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THE CAPITALIZATION OF THE INTERNATIONAL MERCANTILE MARINE COMPANY1

THE

HE International Mercantile Marine Company completed, on December 31, 1903, its first year of life as a going concern. Up to the date of this writing, if stock quotations are any indication of its financial condition, the success of the company, from a market standpoint, is problematical. Its preferred stock is quoted at 18 and its common stock at 5, prices which indicate a general conviction that the equity in the company is worth little.2

There is, however, a possibility that the stock market may be mistaken in its estimate of Mercantile Marine. In a declining market, stock values are influenced more strongly by the financial necessities of holders than by the earning power of the companies whose ownership they represent. This is especially true of the stocks of corporations launched on a declining market where the influence of every adverse factor is exaggerated. International Mercantile Marine has, in this respect, been peculiarly unfortunate. It was brought out during the fall of 1902, when the decline in the market was in full swing, and after the public buying power had been exhausted. Under the circumstances, these securities had no chance of a favorable reception. Moreover, almost from the start they were subject to inside pressure. The English venders, stimulated by some natural distrust of the unknown economies of combination, and strenuously exhorted thereto by the financial press of Great Britain, which has been

1 From the Political Science Quarterly, Vol. XIX, 1904, pp. 50-65.

2 Receivership ensued at last in 1915. The reorganization plans, now under dis cussion, propose to reduce the total of outstanding securities by one half. — ED.

from the outset hostile to the combination,1 sold the stock which they received in payment for their interest, and the members of the American underwriting syndicate, as well as the American vendors, hard pressed by the continued stringency in the money market, have contributed to the selling pressure.

The proposition should be considered on its merits, without special reference to the market price of the company's securities. The outstanding capital of the Mercantile Marine Company is divided as follows:

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To pay interest and preferred dividends-common dividends, at least for some years to come, are hardly to be expected will require the following amounts:

Interest on underlying bonds, taken at 5 per cent

Interest on debentures

Dividends on preferred stock

Total.

800,000

2,340,000

3,276,000

$6,416,000

Following the practice of the older German and English companies and allowing 60 per cent of net earnings for depreciation, insurance, and renewals, the total requirements, letting these funds include the sinking fund, are $16,000,000.2

1 For example, the Economist on Nov. 29, 1902, referring to the report that certain English vendors had expressed a desire to receive bonds in lieu of cash, remarked as follows: "They (J. S. Morgan and Co.) also state that the offer was made on the expressed desire of some shareholders, who wished to invest in the bonds. If that be the case, it seems to imply a singular lack of business capacity on the part of the vendor shareholders, since they need not seek far to find securities with a much greater margin of security than these bonds to return a higher rate of interest. All they do know is that its capitalization will be enormously in excess of that of the undertakings that have been absorbed in it, and none should be better aware than themselves of the difficulty that will be met with in earning dividends on such a large sum, since they have had the experience of the same difficulty with a much smaller capitalization."

2 The bonds of the International Navigation Company, of which $13,686,000 are outstanding, call for a sinking fund of $250,000 to $500,000 annually, beginning May 1, 1905, which will retire the bonds at maturity in 1929. No sinking fund is

Shortly after the Mercantile Marine Company was organized, the statement was made, unofficially, but apparently on good authority, by the Wall Street Journal, that the average net earnings of the different fleets for four years were $6,107,675. The same authority stated that the estimated savings in the cost of operation for the year were $10,000,000. Adding these to the average profits above mentioned, the earnings of 1903 should have amounted to a sum sufficient to pay dividends on the preferred stock, although it was not expected that any disbursement would be made. In other words, accepting the corporation's own estimate of the economies which can be secured by its changes in administration, the amount of its earnings falls short of the amount necessary to pay dividends on the common stock.

Before proceeding further in the analysis, let us test the accuracy of this conjectural estimate by comparing these figures with the amount actually earned by other companies during 1902, a year which was more favorable for the shipping industry than 1903. Such a comparison is presented in the following table:

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It thus appears that the estimated tonnage earnings of the Shipping trust for 1903 are nearly twice the average amount$8.39-which was earned during the preceding year by its leading competitors. Moreover, the German companies have for many years operated under a close pool which secures them all of the economies which the Shipping trust was organized to obtain. Unless some other factors shall be discovered by the combination to increase its earnings, these preliminary estimates will eventually require some revision.

provided for the bonds of the International Mercantile Marine Company, but they are subject to call at 105 after five years. If an adequate reserve is provided, the necessity of a sinking fund on bonds secured by shipping property does not appear.

Accepting the same figure of tonnage earnings for the Shipping trust which was attained in 1902 by its competitors, namely $8.39 per ton, we have next to inquire how the combination measures up to its interest and dividend requirements. The net earnings of the company, on this basis, would stand at $8,941,398, leaving $5,801,398 over fixed charges, for depreciation, renewals, and replacements. This amounts to about $5.60 per ton as compared with $4.30 per ton for the HamburgAmerican line in 1902, $6.19 for the North German Lloyd, and $8.04 for the Cunard line. If we debit the earnings of the International Mercantile Company with $5.00 per ton for these various necessary expenses, an amount which, considering the age of their fleet and the necessity of providing for the redemption of their bonds, would seem to be no more than is required, and if we assume, as before, their tonnage earnings at $8.39 per ton, the Trust has only $606,978 remaining for its preferred stockholders. That this supposition is not wide of the truth, may be seen from the experience of the North German Lloyd Company in 1902, which earned, over interest, 14,770,000 marks, and credited to renewals and insurance all but 212,477 marks of this amount, reducing their dividend payments from 5,278,131 to 210,623 marks. Taking a three years' average of the earnings of the Cunard, Hamburg-American, and North German Lloyd companies, we find that their combined depreciation and insurance charges amount to $24,719,112 out of $37,976,794 of net earnings, or about 65 per cent. It is impossible to escape the conclusion that the Shipping trust must appropriate a similar proportion of its profits for the service of the company, if the first care of its management is for the property of the company. If this is done, however, a readjustment of the capital of the company is among the probabilities.

We have not reached the end of the chapter. The Shipping trust was organized during a period of great prosperity, when the earnings of ocean transportation, although depressed somewhat below the abnormal figures of 1900, were still large. To pass final judgment upon its financial future, it is necessary that we cast backward and discover, if possible, from the history of other shipping companies, what may be expected if earnings follow the course of former years.

In the accompanying table appears the income account of the Cunard Company for a period of twenty years, including 1883 and 1902.

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1889 350,203

1888 314,736 135,327 46,815 |

23,000

40,472)

130,172 64,000 (4%) 2,700

1887 254,482 135,500 77,839 41,143 40,000 (21 %) 1,143

Debenture debt reduced from £450,000 to £96,000 Loss of Oregon

costs

£113,241 140,000

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£30,000 from insurance fund.

4

£25,000 from insurance fund.

The company had on hand at the end of 1890 in investments, bills, and cash,

£559,922.

6 £96,000 debentures paid off July 1st.

£205,804.

Balance of cash and investments,

7 £23,000 taken from insurance fund and added to sum reserved for depreciation. 8 Depreciation fund stands at £302,000.

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