Application Denied

It was 3:30 p. m. The New York Stock Exchange was closed for the day. It was a free hour and the members of the Interstate Commerce Commission (in Washington) felt that they could do what they would do with a clean conscience. They gave to the press and to the world their decision (agreed to by a 6 to 1 vote, several members not voting) on the proposed Nickel Plate merger.

The decision was the product of many months and some half a million dollars' worth of hearings, not to mention several weeks deliberation on the part of the Commission. The proposal was for a merger of the Nickel Plate (New York, Chicago & St. Louis Railroad Co.) with the Pere Marquette, Erie, Chesapeake & Ohio, and Hocking Valley railroads into a great system with some 9,500 miles of track, connecting New York City and Newport News on the Atlantic coast with Chicago and St. Louis in the interior. It would be a fourth great Eastern railway system rivaling the New York Central, the Pennsylvania and the Baltimore & Ohio. The roads in the proposed merger are already controlled by the Van Sweringen brothers (O. P. and M. J.), who have demonstrated their capable management by their success with the Nickel Plate, which they acquired some years ago. They proposed by a system of 999-year leases to unite the five systems into one operating unit, thereby saving some $6,000,000 a year in operating expenses. The stockholders of the separate roads were to be compensated by being given stock according to certain ratios in the new and greater Nickel Plate Co. (a company with the same name as the old company except that in its official title the word "Railway" would displace the word "Railroad").

The chief points of the decision of the Interstate Commerce Commission:

The Pros:

1) The proposed consolidation would not decrease competition because the roads to be merged are not rivals; on the contrary, it would tend to increase competition with the other great systems ( N. Y. C., Penna., and B. & O.)

2) The proposed merger because of its greater geographical extent and traffic possibilities would have a more stable earning capacity than have the five members that would join in it.

3) The proposed system would result in great economies in operation, estimated at $6,000,000 a year.

4) Although the proposed merger of railroad routes is not exactly what the Commission itself had planned as desirable, yet it is certainly meritorious, is in accordance with the policy for consolidation laid down by Congress, and is in the public interest.

The Cons:

1) The directors of two of the roads (the Chesapeake & Ohio and the Hocking Valley) are in majority also directors of the Nickel Plate, and voted these two systems into the merger without proper consideration for the rights of their minority stockholders.

2) The financial structure of the proposed merger calls for a total book investment of $950,000,000. Of this total, approximately two-thirds is represented by bonds and other funded indebtedness. Something less than one-sixth of this investment would be represented by preferred (nonvoting) stock. Slightly more than one-sixth of the investment is represented by common (voting) stock. Consequently control of the whole system would be vested in those whose equity in the system amounts to only about one-sixth of the whole investment and this condition is aggravated by the fact that: 3) The Van Sweringens through a system of holding companies would actually control the system although owning a minority* of the comparatively small amount of voting stock, and moreover by a trust agreement could retain control of the system even after divesting themselves of all ownership. To have an investment of $950,000,000 controlled by persons who own but a very small fraction of it is not in the public interest.

The Finding. "Transportation plan generally approved. Financial structure disapproved, application denied."

Wall Street was deeply shocked by the decision, as was evident next day when Nickel Plate stock fell 33 points. It had been expected that the Commission would approve the merger subject to certain changes in the financial plan. But the decision was no blow to plans for other mergers, because the Commission had evidenced its willingness to look on plans for uniting transportation lines without prejudice. The Van Sweringens meantime went into conference to consider the possibility of revamping their merger scheme to suit the Commission.

*This type of minority control is best illustrated by a simple example: Suppose that a $600,000 corporation (A) with $100,000 worth of voting stock is controlled by a holding company (B) holding $51,000 of its stock. Suppose this holding company is controlled by another corporation (C) owning $26,000 of its stock. A person holding $14,000 of the stock of this third corporation (C) could control the $600,000 corporation.