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A Study in Merger: Formation of the International Mercantile Marine Company

Published online by Cambridge University Press:  24 July 2012

Thomas R. Navin  and
Marian V. Sears
Thomas R. Navin
Affiliation:
Assistant Professor of Business History at Harvard University
Marian V. Sears
Affiliation:
Assistant in Courses at Harvard University
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Abstract

Generalizations about the merger movement in America at the turn of the century have too open been predicated upon inadequate information about the motives and mechanisms involved and the results achieved. This has been particularly true of those combinations in which the firm of J. P. Morgan & Company was involved. The International Mercantile Marine Company merger of 1902 has hitherto been misrepresented as a promotion of Wall Street. The subsequent course of this venture shows how even a combination of the world's most astute bankers and shipping men could be misled in analysis and held powerless to affect their own destiny by the march of economic and political events. Not all the grand combinations of the early twentieth century yielded lush promotional profits; neither should the evidence of overcapitalization in such combinations always be accepted at face value.

Type
Research Article
Information
Business History Review , Volume 28 , Issue 4 , December 1954 , pp. 291 - 328
Copyright
Copyright © The President and Fellows of Harvard College 1954

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References

1 Annual Report of the Commissioner of Navigation (Washington, 1902), p. 67.

2 Huldermann, Bernhard, Albert Ballin (New York, 1922).Google Scholar

3 Unless otherwise stated, most of the statistical material is from reports of Price, Waterhouse & Company, or its affiliate Jones, Caesar & Company.

4 Clement Acton Griscom was born in Philadelphia in 1841 of an old Philadelphia family of some means. He attended a Quaker school, and at 16 became a clerk in a firm of shipping merchants, Peter Wright & Son, advancing to partnership at 22. He devoted his life to the shipping business and became one of the wealthiest men of the country. After the mode of the time, he owned a large country estate, collected paintings, owned a private railroad car, and operated an ocean-going steam yacht. Besides his shipping interests, he became a director in some 25 enterprises, the more important, aside from the IMM, being the Pennsylvania Railroad and the National Transit Company, the largest of the Standard Oil pipeline companies and a firm in which he occupied the honorary position of president. In addition he was influential in the Republican Party. Although New York became important as a center of his business interests, he continued to reside near Philadelphia.

He traveled widely, and customarily spent several months abroad each year. As a result of his international shipping connections, both Germany and Belgium awarded him decorations. He was 61 in 1902 when he became president of the IMM. He died 10 years later.

5 The Commercial and Financial Chronicle, 11 Feb. 1899, p. 282.

6 “Steamship Lines as Extensions of Railroad Systems,” The Commercial and Financial Chronicle, 16 March 1901, p. 507.

7 United States Investor, 17 June 1899, p. 794.

8 Bernard Nadal Baker was born in 1854 in Baltimore, which continued to be his home and the focus of his business activities. He studied chemistry at Yale, preparatory to entering the family chemical business, but soon shifted his attention to shipping, incorporating the Baltimore Storage & Lighterage Company in his late 20's. Other business ventures included a coal distributing company in Baltimore and affiliation with one of the largest Pennsylvania coal producing companies. His business activities widened to include directorships in banks and other enterprises, and he became a trustee of Johns Hopkins. He also had broad social, artistic, and philanthropic interests. He traveled widely and became a close friend of Albert Ballin, the German shipping magnate. At the time of the formation of the IMM he was 48.

He continued his interest in shipping and the United States merchant marine after leaving the IMM. In association with Ballin he planned, but was unable to carry through, the establishment of an intercoastal line to use the Panama Canal when it was opened. Also, he was instrumental in establishing the United States Shipping Board in 1916 and was an original member and chairman. He died in 1918 at the age of 64.

9 John Reeves Ellerman, an Englishman of German descent, was born in 1862. Trained as an accountant, he was affiliated with the industrial promoting organization that reorganized the Leyland Line after the founder's death. This connection gave him the opportunity, when he was about 30, to become financially interested in the company. With the ships he retained after the sale of his interest to Morgan (see footnote 21), he went on to establish the Ellerman Lines, still one of the largest freight shipping operations in the world, and to build up one of the largest British fortunes by the time of his death in 1933. His prominence in shipping led to his being knighted in 1905.

