important task in 1945 for the Gulf, Mobile and Ohio, was its effort to
merge the Alton Railroad into the GM&O’s activities.
All of the studies made by the GM&O appeared favorable to
combined operations if a satisfactory capital structure could be
secured. Under a joint operation, a longer haul would be possible on
much traffic which formerly had been shipped part of the way to
destination over one or the other of the two lines.
From the information available, it seemed that at the time of
merging, the GM&O could offer much more to the Alton than the Alton
could offer to the GM&O.
This was true primarily because the GM&O could better control
its originated traffic and thus deliver much of its northbound business
to the Alton at St. Louis.
important factor in these studies was the almost complete absence of
efficient equipment on the Alton. During
the worst of the depression years, the Baltimore and Ohio (B&O) had
had much more equipment than it needed; so it supplied equipment to the
Alton, seldom receiving any pay for its use.
As a result of this situation, the Alton had only old, worn-out
equipment, and it had no Money to buy anything new.
these facts at hand, the GM&O proceeded to negotiate with
representatives of the Alton Bondholders Protective Committee in New
York. Another meeting took
place in Chicago some time later. On
April 26, the GM&O agreed to acquire the Alton on terms acceptable
to the bondholders’ representatives.
In effect, the GM&O was to purchase outright the properties
of the Alton. All Alton mortgages were to be satisfied by bankruptcy proceedings,
and the property thus cleared was to be placed under the GM&O’s
terms which were finally accepted were these: the GM&O was to give
to each holder of a $1,000 3 per cent Alton bond a $500 4 per cent
Series B GM&O income bond and 7¼
shares of GM&O common stock, which had no par value but was assumed to
be worth $30 in the current market.
The GM&O was to get the Alton properties free of debt, and
these properties would be subject to the GM&O’s two mortgages.
The GM&O was to assume the equipment obligations of the
receiver of the Alton, and it was also to agree to assume the leases on
the Joliet and Chicago Railroad and on the Louisiana and Missouri River
Railroad-two of the three leased lines in the Alton system.
The third line, the Kansas City, St. Louis and Chicago, which
controlled the tracks to Kansas City, was to be leased under new terms.
this plan, the GM&O was to get the Alton properties without any
increase in its fixed charges, except in the case of equipment recently
purchased by the receiver. The
leased roads, of course, would receive fixed rental payments, but these
payments would be relatively small.
Under this plan the GM&O had much to gain and little to lose.
The Alton bondholders, however, felt that this was the best plan
which was available to them, and they were glad to agree to the joining
of the two systems. Because
the future of the combined properties looked bright, the Alton
bondholders deliberately chose common stock rather than preferred so
that they could share in the expected rise in GM&O securities.
the basis of the above plan, the GM&O applied to the Interstate
Commerce Commission on May 14, 1945, for
permission to acquire the Alton. Hearings
were set for June, and this time no opposition was expected from any
source. The case was
prepared carefully, however, in order to forestall any trouble and to
speed the transaction as much as possible.
the same time that the GM&O was negotiating with the representatives
of the holders of Alton bonds, negotiations were going on with other
interested parties. The
B&O had a variety of secured and unsecured claims against the Alton
totaling over $15,000,000, which did not include the Alton stock held by
the B&O. Obviously the B&O did not hope to collect anything like
that sum from any reorganization of the Alton; but from the GM&O’s
standpoint, it was essential to remove the possibility of B&O
interference in ICC proceedings on a prospective merger.
In ail effort to hasten the reorganization, the GM&O on May 25, 1945, paid the B&O $1,190,925.85 for
all its claims on the Alton, plus all of the Alton stock, plus the
collateral which the B&O had pledged to the Reconstruction Finance
Corporation for the purpose of securing an RFC loan previously made to
the Alton. As a result of
this action, the B&O was removed from the Alton proceedings
entirely, and it tacitly supported the GM&O’s merger proposal.
this and a few minor transactions which took place later, the B&O
received about 2 cents on every $1.00 of total claims that it held
against the Alton. It was
obvious, of course, that the B&O’s $25,000,000 in Alton stock
represented no equity, and many of the B&O’s claims were unsecured
bookkeeping transactions such as those which resulted from the
B&O’s practice of providing equipment to the Alton for use during
the depression. Most of
this payment from the GNMO was for the relatively valuable collateral
which had been pledged against the RFC loan.
