CAPITALIZATION
| Seven Reorganizations, 1893–8 | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| Before | After | ||||||||
| Bonds | Preferred Stock | Common Stock | Total | Bonds | Preferred Stock | Common Stock | Total | ||
| Atchison | 69.2 | 30.7 | 100 | 48.9 | 39.6 | 30.7 | 119.2 | ||
| B. & O. | 72.9 | 4.5 | 22.5 | 100 | 121.3 | 35.4 | 31.6 | 188.3 | |
| Erie | 58.4 | 4.1 | 37.4 | 100 | 59.0 | 22.1 | 48.1 | 129.2 | |
| N. Pac. | 61.0 | 16.5 | 22.4 | 100 | 71.3 | 34.2 | 36.5 | 142.0 | |
| Reading | 80.3 | 19.6 | 100 | 61.2 | 33.2 | 33.2 | 127.6 | ||
| Southern | 52.5 | 8.8 | 38.6 | 100 | 43.8 | 23.5 | 59.8 | 127.1 | |
| U. Pac. | 40.9 | 27.3[719] | 31.7 | 100 | 50.4 | 45.7 | 39.1 | 135.2 | |
| Average | 65.8 | 4.6 | 29.5 | 100 | 59.1 | 33.6 | 39.2 | 132.0 | |
| Seven Reorganizations before 1893 | |||||||||
| Atchison, ’89 | 67.7 | 31.8 | 100 | 95.6 | 31.8 | 127.4 | |||
| Atchison, ’92 | 68.8 | 31.1 | 100 | 70.2 | 31.1 | 101.3 | |||
| E. Tenn. ’86 | 48.2 | 19.2 | 31.9 | 100 | 22.1 | 34.2 | 31.9 | 88.2 | |
| Erie, ’75 | 38.5 | 61.4 | 100 | 47.4 | 60.5 | 107.9 | |||
| Reading, ’80 | 69.1 | 1.3 | 29.5 | 100 | 86.3 | 1.3 | 29.6 | 117.2 | |
| Reading, ’83 | 71.9 | .4 | 27.6 | 100 | 100.4 | 27.6 | 137.7 | ||
| Rk. I. ’80 | 32.2 | 67.7 | 100 | 40.3 | 135.4 | 175.7 | |||
| 62.5 | 1.7 | 35.7 | 100 | 73.9 | 2.8 | 37.6 | 114.4 | ||
| One Reorganization, 1902 | |||||||||
| Rk. I. ’02 | 54.2 | 45.7 | 100 | 55.7 | 40.0 | 57.2 | 152.9 | ||
The most striking fact is that every reorganization but one has occasioned an increase in total capitalization.[720] The increase varies from 1.3 per cent for the Atchison in 1892 to 88.3 per cent for the Baltimore & Ohio in 1898; and the average increase is 32 per cent for the later period and 14.4 per cent for the earlier. This reflects the exchange of new securities on which a lower rate of interest is payable with securities on which all payments are optional, for old securities which claim a high annual return. It is the result of the attempt to reduce the demands upon reorganized corporations without materially reducing the sums which old securityholders may in times of prosperity receive. It reflects also, however, the sale of securities for ready cash, or the exchange of these for assessments, as well as the investment of minor sums in the improvement of the roads. A closer examination of the table shows that the increase comes chiefly in bonds before 1893 and in stock after that date. The average increase in bonds of the seven reorganizations before 1893 was 11.4 per cent and of common stock .9 per cent; whereas bonds decreased between the reorganizations of 1893–8 from 65.8 per cent to 59.1 per cent of the previous capitalization, although common stock increased 9.2 per cent and there was introduced a great volume of preferred stock which is scarcely found at all before. The less radical nature of the early reorganizations and the use of income bonds instead of preferred stock as a security with optional interest are here apparent. In brief, the statement of capitalization before and after reorganization summarizes and confirms the conclusions which we have reached. A few fundamental principles have underlain the complicated details of the exchanges of new securities for old. These principles appear when the reorganizations are examined one by one, and they show not less clearly when all the reorganizations are taken in two general groups.
Another question now naturally arises. If an increased capitalization has been obtained without an increase in charges, owing to the lowering of the rates of bond interest and to the liberal use of stocks or income bonds, what has been the effect on the market value of the securities concerned? Is the aggregate value of the new securities less or greater than the aggregate value of the securities which they have replaced? It has been seen that taken as a whole less annual payments can be claimed from the railroads as of right. Has this fact decreased aggregate quotations, or has the larger volume of securities and the chance for dividends over and above the minimum interest, raised such quotations higher than they were before? The following tables compare the quotations of securities disturbed by the various reorganizations one year before the failure of their railroads, with the quotations one year after reorganization of the new securities issued to exchange for them. A third column is inserted to show the effects of years of prosperity upon quotations subsequent to reorganization.