10 O'Hagan, H. Osborne, Leaves From My Life (London, 1929), I, 384.Google Scholar

11 There is a report that it was current criticism of Ellerman in the London Financial Times which caused Baker to grow wary and withdraw. (O'Hagan, I, 385–6.) Since greater accountability was attached to the issuance of a corporate prospectus in England than in the United States, it may be, as was currently reported, that “being advised of the heavy responsibility that would rest on him if he became a party to the prospectus of a new company as settled, [Baker] was unable to see his way to join the Leyland directorate.” (Fairplay, 3 May 1900.)

12 Annual Report of the Commissioner of Navigation, 1922, pp. 116–7.

13 The current dearth of ships was reflected in the preamble of the Frye Payne subsidy bill introduced in Congress in December, 1899 ( Senate Bill No. 727), “Whereas the profitable employment of the surplus productive power of the farms, factories, mines, forests, and fisheries of the United States imperatively demands the increase of its foreign commerce ….” (Annual Report of the Commissioner of Navigation, 1900, p. 65.)

14 It was Morgan's practice to assign to juniors in his organization the responsibility for carrying through the detailed investigating and negotiating involved when he undertook promotion of an enterprise. It is likely, although not certain, that he assigned the task in this case to Charles Steele and George W. Perkins, for they became members of the board of directors of the IMM, and Steele was a member of the five-man voting trust and one of the three individuals, the others being the president and treasurer, to receive preliminary copies of Price, Waterhouse accounting statements. Steele had become a partner in March, 1900, and Perkins was admitted in January, 1901.

15 Fairplay, 3 May 1900.

16 Newspaper reports gave Baker a more important part in the early stages of negotiations than later on. In November, 1900, when there were rumors that a world-wide shipping combine was pending, Baker and Atlantic Transport were assigned leading roles. Alexander Brown & Company, bankers represented on Atlantic Transport's board, were reported to be principal financiers, with J. P. Morgan & Company also interested. And when the combine actually was formed in 1902, Baker was expected by some to be the president of the parent company.

17 O'Hagan, op. cit., I, 386.

18 Fairplay, 24 Sept. 1903, p. 470.

19 A requirement of the company was that a stockholder wishing to sell his shares had to offer them to the company at par. (The Times, Financial and Commercial Supplement, 18 July 1904.)

20 Figures for White Star from The Times, op. cit.; for Atlantic Transport Company from Jones, Caesar records.

21 Two parts of the Leyland Line the Americans did not buy: the Lisbon-Mediterranean and the Antwerp-Montreal services. Ellerman was allowed to buy the ships on those runs, but he was asked to sign an agreement that, except for the line to Canada, he would stay out of the North Atlantic trade for 14 years, a type of proviso common in merger agreements both then and now.

22 Annual Report of the Commissioner of Navigation, 1902, p. 73.

23 It was while Morgan was abroad that Hill and Harriman fought their famous battle for control of the Northern Pacific. Morgan was forced to return hastily to the United States because of his affiliations with the Hill interests.

24 Pirrie had conflicting interests as a negotiator; as a White Star stockholder he would benefit from a high price for his shares, and as a representative of the purchasers he would be seeking as low a price as possible.

25 In making this deduction, the negotiators clearly intended to arrive at a figure that would not be inflated by the abnormalities of war operations, but the shortage of ships in 1900 had resulted in unusually high commercial freight rates and therefore had produced abnormal profits quite apart from the profits of direct war work.

26 It was usual at the time for common stock in newly promoted mergers, even with a par value of $100, to be assigned only nominal value. Sometimes, as in the case of the American Linseed Company, a merger of 1898 in which a share of common was given as a bonus with each share of preferred, the sum of the market prices of the two stocks in press comment was related to par of the preferred alone. (The Economist [Chicago], 24 Dec. 1898, p. 732.)

27 Fairplay, 9 Oct. 1902, p. 555.

28 Bradstreet's, 23 Nov. 1901, p. 741.

29 Eventually the private syndicate sold its Hamburg-America stock and dissolved, at a small profit to the participants.

30 The Hamburg-America Line was even reported to have plans to start a nominally American line that could qualify for the subsidy (Fairplay, 1 Jan. 1901, p. 21) and the British government was re-examining its policies with relation to subsidies.

31 Typical of press speculation on the expected market prices of the IMM preferred and common were 80 and 30, respectively (Wall Street Journal, 12 May 1902), and 90 and 40 (United States Investor, 26 April 1902). U. S. Steel had been selling in the 90's and 40's throughout April, 1902.

