trade, and that it possesses the power to again unlawfully combine with others to do the same unlawful acts, and though not actively threatening, yet because of the disposition displayed throughout the larger portion of its history, it may again do so, I am of opinion, that the corporation should be prevented doing the things and repeating the practices respecting the fixing and maintaining of prices herein viewed illegal. The ordinary relief, obviously, is the injunction process of the court, which, in an ordinary situation, would follow such a finding as of course. I am satisfied, however, that the same end will be attained, in a manner consistent with recent legislation, by retaining jurisdiction of the bill, if desired by the government, for the purpose of restraining the defendants against engaging in the price fixing practices found illegal.

VI

UNITED STATES STEEL CORPORATION FINANCE1

THE

CAPITALIZATION AND INVESTMENT IN 1901

HE relation of the assets and actual investment of this great combination to the securities issued is of high public importance in estimating both the status of the Corporation itself, the reasonableness of its profits, and its other effects on the interests of the public.

The Corporation in 1901, after its organization had been fairly completed (and including the acquisition of the Shelby Steel Tube Company, which did not occur until August), had a total outstanding capitalization, including underlying bonds, sundry mortgages, and purchase-money obligations (but excluding $535,407 unacquired stock of subsidiaries), as follows:

For the purposes of the Bureau's investigation it was essential to make an analysis of the actual value of the physical properties of the Corporation in 1901, upon which this huge capitalization was based. The Bureau has made such an analysis by three different methods:

First, by organization history — that is, from historical study of the organization and investment of the constituent concerns at the time of their formation.

Second, by market value of securities - that is, by computation of the public estimate of the value of the properties of those 1 From U. S. Commissioner of Corporations, Report on the Steel Industry, Vol., July 1, 1911, pp. 14-38, 239-251, 40-60.

constituent concerns as reflected in the market prices of their securities.

Third, by departments of business—that is, by a detailed estimate of the physical properties of the company by departments of its business, computed from all available data and with an especially elaborate calculation of the value of the ore property.

The valuation arrived at by the Bureau by the first method, which is chiefly for tangible assets, is approximately $676,000,000; the valuation arrived at by the second method, which includes intangible considerations, is approximately $793,000,000; the valuation arrived at by the Bureau by the third and more precise method, this being for tangible assets only, is approximately $682,000,000.

None of these valuations includes any value imparted to these properties by the very act of merging them into the Steel Corporation and treating them as a unified going concern. Obviously such a value must be largely due to the element of concentration of control and consequent elimination of competition, which value should not be included in the present discussion.

It may be noted at this point that the United States Steel Corporation is a holding company, practically its entire property consisting of the securities of a number of subsidiary concerns, some of which, moreover, in turn own stocks in underlying concerns. For the sake of brevity and clearness in this report, however, it will be convenient to refer to the physical properties thus controlled as though they were directly owned by the Corporation itself. For all practical purposes such is indeed the fact.

ESTIMATED VALUE OF CORPORATION'S PROPERTY, BASED ON STUDY OF ORGANIZATION OF CONSTITUENT CONCERNS

The Bureau's estimate of the value of the Steel Corporation's property, arrived at by a study of the organization of the constituent concerns - approximately $676,000,000 - includes the entire physical property and not merely the equity over and above bonded indebtedness (which indebtedness, for these constituent concerns, is assumed to represent an equivalent invest

ment in property). It includes only a negligible allowance for intangible considerations.

In the main the valuations arrived at are based upon the method by which these constituent companies were organized. A very common basis of organization was to determine upon cash prices for the plants acquired and then to give the vendors (the owners of the plants) the option of taking the price in cash. or of taking preferred stock up to the full amount of the cash option figure, with a large bonus in common stock. New cash capital frequently was raised on the same terms. The result of this method of organization was that the preferred stock of the consolidated concern at its original organization represented practically the entire value of the property acquired — certainly the entire value of the physical assets.

This was the method followed in the four "Moore" companies, viz. National Steel Company, American Tin Plate Company, American Sheet Steel Company, and American Steel Hoop Company.

In the case of at least three of these companies a considerable block of the common stock was issued to the promoters as a "commission" for their services; in the case of the American Sheet Steel Company apparently some preferred stock was also issued for this purpose.

In the organization of the American Steel and Wire Company the preferred stock likewise covered the entire value of the physical property acquired at the time of organization, all of the common stock being issued either as a bonus or for underwriting services. The same method, substantially, was followed in the organization of the National Tube and American Bridge companies.

The common stock of the Federal Steel Company, however, appears to have had some property value back of it.

The valuation of the Carnegie company's property is more difficult because the organization of this concern was arranged privately by the former owners, and because its securities were never actively dealt in. The book value of the property of the old Carnegie Steel Company (Ltd.) (which had approximately a 29 per cent interest in the H. C. Frick Coke Company) on

March 1, 1900, or just before these two concerns were transferred to the Carnegie company of New Jersey, was, roughly, $81,500,000. This book value, while correct for some of the properties of the company, undoubtedly understated the value of others, particularly the item of "investments." Using such data as were available, the Bureau has arrived at the conclusion that the tangible property of the Carnegie concern in March, 1900, was not in excess of the $160,000,000 bond issue (the company also issued $160,000,000 of stock). A suggestive fact is that in organizing the New Jersey company $125,000,000 of bonds, and a like amount of stock, were allotted for the various Carnegie steel properties, and $35,000,000 of bonds and an equal amount of the stock for the H. C. Frick Coke Company. This clearly is analogous to a similar distribution of preferred and common stock in the case of several of the other constituent concerns of the Steel Corporation. These terms, in connection with other evidence presented in the body of the report, indicate that the Carnegie interest issued bonds up to subtantially the full amount of tangible property, leaving the stock to cover intangible considerations.

The Lake Superior Consolidated Iron Mines has been entered in the Bureau's estimate at a value equal to the par of its outstanding stock, approximately $29,400,000.

The foregoing valuations, it should be kept in mind, are applicable at the dates of the respective organizations of the companies named, except in the case of the last four concerns, where the figures given apply to the dates of acquisition by the Steel Corporation. By April, 1901, the various constituent concerns had increased their property investment, through surplus earnings, to the extent of approximately $117,700,000. Adding this sum, together with $25,003,000 new cash capital provided the Steel Corporation, to the valuations stated above and including underlying bonds, purchase-money obligations, and real-estate mortgages (which also cover any additions to the property made in this way), brings the indicated total investin the physical property acquired by the Steel Corporation in 1901 up to approximately $676,000,000, as shown by the table on the succeeding table. [P. 19 of Report, omitted.]