The Financial Situation

MERRYLE STANLEY RUKEYSER

Railroad Mergers As a Step Toward Improved Credit

THE dream of the great imaginative spirits of an earlier era in transportation may soon be realized through the routine action of a government bureau. Under the Esch Cummins Act the Interstate Commerce Commission is authorized to suggest the tying together of great railroad systems —to place the seal of government approval on plans of consolidation which were frowned upon by the government and by public opinion earlier in the century, when they were advocated by E. H. Harriman and James J. Hill.

When real developments emerge out of this new authority of the Federal regulatory body, the mergers will have received the support of at least six members of the necessarily somewhat bureaucratic commission, and of the boards of directors of the two corporations to be welded into one.

When at length the dreams of the dreamers in railroading come true, they will have received a prosaic touch from contact with many minds. They will not be the product of the free interplay of ideas of any one single genius of transportation. They will not be roughly and boldly hewn out of the raw timber of the ambition of any one man.

As a matter of fact, there seem to be no Hills and Harrimans hi the present array of railroad talent. A comrade of the late Mr. Harriman remarked during the course of an interview the other day that present transportation conditions repel giant figures from the railroad field. Under the existing scheme, there is little opportunity for a railroad genius, with a passion for constructivity, to give free range to his imagination. His vision cannot any longer wander without restraint over strange fields, but is of necessity limited by the standards and judgment of a governmental agency—the Interstate Commerce Commission.

Moreover, the new legislation,— which seeks to assure, without legally guaranteeing, a fair return to the railroads and which at the same time limits the earnings of the exceptionally prosperous lines,—tends to check the amount of profit that any individual can derive from effecting new alignments and associations. The whole trend of recent developments has been to minimize the fun and the profit in the transportation game. Men of colossal gifts are therefore, in theory at least, likely to drift into other fields, where the restrictions are not omnipresent.

HOWEVER, ours is a democratic country—in principle at least—and there is no reason perhaps why we should be slaves to our geniuses. Instead of awaking as a nation some bright morning to read without warning in the newspapers that two huge railroads systems have been wedded as a result of the arbitrary decision of a super-man of transportation, we shall, under the guidance of the Federal body, formulate plans for mergers only after protracted, hearings. Consolidations will be effected, not in defiance of a strict reading of the law, but in accordance with the formulae prepared by Congress. Whatever the excesses and retardations resulting from rigorous Federal regulation of the railroads, few indeed are the impartial students who are ready to recommend a return to the old régime of anarchy in railroading.

Although much of the drama will be extracted from forthcoming mergers by the nature of the new methods, the mere possibility of consolidations will bring thrills to the marketplace, where stocks are bought and sold and fortunes made—and often lost. Already, though the subject of unions of roads is still in the background, the sensitive ear can hear rumblings in Wall Street of new groupings of the railroads. The Pennsylvania Railroad and the New York, New Haven and Hartford are at this writing mentioned by the financial gossips as principals in a forthcoming merger, but one can be certain at this time that nothing final has been determined in the case of these two roads or 'any others.

IT is likely that the Interstate Commerce Commission will take the initiative in the matter of consolidations. The new Act authorizes it to prepare a general plan for regrouping of the railroad systems and also to approve the linking of any two individual systems, if this will not interfere unduly with competition. At the invitation of the commission, Professor William Z. Ripley, of the Economics Department of Harvard University, is now engaged in drawing up a general preliminary plan, which is likely to be the starting point of endless discussions on the subject of mergers.

Although the Act is broad enough in the clauses under consideration to permit various kinds of mergers, leading railroad investment bankers incline to the view that, at first, consolidations will be limited mainly to unions of a short line road of relatively poor credit standing with a longer system enjoying good credit.

From the viewpoint of the stronger roads, two motives will contribute to a decision to merge. First, the addition of the new mileage is likely to give it new gateways, to bring it to strategic points, and to enable it generally to round out and improve its lines. Secondly, the opportunity to complete a transaction profitable to the corporation and its stockholders will perhaps be a determining cause. The stronger road may assume that under its management the unprofitable weaker road may be converted into a producer of gain.

The object of the weaker road in entering an amalgamation would be to escape from an unprofitable, precarious existence, and to participate in the earnings of a profitable corporation that thrives under capable and efficient management.

To prevent huge profits to promoters of mergers obtained by pumping water into consolidated corporations, the new Railroad Act provides that the stocks and bonds of the combined company shall not be in excess of the total property value of the wedded properties. The principal opportunity for profit, therefore, must necessarily come from managing well a property which previously had been inefficiently handled. Moreover, mergers are likely to reduce overhead costs, for short lines— of 1,000 miles or less—which are likely to be prominent among the possible mergers, are compelled to carry an organization almost as large as the longer systems and the expense makes the business of operating such a road extremely hazardous and, as experience has shown, often unprofitable.

The expectation of a merger between any -wo or more given companies will stimulate speculation in the securities— especially the common stock—of each.