| Seven Reorganizations, 1893–8 | ||||
|---|---|---|---|---|
| Lowest quotation of month one year before failure | Lowest quotation of month one year after reorganization | Lowest quotation December, 1906 | ||
| Atchison | $184,857,934 | $129,364,451 | $342,941,683 | |
| B. & O. | 26,955,000 | 34,092,518 | 45,634,437 | |
| Erie | 67,190,748 | 38,895,077 | 82,230,457 | |
| N. Pac. | 157,555,214 | 135,507,699 | 289,557,415 | |
| Reading | 88,940,250 | 71,607,223 | 179,190,107 | |
| Southern | 45,653,414 | 35,231,356 | 71,411,937 | |
| U. Pac. | 83,241,672 | 103,329,339 | 187,596,748 | |
| $654,394,232 | $548,027,663 | $1,198,562,784 | ||
| D. 16.2 per cent I. 83.1 | ||||
| Four Reorganizations before 1893 | ||||
| Atchison, ’89 | $129,142,003 | $113,993,417 | ||
| Atchison, ’92 | 35,100,000 | 42,600,000 | ||
| E. Tenn. ’86 | 17,657,377 | 21,746,188 | ||
| Reading, ’83 | 39,061,531 | 48,664,864 | ||
| $220,860,911 | $227,004,469 | |||
| I. 2.7 per cent | ||||
It thus appears that the increased volume of securities of the reorganizations of 1893–8 sold for a less aggregate price than did the smaller volume which it replaced. Whereas the disturbed securities of the seven roads in question, multiplied by their quotations one year before reorganization, give a product of $654,394,232, the new bonds and stock given for the disturbed securities, multiplied by their quotations one year after reorganization, give a product of $548,027,663.[721] This is not true for three of the four reorganizations before 1893, and it is not true for the reorganizations of the Baltimore & Ohio and of the Union Pacific in the later period. Individual causes account for most of the difference. The Reading reorganization of 1886–8 took place so soon after the previous failure that our method makes it necessary to take the quotations of securities “before reorganization” only five days after the railroad has left receivers’ hands. These figures are therefore unduly depressed. The Atchison reorganization of 1892 was voluntary, and was not caused by financial difficulties. The reorganizations of the Union Pacific and of the Reading in 1897 and 1898 respectively occurred later than most of the other reorganizations and benefited from the sharp increase in stock and bond quotations which began in 1897. For the seven reorganizations of 1893–8, to repeat, the aggregate market value of old securities before reorganization was greater than the market value after reorganization of the new securities given in exchange for them. The smallest changes took place in the senior securities. In the case of the Northern Pacific the aggregate value of the three prior mortgages disturbed increased from $85,498,685 one year before failure to $86,158,702 one year after foreclosure; while the consolidated or blanket mortgage of the company decreased from $36,032,360 to $29,235,111. In the case of the Reading the value of the general mortgage 4s increased from $37,160,977 to $37,383,503, while the first, second, and third income bonds decreased from $32,353,497 to $22,784,700. The reason was not generally a smaller increase in volume, but the fact that new bonds of fairly stable value were given for the better sorts of old securities, while old junior mortgages were apt to receive new income bonds or preferred stock, of which the value varied within wide limits.
The wide difference in the nature of the securities of the different roads forbids any attempt at precise classification. The following divisions may, however, be made: Three of the reorganizations from 1893–8 retired branch-line bonds for which quotations are obtainable, with a resultant increase in value for the issues of $3,256,127, or 14.2 per cent. Five of the reorganizations dealt with what may be classed as general mortgage bonds, and the value of the new securities given was to the value of the old as $182,160,406 to $196,186,382, or a decrease of 7.1 per cent. Three of the reorganizations retired junior bonds other than income. The value of the old securities was $47,874,648 and that of the new $22,272,174, or a decrease of 53.6 per cent. Four of the reorganizations retired income bonds. The value of the old securities was $40,913,662, the value of the new was $28,177,721, and the decrease was 31.1 per cent. Three of the reorganizations retired old preferred stock, and reduced the aggregate market value from $36,509,662 to $13,825,138, or 62.1 per cent. Finally, the common stock decreased 21.3 per cent from an aggregate value of $125,160,409 to one of $98,316,060. Stated in tabular form the result is as follows:
| Value one year before failure | Value one year after reorganization | Per Cent increase or decrease | ||
|---|---|---|---|---|
| Branch-line bonds | $22,840,928 | $26,097,055 | I. 14.2 | |
| General mortgages | 196,186,382 | 182,160,406 | D. 7.1 | |
| Junior mortgages | 47,874,648 | 22,272,174 | D. 53.6 | |
| Income mortgages | 40,913,662 | 28,177,721 | D. 31.1 | |
| Preferred stock | 36,509,662 | 13,825,138 | D. 62.1 | |
| Common stock | 125,160,409 | 98,316,060 | D. 21.3 |
This makes more definite the conclusion which has been outlined in general terms before. The burden of the reorganizations from 1893–8 fell on the junior securities and stockholders. The holders of prior lien bonds actually had more value than before one year only after reorganization had taken place; the general mortgage bondholders had nearly recouped their losses; while the former position of the other creditors and of the stockholders was far from being regained.
It may be objected that the decreases in market quotations were due to a general decline in prices of securities and not to reorganizations of the roads in question. This objection, however, cannot hold. It is true that a general decline began in the United States in February, 1893, and continued through 1894, reaching its lowest point in August, 1893, and, after that, in March, 1895; and that this decline was due to general conditions of panic and depression. In 1895, however, a revival took place, and, proceeding with uncertain steps through 1896, became obvious and important in 1897 and 1898. The average date of failure from 1893–8 of the seven roads described in the text was October 1, 1893, and the average date of reorganization was September 1, 1896. Since the market price figures quoted are taken one year before failure and one year after reorganization, conditions in October, 1892, should be compared with those in September, 1897. The following diagram traces the movements of twenty-six important railroad common stocks between those dates. Quotations for none of the seven railroads in question are included.[722]