Eaton to the Wars

Cyrus Stephen Eaton is a well-dressed, frosty-eyed financier of 56. He left his native home in bleak Pugwash, Nova Scotia, to study for the Baptist ministry. In Cleveland in 1925 he dramatized his power to refinance Trumbull Steel Co. by proving to its officers that Cleveland Trust Co. would honor his check for $20,000,000. By 1930 he was instrumental in forming the No. 3 steel Company (by mergers built on Republic), was sitting on the boards of 20 great corporations (utilities, steel, paints, hotels). That year he helped undermine the foundation of the tottering Insull empire by selling Sam Insull a huge block of stocks in Insull companies for $56,000,000, about $6,000,000 above its market value. His financing, in the hardbitten, buccaneering tradition of the Coolidge Era, took on a heroic cast because it brought to the Middle West its share of control of American Industry. Admiring Clevelanders called him "Cyrus the Great."

Depression I finally knocked the props from under Mr. Eaton, washed away his industrial controls. By 1932 he was left with little except his Cleveland securities house, Otis & Co. But Mr. Eaton still rode to hounds. And last week he rode off again to the financial wars.

Cyrus Eaton's Otis & Co. wrote a letter to Wendell Willkie, president of Commonwealth & Southern Corp., saying that they understood that big holding company was about to buy 125,000 shares of stock from its Michigan subsidiary, Consumers Power Co. Mr. Eaton righteously set out a plan to disprove Wendell Willkie's chronic complaint that investors will not buy utilities securities: his Otis & Co. would gladly pay a price "substantially in excess" of the $28.25 that C. & S. was going to pay.

Promptly from Mr. Willkie to the news services went an angry reply: Commonwealth & Southern had offered a year ago to pay up to $60 for Consumers stock, said he. Both SEC and the Michigan Public Utilities Commission had ruled that it could buy the stock at book value.

From the Washington front, another gun began firing from an unsuspected emplacement. For probably the first time in his checkered career Cyrus Eaton found he had old, reforming Senator George Norris on his side. "The Power Trust." said the frail Senator in a prepared statement, "is caught at its old tricks. ... It happens again that the holding company is robbing its own subsidiaries, in order to enrich itself." Rejoined Willkie: "Completely and absolutely false." Back came George Norris with another blast to the effect that the cost of the stock deal would be reflected in electric rates paid by Michigan consumers.

Senator Norris is no longer as young as he once was, and his remarks made less than no sense. Electric rates are not based on per share stock prices; they are based on the total amount of money invested (or supposed to be invested) in the business. Nor could Commonwealth & Southern rob Consumers Power even by buying its stock at 1-c- a share: Commonwealth & Southern already owns 100% of the common stock of its subsidiary, and regardless of price will still own 100% after the transaction it proposes. For that matter, Commonwealth & Southern would lose nothing by paying $1,000,000 a share.

The object of the deal was to put $3,500,000 into Consumers Power, which recently dedicated a new 35,000-kilowatt plant at Kalamazoo, is constructing a new 70,000-kilowatt plant in Bay City. This will fatten up the equity in Consumers Power in preparation for issuance of $28,500,000 in bonds ($10,000,000 for new money, $18,500,000 for refunding).

Meanwhile, all was relatively quiet on a more important financial front established by Cyrus Eaton's letter. In addition to proposing public bids on the stock issue, he had also proposed that he and associates (including big Halsey Stuart & Co.) be allowed to bid on Consumers' $28,500,000 bond issue. Foe of competitive bidding, Wendell Willkie had already arranged to have the issue handled by conservative Morgan Stanley & Co., Inc. and Bonbright & Co., Inc., who step out one door when competitive bidders step in at another, holding that both investor and issuer are best served by honest, astute, noncompetitive handling. Since the Consumers Power stock issue is small potatoes to any underwriter, there was a shrewd suspicion that Mr. Eaton was really aiming at the bond issue (on which the banking fee at 2% would be more than $500,000), rather than at making a raid on Commonwealth & Southern such as he made on the Insull empire ten years ago.

By last week the Eaton-Norris army had slowed its firing, and Mr. Willkie's patience had been exhausted. To the Sunday papers he sent a statement:

"If Otis & Co. is really interested in buying common stocks of utility companies for investment purposes, they can purchase at book value . . . the stock of the Detroit Edison Co. . . . They can likewise buy the stock of Consolidated Edison Co. of New York ... at approximately 60% of book value. ..."

Mr. Willkie wound up with an ironic tribute to the public-relations finesse of his opponents, who issued their statements to the press at night, forced newsmen to call Willkie by phone for his replies, which ran at the tail end of stories in morning papers. Said he: "Apparently, the foes of the utilities prefer to work under cover of darkness. At least their strategy requires me to stay at home at night, to be on hand for inquiries from the press, and that is probably salutary."

Early this week Jerome Frank and the SEC were deliberating in Washington whether to give any ear whatsoever to Cyrus Eaton & friends.

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