In the light of these facts, it seems that the B&O received
reasonable payment under the circumstances.
At any rate, the B&O was satisfied with the transaction and
did not oppose the consolidation. It
has been said that one of the reasons that the B&O was willing to
compromise its claims was its income tax situation in 1945.
The B&O had long ago written
off its investment in Alton stock, but the Internal Revenue Department
had not been convinced of the losses involved.
By this sale, the Baltimore and Ohio was able to prove its losses
and was able to have a major deduction in 1945 to
offset its high net income for that year.
If the transaction had come in a less prosperous year for the
B&O, the payment required from the GM&O might have been larger
or the discussions might have lasted longer.
THE ALTON MERGER
PROCEEDINGS BEFORE THE
The ICC hearings on the
GM&O merger with the Alton had none of the elements of a pitched
battle between rival camps, as had been the case in the Mobile and Ohio
merger hearings in 1939. The
Illinois Central, the Wabash, and the Chicago and Eastern Illinois
appeared to protect all “through routes and channels of trade via
gateways now existing.” This
was quickly settled because it was stated at the opening of the hearing
that the GM&O “is willing for the
Commission to impose . . . the
condition that Gulf, Mobile and Ohio shall maintain and keep open all
routes and channels of trade via existing gateways unless and until
otherwise authorized by the Commission.”
Various groups of
interested security holders, as well as the receiver, had offered
tentative plans to reorganize the Alton, but, as the hearing progressed,
all of these groups temporarily shelved their plans and accepted the
basic points of the GM&O proposal.
Because of this, the Commission was able to devote the time of
the hearings to the effect of the proposed merger on the two roads.
Hicks of the GM&O stated that the merger would help his road by
increasing revenues, but “the consummation of this transaction results
in no increase in Gulf, Mobile and Ohio’s fixed charges except as to
Alton equipment obligations-and rentals for leased lines.” He also
made it clear that the GM&O did not really want the line to Kansas
City, but it had agreed to take that segment in order to speed up the
entire Alton transaction.
The main reason
the GM&O did not desire this line to Kansas City was that the
GM&O was a north-south road and the Kansas City line was primarily
an east-west operation. In
addition, everyone connected with the Alton said that the Kansas City
line was the major cause of the Alton’s downfall.
The tentative plan to dispose of the Kansas City line made the
whole proposition appeal to the GM&O.
The traffic studies which the GM&O had made
of the possibilities of combined GM&O-Alton operations were
summarized for the benefit of the Commission. It was pointed out that the combination would be primarily an
end-to-end merger and that both lines could feed some additional traffic
to the new company, which would tend to increase the length of haul.
The studies indicated, however, that the GM&O would help
the Alton more than the Alton would help the Gulf, Mobile and Ohio.
E. B. DeVilliers, Assistant Vice-President in Charge of Traffic
for Gulf, Mobile and Ohio, said,
. By far the larger part of the additional revenue to be realized from the longer haul
of traffic is on the Alton end. That is, it is contributed by the Gulf,
and Ohio to the haul for the Alton.
We found many more cars being handled by the
and Ohio that could be handled via the Alton than vice versa. Approximately 80 per cent of the additional revenue to be
realized is contributed by the Gulf, While and
Ohio traffic. That is, it
comes from traffic now being handled by the Gulf, Mobile
and Ohio and which we believe will be handled by a longer haul, Alton
Junction. The other 20 per
cent is contributed by the Alton. That is, it comes from traffic now being handled by the
Alton which we believe can be handled by longer Gulf, Mobile and Ohio junctions.
. . .
point was the fact that the GM&O was not just buying the stock of
the Alton, but that it was proposing a true Merger.
