Henderson daily dispatch., 1937-05-13
OTHERS VIEWS
HOW HOLDING COMPANIES
OPERATE.

M. j. Van SWerlngen railroad empire
for the sum of something like $780,
600 to Pennsylvania and a New
York brokerage firm, which purchase
! price represents some 100 per cent Of
profit to Mr.. Ball, the glass-jar mag
nale, made so under prohibition re-
| gime, who bought the controlling
stock of the Allehany Corporation at
a foreclosure sale made by the firm
of j. p. Morgan and Company some
thing like year ago. This Van Swer-
ingen railroad empire embraced $4,000
miles of tcackage and represented
capital investment of some $4,000, 00O,
600. Of course, the method by which
control of this vast enterprise in rail-
reading was obtained has become
matter of general inquiry, not merely
among the men of the street, but with
the editors of even the metropolitan
press, for the amount of money in
volved suggests miracle performance
or legerdemain or both
Well, l am going to try to explain
this piece of high finance. The Van
Sweringens controlled these great pro-
pcrties (seven distinct railway sys-
tems) by use of the holding company
The Allegheny Corporation. Mr..
Ball organized and used The Mid
america in making the purchase at
the foreclosure aforesaid.
Now, a corporation is a creature of
Legislative enactment directly or I'M
der a general corporation law, rather,
in this instance, Incorporation law.
The management and internal struc-
ture of the corporation are phases Of
operation under the law of the state
of it's creation. Some states have very
rigid and wholesome incorporation
laws, while others, for purposes of re-
venue incorporation fees and taxes
thereafter) have let the bars down
and invited promiscuouts incorpora-
ton under their laws. In the latter
class of states New Jersey and Della
ware are the most conspicuous In
fact they are veritable corporation
hatcheries, as it were. And strange as
it might seem, this administration
has frequently incorporated Federal
agencies under the laws of Delaware,
and for the same reason that private
enterprise has done soto avoid be-
ing handicapped by any restrictive
laws.
But that does not answer the ques-
ton as to how Mr.. Ball got control Of
this vast railroad empire by an out
of-hand investment of only 100000.
In making answer, l am going to give
you the formula, not the specific facts
! of this case, which is as follows Sup
pose we have railroad whose out
standing bonds amount to $4,000 900,
it's preferred stock to $50,O00,00O and
it's common stock to $5O,O0O00O, max
ing a total of $15O,OOO,OOO. Some
manipulators and scheming bankers
want to get control of this railroad
property. The common stock carries
the voting rights, and hence it's con-
troll, so they figure on the acquisition
of a majority of this common stock,
which involves just a little above so
per cent, or, stated lin dollars, some
$25,OO1, 600. But they do not want to
put that much of their own money in
the purchase of this Stock. What then
do they do? They organize a holding
company They ISSUE $10,00O,00O in
bonds, $10,O0O,0O0 in preferred and S.
100000 in common stock, and retain
just above so per cent of the common
stock, or $2,501 900. However, they do
not want to put even that much of
their money in the enterprise So they
form the second holding company and
issue $1,000 900 in bonds, $1,000,000 in
preferred and 100000 in common
stock and of the last they retain just
above SO per cent. or $286,0O0. Thus a
system worth $15O,OOO,OO passes into
the control of promoters for the meas
ly sum of $226,OOO. The record shows
that the Van Sweringen brothers &C
hoir act
of-pocket investment of from 2 to
IL per cent c. The original investment
involved.
That tie above formula is some
thing that is constantly used by pro-
motors, as well as by those engaged
in the enterprise, but want to acquire
control, is shown by the evidence be-
fcre the Federal Trades Commission,
in which it appeared that in some in
stances there were as many as nine
companies between the top-owning
and controlling company and the OPP
Grating company, all of which were
getting return from the consuming
public. This showing was made in an
investigation limited largely to the
gas and electric utilities, but the me-
thod is applicable to all industry. In
one other instance before the Federal
Power Commission it appeared that
the directors of the top-owning and
controlling company organized a ser
vice company and capitalized the SER
vice contracts it had with its operat-
ing companies at S1.OoOO00, and, with
out the investment of one thin dime
in it's capital structure, made in five
years, 1922 to 1927. inclu i've, the neat
sum of $13 175, 1888.
The foregoing disclosure represents
the blight 7'~on the holding companies
and it must he rn-n0ved or the whole
of the ho'din" comnany device will be
outlawed Public opinion will accom-
plish it's abandonment. In equity and
good conscience, the men who own
and control the holding companies dc
rot own the operating companies.
Their office is that OF trusteeship. The
investing and consuming public are
their wards, and they must be faith
| full to that trust or they will be driven
from office and the office destroyed.
There are honestly and efficiently OPP
| GRATED holding cOmDarieS I think it