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Ch. 4] RAILROAD EXPANSION AND CONSOLIDATION 731
over its own tracks. Accordingly the directors of the two
northern railroads offered to give to the stockholders of the
Chicago, Burlington and Quincy Railroad—many of them
New England investors—$1,000 par value in the 4 per cent
joint bonds of the Great Northern and Northern Pacific railroads
in exchange for each five shares of the Burlington Company's
stock. These bonds were to be secured, in addition to the
joint and separate guarantee of the two railroads, by the
deposit with the trustees of the Burlington stock. Practically
all the stockholders of the Burlington road accepted the offer,
and, without the use of any of their own capital the two
Hill roads secured the absolute control of one of the finest
railway' systems in the world.^^
The evil of pyramiding of credit by the issue of collateral
trust bonds occurs when the earnings of the road whose stock
is acquired fail to permit a dividend sufficiënt to carry the
interest on the collateral trust bonds. As in the case of the
fixed rental, the plan works very well so long as the earnings
of the newly acquired road equal or exceed the cost of carrying
it. But railway earnings fluctuate. And the experience of
several roads which have followed this plan of consolidation
has been very unfortunate. In fact the receivership of the
Toledo, St. Louis and Western Railroad in 1914 was due to
this cause and this cause alone.' In other receiverships it
' In August, 1907, the Toledo, St. Louis and Western Railroad acquired
64,800 shares out of 195,579 shares of the 4 per cent non-cumulative preferred
slock of the Chicago and Alton Railroad and 144,200 shares out of
195,428 common shares of the same railroad. The Toledo, St. Louis and
Western Railroad issued $11,527,000 collateral trust bonds—with the Chicago
and Alton stock as collateral security. Approximately $6,500,000 of these
bonds bore immediately 4 per cent fixed interest and approximately $5,000,-
000 bore 2 per cent until 1912 and 4 per cent thereafter. These collateral
trust bonds involved a fixed charge in 1908 of $365,000, and the dividends on
the Chicago and Alton stock amounted to $836,000, the maximum amount
received in any one year. In 1913 the charges on the bonds amounted to
$460,000 and the Alton paid no dividends. In fact the Alton showed a
deficit after charges of $1,900,000. (The dividends on the Alton's preferred
stock had ceased in 1911 and on the common in igio.) This burden was
temporarily absorbed by the Toledo, St. Louis and Western's own earnings.
But in the autumn of 1914, the latter's earnings showing a marked falling oflf,
a receivership became necessary. Except for a short period in 1914 the earn-
^ See page 728, note 19.
Beschrijving voorwerp
| Titel | The financial policy of corporations |
| Auteur | Dewing, Arthur Stone |
| Jaartal | 1926 |
| Collectienaam | NIVRA Historisch Archief, UBVU gedigitaliseerd |
| PPN | 344552586 |
| Toegangsgegevens (URL) | http://imagebase.ubvu.vu.nl/getobj.php?ppn=344552586 |
| Signatuur origineel | NIVRAHA149 |
| Evaluatie |
Beschrijving
| Titel | NIVRAHA149_00755 |
| Transcript | Ch. 4] RAILROAD EXPANSION AND CONSOLIDATION 731 over its own tracks. Accordingly the directors of the two northern railroads offered to give to the stockholders of the Chicago, Burlington and Quincy Railroad—many of them New England investors—$1,000 par value in the 4 per cent joint bonds of the Great Northern and Northern Pacific railroads in exchange for each five shares of the Burlington Company's stock. These bonds were to be secured, in addition to the joint and separate guarantee of the two railroads, by the deposit with the trustees of the Burlington stock. Practically all the stockholders of the Burlington road accepted the offer, and, without the use of any of their own capital the two Hill roads secured the absolute control of one of the finest railway' systems in the world.^^ The evil of pyramiding of credit by the issue of collateral trust bonds occurs when the earnings of the road whose stock is acquired fail to permit a dividend sufficiënt to carry the interest on the collateral trust bonds. As in the case of the fixed rental, the plan works very well so long as the earnings of the newly acquired road equal or exceed the cost of carrying it. But railway earnings fluctuate. And the experience of several roads which have followed this plan of consolidation has been very unfortunate. In fact the receivership of the Toledo, St. Louis and Western Railroad in 1914 was due to this cause and this cause alone.' In other receiverships it ' In August, 1907, the Toledo, St. Louis and Western Railroad acquired 64,800 shares out of 195,579 shares of the 4 per cent non-cumulative preferred slock of the Chicago and Alton Railroad and 144,200 shares out of 195,428 common shares of the same railroad. The Toledo, St. Louis and Western Railroad issued $11,527,000 collateral trust bonds—with the Chicago and Alton stock as collateral security. Approximately $6,500,000 of these bonds bore immediately 4 per cent fixed interest and approximately $5,000,- 000 bore 2 per cent until 1912 and 4 per cent thereafter. These collateral trust bonds involved a fixed charge in 1908 of $365,000, and the dividends on the Chicago and Alton stock amounted to $836,000, the maximum amount received in any one year. In 1913 the charges on the bonds amounted to $460,000 and the Alton paid no dividends. In fact the Alton showed a deficit after charges of $1,900,000. (The dividends on the Alton's preferred stock had ceased in 1911 and on the common in igio.) This burden was temporarily absorbed by the Toledo, St. Louis and Western's own earnings. But in the autumn of 1914, the latter's earnings showing a marked falling oflf, a receivership became necessary. Except for a short period in 1914 the earn- ^ See page 728, note 19. |
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