Thus the GM&O would accept full responsibility for the Alton
as well as have a chance to profit if the Alton should show an improved
earning capacity. E. D. Scruggs, who had testified at the GM&O - M&O
merger hearings as a witness for the M&O Bondholders Committee,
testified this time as an employee of the GM&O The more important
parts of his testimony are quoted in Figure 17.
the testimony had been given about the corporate parts of the plan and
the traffic potentials of the merger, Mr.
Hicks was recalled to state the GM&O’s policy with regard
to employee treatment in the merger.
His testimony said in part:
Exam. Molster]--Mr. Hicks,
didn’t you testify as to the effect of this proposal upon employees?
I remember your testimony, you said they would not be adversely
stated, I believe, that they were protected by the Washington Job
Protection Agreement, and based on our experience with the Gulf, Mobile
and Ohio acquisition in a merger case, not a single complaint arose that
was not settled on the property.
much is it going to cost you to take care of employees under this
A-We did not avail ourselves
the Washington Job Protection Agreement in the
case of the Gulf,
and Ohio case and we did not pay any wage dismissal or any allowances to
any employee. We kept all
employees, and that will be our purpose in this case, to retain all
employees and let normal and natural attrition take up the slack.
case for the Alton Bondholders Protective Committee was stated by Mr.
Louis Boehm and Mr. Patrick B. McGinnis.
Mr. Boehm opened this part of the testimony by explaining the
manner in which the Alton group began negotiations with the GM&O.
He also gave some of the major reasons why the consolidation was
accepted by the Alton creditors. The
major points of his testimony were:
. . I happened to read or have called to my attention, rather, a
statement which appeared upon Dow-Jones’ ticker issued by Mr. I. B.
president of the
Gulf, Mobile and Ohio Railroad Company, that the Gulf,
and Ohio had made some traffic studies of the Alton Railroad and that it
had come to the conclusion that the merger o£ the two roads would be
beneficial to both, but that the bonds were widely scattered and there
didn’t seem to be anybody to represent them, so they have dropped the
idea, so I called Mr. Tigrett on the long distance telephone at Jackson,
Tennessee and told him of the existence of our committee and that we
were ready to talk with him about a merger.
Mr. Tigrett with some of his operating officials came to New York and we
negotiated for the sale and merger of the Alton with the Gulf, Mobile
Mr. Tigrett of the Gulf, Mobile
and Ohio made us a proposition. The
committee considered it, it made a counter-proposition which was
considered by the Gulf, Mobile and Ohio and finally accepted and the
present plan and agreement is the result of an arm’s length
negotiation between the committee and the Gulf, Mobile and Ohio Railroad
and is in the opinion of the committee, the best deal that could have
been made under circumstances, particularly in view of the fact that
according to the present management of the Alton, approximately
$26,600,000 would have to be spent for equipment in addition to
$6,000,000 already spent by the Trustee and according to Coverdale and
Colpitts, $17,850,000 would have to be spent in addition to $6,000,000
already incurred by the Trustee, making a total in one case of
$26,600,000 and in the other case $23,830,000 for this railroad.
McGinnis went briefly into the background of this transaction front his
standpoint. He explained as
. At the first
meeting of the committee I told the committee that we had a lien on the
plant and structure but the road was almost devoid of equipment and that
my solution, if possible, would be to combine our plant and structure
with a railroad having equipment.
you and Mr. Boatner thereupon, at the request of the committee, contact
certain railroads for the purpose of interesting them?
merging with the Alton?
roads did you contact?
the two of us, the Santa Fe, the Wabash and the Chicago,
Burlington and Quincy.
were you told by the management of these railroads?
displayed no interest.
were not interested in taking over the Alton?
Since the Alton group could
not interest any of these railroads, they were quite
ready to talk with the GM&O about their merger proposal.