The market in rails may be expected to bubble with activity, as more definite information begins to emerge regarding specific deals. The far-seeing speculator knows that, if anything comes of the authorization for mergers —and most observers do expect developments—that the first consolidation will in all probability be between short lines of weak credit and longer lines of high credit. Later, a series of consolidations between groups of strong roads may come.

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MANY observers expect other roadsto merge with the St. Louis & San Francisco Railroad Corporation and with the Chicago, Rock Island and Pacific. A union of such roads as the Western Maryland and the Wheeling & Lake Erie would not come as a complete shock, nor would a merger of the Chicago, Burlington & Quincy and the Great Northern and the Northern Pacific. Another type of consolidation is likely to be of roads that already have a community of interest, such as the Chicago North Western and the Chicago, Minneapolis, St. Paul and Omaha.

Unquestionably, speculators will interpret mergers as favourable to stock prices and will begin to bid up securities affected as soon as they have either hunches or real information. Many observers of the ebb and flow of quotations that comprise the market believe that speculation in railroad stocks in the coming months will be an outstanding feature of the marketplace, and that the speculative appetite will be made all the more avid by the dynamic expectation that new alignments are likely.

Paradoxically enough, many railroad executives by no means hail with delight this prospect for a return to the ideas of Hill and Harriman. When Senator Cummins, who is responsible for this phase of the new railroad legislation, sought to make mergers mandatory, the Association of Railroad Executives vigorously expressed its opposition. The clauses enacted represented a compromise, which makes consolidations voluntary instead of obligatory.

Those railroad men who are cold to the subject of mergers as an immediately practical matter fear that it might throw a smokescreen around the present struggle of the roads to attain a better credit standing. They feel that the main job of the roads is to bring their earnings up to a sufficiently high level to convince holders of capital that they will be able fully to discharge their obligations. Railroad folk who take this position contend that the new Transportation Act, which provides for a fair return for sectional groups of railroads and the fall in commodity prices, will together operate toward the enhancement of railroad credit. After that has been heightened, the companies will be able to expand enough adequately to handle the country's growing demands for transportation. Better credit facilities—and the fall in commodity prices will eventually cause a fall in interest rates on borrowed money —will make it feasible for railroads to purchase equipment on a greater scale, fully to take care of .maintenance charges and betterments and in other ways to improve the efficiency of systems.

Undoubtedly, no will o' the wisp chase after possible mergers should retard the campaign to put the railroad on a more efficient basis.

But this movement need not indefinitely defer the making of desirable consolidations, which must be voluntary. And, since under the Act, the travelling public and shippers are required to pay rates which will give groups of railroads from 5½ to 6 per cent return on their property valuation, it is desirable that all the leaks caused by inefficiency be abolished. Since the users of transportation are in effect called upon to assure the railroads of a fair return, nothing should stand in the way of railroad efficiency and economical operation. The aim ought to be to have the railroads earn a fair return at the lowest possible cost to shippers and travellers. If mergers will make for more economical operation and will result in a saving to consumers, neither prejudice nor XVIIIth century economics should be permitted to obstruct their consummation.

THE Securities Department of Messrs. Huth & Company is offering the Danish Government 31/2 per cent loans of 1909, as well as the City of Copenhagen 4 per cent loan of 1901. Interesting circulars have been prepared on both of these issues, giving the denominations in which the bonds have been issued, pertinent facts as to yields and details on their maturity.

Balfour, White & Company, 136 St. James Street, Montreal, Canada, have prepared an interesting letter giving details regarding the exchange situation as it favourably effects the purchase of Canadian Securities by American investors. This resume briefly gives facts and figures as to why the rate of exchange at the present time makes the average Canadian Security an attractive purchase to Americans.

Horace S. Bell, of Albany, N. Y., is offering the Mississippi River Power Company fifteen years, 7 per cent, gold debenture bonds. A circular of much interest has been prepared which, among other facts, states that the Mississippi is the largest power company in the world (its capacity is one hundred and fifty thousand horsepower). This company supplies the light and current to St. Louis, and, besides this,' serves six million people in the Middle West.

Kardos & Burke, 32 Broadway, New York, have ready for free distribution an interesting booklet called Provide for Your Future Now. It shows how you can attain Financial Independence by saving and investing systematically.

In reviewing the financial situation for the past year, The Bache Review says, in part: The year 1920, especially the latter part, was marked by a credit strain which has rarely been equalled in this country, and never equalled without being followed by a financial debacle. That the country has been able to pass through this period without serious disaster is due to two things: the fact that the Federal Reserve System has stood back of the banking structure with a practically unlimited supply of credit and of currency, and the fact that the banks, during the years of war, had piled up untold percentages of profits, which enabled them, without serious consequences, to stand heavy losses (or at least heavy paper losses) in carrying through, without bankruptcy, firms and institutions which were temporarily crippled and many of which are still being carried. This attitude of the banks has been the. salvation of the industrial structure. Without the Federal Reserve supplies back of them, they would have been compelled to let good business concerns go to the wall and the falling cards would have swept the country with wrecks.