprehensions appear to have been exag-
gerated In the Wall-street mind. Nothing
has been adduced to prove conclusively that
a reaction has begun. The declining ten
dency of pig iron prices is not necessarily
bearish. A very large percentage of pig
iron goes directly into steel, and decline
in prices for the raw material therefore.
need not affect the earnings Of the Steel
Corporation. The United States Steel Cor
poration itself is the largest buyer Of pig
iron in the market, requiring in its steel
plants more of the raw material than it is
able to produce for itself. The disposition
OF railroad managers to scale down their
Improvement plans is rather significant
and extensive improvement operations re-
quiring enormous quantity of structural
steel would seem, in some localities, at
least. to be approaching limit, but with
these and certain other similar tendencies
taken into due account the situation, as a
whole, is still very comfortable and prom
Using one. A depression sooner or later, to
be sure, is inevitable, and when it comes
dividends on United States Steel common
cannot be wisely continued. These divi-
dends amount to more than $20,000000
year. and there is that amount of present
security, therefore, behind the dividends on
the preferred stock. In other words the
earnings of the Steel Corporation would
have to fall off more than $4,000. 600 a year
from the present average before the pre-
ferred stock dividends would be in jeopardy.
XXX
The United States Steel Corporation's
conversion scheme, whereby it was pro-
posed to retire s2O0,O00,0OO Of the per cent.
preferred stock and issue $3.50 100000 Of
per cent. second mortgage bonds, appears
to have been a financial failure. The plan
| was to exchange SOC, Of the bonds
for a like amount of the preferred stock
and realize cash on the remaining $50, OOo,-
600. The underwriting syndicate undertook
to furnish sS0OO0.Oo0 in preferred stock and
pay cash for s2O,0O0.OO0 of the bonds at par.
The term Of the conversion privilege expired
| on Saturday, May 16. AT the Office of j. Pier
| pont Morgan e. Co. they refused this week
| to make any statement of the result, but
1t has become known through unofficial
| sources that in addition to the $50. 900 of
preferred stock furnished by the under
| writing syndicate only about $4,000 900 was
presented for conversion by outside holders
and that the only bonds sold at par for
cash was the block of $4,000, COO which the
syndicate. under its contract, had to take
1t is not to be wondered at that outside
| holders of the preferred stock declined to
avail themselves of the privilege to pay
par for bond that has been selling below
| S. in the open market for long time So
| 1T would seem that the actual conversion
| involved only S12O. 000, 600 of preferred stock
OF which the underwriting syndicate fur
| 100000. a total of $40 100000 The syndi-
| cate paid cash for an additional $4,000 600
| In bonds, causing the entire transaction
/ TO amount, in conversion and cash. to $780,
| 100000 The underwriting syndicate receives
per cent. commission of this total or
S.6O0.000 This commission, of course, is
| to be deducted from the $4,000, coo cash so
| that the United States Steel Corporation
realizes only S14 100000 net In other words
| the underwriting syndicate exchanged $780,
| 100000 per cent preferred stock for like
/ amount OF per cent. bonds, paid cash for
S2O.OOOOCO more bonds at par and received
back S56CO,OOO as commission. It's S2O.-
100000 block of bonds. therefore, nets 1t
only sl4. 100000 With the bonds selling in
the market around So there would seem to
be very little profit in the transaction for
the syndicate. but 1t does not deserve, per-
| maps. the sympathy that has been wasted
upon 1t. This underwriting syndicate Is
| composed largely of what are known in
Wall-street vernacular as insiders" They
| were hung I'D with a quantity of United
| States Steel preferred after James
Keene had concluded his remarkable cam
paisn OF distribution. and they conceived
4 the lutst Ol tie STOCK INTO bonds
| and selling the bonds to the United States
! Steel Corporation. a sinking fund has been
established by means of which the new
/ bond issue will be automatically redeemed
within sixty years. The insiders convert
| their surplus preferred stock into bonds
| and sell the bonds TO the sinking fund
] maintained by the United States Steel
l. Corporation. The advantage of n bond
| over preferred stock in the steel bust
ness Is almost too obvious to mention The
/ bond carries foreclosure rights. which
/ mean a great deal when il is considered
| the extent 10 which the steel trade is sub
| ject 10 ups and downs. Another point
/ which has been gained by putting second
mortgage bonds on the properties of the
| United States Steel Corporation is that the
/ Morgan interests have anticipated the pos
| sibility of Carnegie foreclosure.
| The practical failure of the United States
! Steel Corporations conversion scheme re-
| calls one of the most striking incidents in
| Mr.. Morgan's financial career. II occurred
many years ago. before his prestige In the
| world of finance was anything near as
! powerful as 1t Is to-day His banking house
undertook to sell by subscription block of
| new securities. The matter was freely adj
| vertised in the financial press and subscrip-
| tions invited In the usual manner, but the
announcements were concluded with the
! extraordinary statement that the subscrip-
ton book would remain open only twenty
four hours. No such rapid-hre business as