CHAPTER XXII
THE SOUTHERN PACIFIC MERGER CASES
New Era
There is no question that the final separation of the finances of the Central Pacific from those of the United States government was a matter of very great importance to both parties. The direct result was to place the federal government outside the Central Pacific instead of inside it. Instead of holding the dual relation of creditor and regulating body, Congress now stood as regards the Central Pacific in the same position as with respect to every other railroad in the United States—without interest in the company’s internal finance, but free to act in the interests of the consuming, shipping, and investing public. This was an immense advantage, both from the point of view of the government and from that of the railroad itself.
The Central Pacific reorganization of 1899, moreover, not only accomplished a desirable change in the external relations of the Huntington lines, but it also brought about a change in the relations between the Central Pacific Railroad and the Southern Pacific Company which was of considerable significance. It will be recalled that from 1885 to the time of the reorganization of the Central Pacific in 1899, these relations had rested upon a leasehold interest only. The insecurity of such a connection had been brought forcibly to the attention of the Southern Pacific management during the course of the reorganization proceedings. But as a result of the participation of the Southern Pacific in the reorganization which made possible the repayment of the government debt, that company became possessed of the ownership of the entire outstanding Central Pacific common and preferred stock. While such ownership still lacked the completeness which would have followed the assumption of direct title to the Central Pacific road-bed and rolling stock, it was considered satisfactory, and certainly was an improvement from the Southern Pacific’s point of view over anything which had gone before.
Separated from all financial connection with the government and with its parts joined together by the double tie of leasehold and stock control, the Central Pacific-Southern Pacific system, on the conclusion of the Central Pacific reorganization of 1899, entered upon a new era which contained possibilities of new policies, and of a sounder and more profitable development than it had yet known. There was, too, one additional circumstance which made it easy for the stockholders of the Southern Pacific in 1900 to embark upon new policies—namely, the death of Mr. Huntington. Of the original associates, Huntington was the last survivor. Mark Hopkins had died in 1878, Charles Crocker in 1888, and Stanford in 1893. For ten years, at least, Huntington had been the active manager of the Southern Pacific properties. Personally, he never owned so much as 50 per cent of the Southern Pacific stock outstanding,[591] but by virtue of the support of the Crocker and the Hopkins interests, he exercised almost undisputed control. Huntington had reached the ripe age of seventy-nine years in 1900, and his death was not unexpected. The effect was none the less great, however, for the passing of Mr. Huntington meant the removal of the last of the men to whom the integrity and independence of the Central and Southern Pacific companies were matters of personal pride.
Purchase of Control by Union Pacific
It was the death of Mr. Huntington, to repeat, which now made possible a very important change in the relations which the Central Pacific and the Union Pacific railroads bore to each other. While the Union and the Central Pacific roads both owed their existence to the same federal legislation, and while they had been close business associates for over thirty years by virtue of geographical necessity, both had uncompromisingly maintained their independence. Neither Jay Gould, who was long influential in Union Pacific affairs, nor Huntington himself, were men who cared to form part of organizations which they could not control. Moreover, Huntington distrusted Gould. He once wrote Colton that Gould had scared the Kansas Pacific people so that they had let him, Gould, get into bed with them. For his part, he did not intend to follow the Kansas Pacific example. Gould might frighten him so that he would leave the bed, but never so that he would share it. After Gould’s death in 1890, the same disinclination to combine persisted. The Huntington group was now powerful, and still unwilling to enter a combination which it could not control. The record shows that proposals were made. The Union Pacific, dependent upon the Central Pacific for direct connection with San Francisco, and fearful lest at Mr. Huntington’s death his Southern Pacific stock should fall into unfriendly hands, offered to purchase his shares, or, failing in this, to conclude a permanent alliance. To this offer Mr. Huntington remained indifferent.
Huntington died, however, in August, 1900, leaving his Southern Pacific stock to his widow and nephew in the proportion of two-thirds and one-third, respectively; and both, as had been anticipated, proved willing to dispose of their holdings. Negotiations were carried to completion in February, 1901. Four hundred and seventy-five thousand shares were purchased from the Huntingtons and from Edwin Hawley, the late financier’s most intimate business associate, while enough was secured from other parties through Kuhn, Loeb and Company to make an aggregate of 677,700 shares, at an average price of 50.6146. Market quotations were then in the neighborhood of 45. On February 4, Kuhn, Loeb and Company engaged to deliver to the Union Pacific one month later 72,300 additional shares at the same price, plus 4 per cent interest from February 11, bringing the company’s holdings up to 750,000 shares.
This, in Mr. Harriman’s opinion, was sufficient for control. A year or two later an attempt to force the Southern Pacific to pay in dividends earnings which its managers thought should be expended in improvements led the Union Pacific to acquire 150,000 additional shares. In January, 1910, purchases were renewed for the last time, in view of pending legislation in Congress which promised to make the possession of an absolute majority of Southern Pacific stock desirable; but these purchases ceased after 74,000 shares had been obtained, and 50,000 of these shares were subsequently sold. This concluded the episode. On June 30, 1911, the Union Pacific through the Oregon Short Line owned 1,266,500 shares of Southern Pacific common, or 46 per cent of all outstanding stock—sufficient to give undisputed control.