Mr. McGinnis stated his reasons:
were some other reasons why I recommended the acceptance of the GM&O
. . The offer, as Mr. Scruggs says, is not a purchase of the
common stock which happened four times in the past, by various
railroads. It is the
acquisition of the physical properties; so that the fortunes of the
Alton will be the same as the fortunes of the Gulf, Mobile and Ohio.
reason, as I said, I think it is a permanent cure to Alton as against
the palliatives that have gone through in the past and I think that the
capitalization is reasonable and conservative and yet as far as the
bondholders are concerned, we now receive $30 a year interest, when it
my opinion, the $500 income bond of the Gulf, Mobile and Ohio 4 per
cent, $20 a year, will be paid in any of the foreseeable future so that
beginning, if the plan is approved, beginning January 1, this year, the
Chicago and Alton bondholder will be receiving what amounts to two
thirds of their full interest beforehand, yet it will not be a fixed
charge on either company.
particularly adopted a course of accepting common stock rather than
preferred because we believe in the future this combined system and by
taking 7¼ shares of stock, if they got a bargain we are going to
participate in it and if they did not, the same way but at least in my
opinion we are assured of two-thirds of the interest which we would get
under our full bond under the old deal.
reason that I recommended the plan is that in my opinion, even in normal
times, there is hope and justifiable hope for looking forward to
reasonable dividends and if we should, in some future year, receive a
dividend of 51.00 a share on our seven shares, we are up pretty close to
our former full return.
also think that this combined system eventually will justify a price of
$40 a share. It is
presently selling at 27⅞. In
other words, since this deal was announced, the stock has advanced from
16 to 27⅞.
Of course, it is true that
the whole railroad market has gone up but nevertheless the percentage is
greater in this stock than it is in most of the others which: No. 1, I
think indicates that the general market has recognized the substantial
fairness of the plan, and even more, the probable success.
there was no opposition and all parties seemed eager to proceed to the
work of the
actual merger, the hearings were brief, and the trial examiners’
report was dispensed with.
Instead, the Commission proceeded to study the case as soon as
possible, and on September 19, 1945, it gave its approval to the
this step, the Company proceeded as quickly as possible to advance
through the maze of legal technicalities toward the merger.
On May 28, 1946, the federal district court approved the plan as
a basis for reorganization proceedings for the Alton under Section 77 of
the Bankruptcy Act.
It was not until May 31, 1947, however, that all the details of
the plan were completed and the task was formally concluded.
FROM TESTIMONY OF E. D.
SCRUGGS IN HEARINGS,
FINANCE DOCKET Nos. 14931,
different reports were made on the Alton situation. Back in 1941 Mr. William Wyer made a report for the insurance
group of the Alton bondholders and Coverdale and Colpitts made a
report for the savings banks groups of the Alton to estimate what
effect Baltimore and Ohio control had had on the Alton properties.
After very thorough and careful investigations, they both came
to very nearly the same conclusions.
the year 1939, Coverdale and Colpitts estimated that if the Alton had
been operated independently and had owned its own equipment they would
have earned $611,000 more than they actually, earned.
Wyer based his estimate on the three years, 1937, 1938 and 1939 and
for those three years he estimated that the Alton would have earned
$631,000 additional net if the road had been independently operated.
Molster--What does that imply,
Mr. Scruggs, that the Baltimore and Ohio was not very generous with
Witness-No, sir, I wouldn’t say that.
I think in my observation of system operation, of any system,
the duty of the management primarily is to get the best results for
the system as a whole. The
Baltimore and Ohio control of the stock, 100 per cent of the stock of
the Alton, and as long as it was solvent, I think they, operated it to
get the maximum benefit for the Baltimore and Ohio system.
Molster-The Alton would not have
been a great deal better off, would it, with these amounts that you
have indicated? The Witness: It would have been better off than the
earnings in the past showed but, in my opinion, they would not be
nearly as well off under independent operation as they would as a part
of the Gulf, Mobile and Ohio.
Mr. Lott]-And that is the essential difference, is it not, between the
Baltimore and Ohio’s control of the Alton and the Gulf, Mobile and
are several differences. The
biggest difference, as I see it, in the public interest, is that the
Gulf, Mobile and Ohio is not proposing to acquire control of the Alton
and leave the Alton as a separate company for whatever hazards there
might be in the future for that road.
Gulf, Mobile and Ohio is here proposing to take over the Alton road as
such, so that in the future there will be no distinction between what
is presently Alton lines and what is presently Gulf, Mobile and Ohio
lines. In other words,
they will sink or swim on the total consolidated picture and not on
what might happen to one end of the line or what might happen to the