Everything aligned perfectly for Frank Taplin. He owned shares in a small railroad, controlling a strategic corridor, in the merger mania of 1929. The battle for Taplin’s little railroad is a story of the excesses of the late 1920s stock market frenzy.
The New Era of the late 1920s saw demand for stocks like no other. Investment banks supplied the demand in innovative ways. One way was through the use of a holding company.
A holding company is exactly like sounds. It produces nothing. It provides no services. It simply holds and votes the shares of other businesses. In return, the holding company issues shares to the public supplying the demand for more shares.
One such holding company was the Allegany Corporation. It was created by the Van Sweringen brothers, with the help of J.P. Morgan and Company in January 1929. Its purpose was to hold railroad interests.
The Allegany Corporation was unique in that it wasn’t offered to the public but to J.P. Morgan’s “preferred list.” It was a who’s who of men in power and influence in the country. J.P. Morgan offered shares at cost to those on the list, with the understanding that the stock would be trading on the public market, at a profit, in the very near future. No strings attached.
J.P. Morgan offered 575,000 shares of Allegany to its “list” at the low price of $20 each. The same stock sold on a when-issued basis at around $36 per share. A few months after going public, it soared past $50.
Of course, J.P. Morgan and Company wasn’t alone in their new holding company endeavors. Kuhn, Loeb and Company had similar ideas. Otto Kahn, the head of Kuhn, Loeb, claimed it was a response to protecting their business.
You see, there happened from 1926 to 1929, and particularly in 1929, a perfect mania of everybody trying to buy everybody else’s property, and the railroads were not excluded from that. New organizations sprang up. Money was so easy to get…
The result was that many of the railroads became fearful, and with good reason, that lest somebody imperil their just interests in their own territory many of them felt either being aggressors or like defending themselves against aggressors, very much the European situation all over again, only instead of leading to warfare it led to expenditures.
It would be an understatement to say the railroad industry was important to Kuhn, Loeb and Company. Since the early days of railroads, Kuhn, Loeb specialized in railroad financing and did more business than any other investment bank in the country.
The Allegany Corporation set its sights on adding railroads to its holdings. The Pennsylvania Railroad took it as a threat.
With the help of Kuhn, Loeb and Company, the Pennsylvania Railroad created a holding company of its own — the Pennroad Corporation — in April 1929. The sole purpose of Pennroad was to buy railroad assets strategic to the Pennsylvania Railroad’s defense.
On the advice of Otto Kahn, Pennroad offered shares directly to the shareholders of Pennsylvania Railroad. Practically all of them took them up on the offer.
Except, it wasn’t stock that they bought, but voting trust certificates. Instead, the shares were held by a trust, with the voting rights managed by the trustees tied to Pennsylvania Railroad, which assured the railroad maintained control of Pennroad. Certificate holders owned the stock of Pennroad but without the voting rights attached.
In total, Pennroad raised $87 million in its first stock issuance and another $45 million in a later sale. Then its hunt to outbid Allegany began.
Frank Taplin was a coal baron. He owned the North American Coal Corporation, the largest coal shipper on the Great Lakes. But trends were shifting and he needed access to the coast. A railroad was the key and one stood out.
Pittsburgh and West Virginia Railroad was strategically positioned for his needs. Its location also made it a perfect candidate for suitors should other railroads come calling. In 1923, Taplin bought up 73% of Pittsburgh and West Virginia for himself and some friends at an average cost of $52.50 per share. Six years later, Taplin’s little road was in high demand.
The New York Central, Allegany, Pennsylvania, and B&O saw Taplin’s railroad as key to their plans. Except, Taplin was adamant on the price. He knew its importance years earlier. He insisted on $200 per share.
Talks with New York Central fizzled out. The Van Sweringens and Allegany fell through. Pennsylvania, via Pennroad, was the last one standing.
Mr. Taplin did not get his $200 a share, but he did well enough. The market quotation for his stock, at its highest, was 165, in 1929, it did not exceed 145 and fell at one time to 110; and at the time of the sale of his block of 223,000 shares to Pennroad was finally agreed on, in September, 1929, it stood somewhere in the 140’s. Nevertheless, he received $170 a share — an advance of about 30 points over the market, and — on about half the block — a clear profit of 118 points.
The Pennroad board approved the purchase on September 5th. The stock market peaked two weeks later.
A month before the fateful October market crash, Taplin cashed out. Pennroad Corporation paid about $38 million for Taplin’s shares in the Pittsburgh and West Virginia Railroad.
Pennroad served its purpose. Kuhn, Loeb and Company, along with Pennsylvania, were more than satisfied with the results.
Pennsylvania Railroad bought control of a vital road in the Pittsburgh region, along with a handful of others, and prevented Allegany from moving on Pennsylvania’s turf. Kuhn, Loeb earned a tidy profit of $8 million. Most of it was underwriting fees, along with options to buy Pennroad stock at $16 a share. They exercised the options the next day and sold the stock at a market price of $25.
But what did shareholders get on the deal?
Pennsylvania Railroad, through Pennroad, raised as much capital as possible to strengthen its own position. Money was easy to come by, as Otto Kahn said. They simply took advantage of market euphoria to better their situation.
Yet, investors don’t chase easy money unless they believe there’s easy money to be made. Investors saw the new share issuance as another opportunity to get rich. That it was tied to a company with a good reputation only made it better. They never considered that they might be overpaying for a risky venture. The New Era mania taught them that returns were easy to come by too.
It was the wrong lesson.
Pennroad continued to raise funds by issuing new shares as late as October 8, 1929. Three million shares at $16.50 to be exact (diluting the already 6 million shares outstanding) with the stock selling at around $24 in the open market.
By November 1930, the stock traded at $7. It dropped to $1 a share by June 1932. Within three years Pennroad’s shares were worthless.
Wall Street Under Oath
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