32 S. F. Van Oss, Effecten Boek voor 1920 (Groningen, P. Noordhoff).

33 DeBoer, M. G., Holland-America Line 1873–1923 (Rotterdam, 1923), 67.Google Scholar

34 In their report to the directors of Atlantic Transport (W. Va. ) accompanying the balance sheet for 31 Dec. 1903, the auditors pointed out that they had, the year before, given full instructions for adjustments of errors and for future treatment of accounts, but that the next year they again found them out of balance and had had to spend a week reconciling them. The errors, furthermore, had been numerous and for large amounts.

35 The $83,700,000 is arrived at in the following manner. From the $50,000,000 bond issue should be deducted $17,000,000 worth of new ships that had not previously existed. The part of the bond issue spent to acquire existing tonnage was therefore only $33,000,000. From this figure should be taken the $11,000,000 paid for Leyland, leaving $22,000,000. Similarly a figure considerably less than $60,000,000 should be used for the preferred stock issue, for nearly $8,000,000 was not distributed. The remainder had an expected market value, at $85 a share, of about $44,200,000. Over $10,000,000 of the common stock also was not issued, and the remainder had an estimated market value, at $35 a share, of about $17,500,000.

36 First Annual Report of the International Mercantile Marine Company, for the Fiscal Year Ended December 31, 1903, p. 5.

37 First Annual Report, op. cit.

38 There also were outstanding bonds in the subsidiaries, whose interest amounted to about $150,000 a year.

39 This figure does not include dividends on the minority preferred of Leyland.

40 Widener was quoted in the Wall Street Journal of 2 Dec. 1902, as estimating that management economies alone would effect substantial savings. Press quotations gave unbelievably high estimates, some around $10,000,000 a year.

41 Among the investments of the Rockefeller Foundation about a decade later were IMM bonds of approximately the amount of John D. Rockefeller's original participation.

42 Wall Street Journal, 1 April 1902.

43 Apparently there was basis for this expectation for Baker had said at an earlier date that if a subsidy bill passed, some of his British ships would be put under the United States flag, but if the bill failed to pass that the ships his line was building in the United States would be used in the protected coastwise trade.

44 Standard and Poor's “High Grade Corporate Bond Yields — Industrial” stood at 4.66% for April, 1902.

45 Baker at the time was said to own over half the stock of his company.

46 Morgan, in a reported statement in April, 1902, had rather implied that Cunard would enter the merger eventually but that it would be better to delay until the corporate organization of the parent company had been completed. (New York Times, 22 April 1902, p. 8.)

47 Fairplay, 5 Dec. 1912, p. 892.

48 Report to the president and directors accompanying the balance sheet for the year ended 31 Dec. 1903.

49 Fairplay, 5 May 1904, p. 688.

50 Relations between the Morgan and Griscom families remained cordial in spite of this shift in management. (Griscom, Lloyd C., Diplomatically Speaking [Boston, 1940], p. 324.)Google Scholar

51 Nine years later, on the maiden voyage of White Star's proudest ship, the Titanic, Ismay was one of those aboard — and one of the few to be saved. Shaken and disgraced, he resigned from the presidency after several months and was succeeded by Harold Sanderson, formerly a partner in Ismay, Imrie & Company, and associated with the IMM from the start and vice president since 1906. Among those lost on the Titanic were Pirrie's nephew and Widener's grandson.

52 In the U. S. Steel syndicate, the maximum called had been 25%.

53 Conversation of Thomas R. Navin and Ludlow Griscom, grandson.

54 Just before the third syndicate call, bringing the total cash contribution to 80% of the subscription, the directors of the Baker-Whiteley Coal Company (of which Baker was president and which owned stock in the Atlantic Transport Company) voted to authorize Baker to use the stock it owned but which stood in Baker's name, to raise money “for the purposes of this company or for his own use….” (Minutes of Directors' Meeting, Baker-Whiteley Coal Company, 8 Oct. 1902.)

55 United States Investor, 27 Dec. 1902, p. 2,529.

56 Conversation of Thomas R. Navin with Ludlow Griscom.

57 After the first year, there is little available information regarding the actual intercompany payments. There was a report in 1904 that modification had been made. (Fairplay, 1 Dec. 1904, p. 842.)

58 Franklin's son is today president of the United States Lines.