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The Columbia University Libraries reserve the right to refuse to accept a copying order if, in its judgement, fulfillment of the order would involve violation of the copyright law. Author: U.S. Bureau of Corporations Title: Summary of report of the commissioner of... Place: Wasiiington, D.C. Date: 1913 MASTER NEGATIVE • COLUMBIA UNIVERSITY LIBRARIES PRESERVATION DIVISION BIBLIOGRAPHIC MICROFORM TARGET ORIGINAL MATERIAL AS FILMED - EXISTING BIBLIOGRAPHIC RECORD wkmmmlm *»-ra« U. S. Bureau of corporations. Summary of report of the commissioner of coi-pork^^ tions on the International harvester co. March 3, 1913. Washington,Trovt. print, off., 1913. ix, Z7 p. 23*". Luther Conant, jr., commissioner. II li.i~''"^^'°"*^ harvester company. i. Conant, Luther, 1872- ^1 Library of Congress o 13^5168 nD2769.F2AS 1913 RESTRICTIONS ON USE: RLM SIZE: /^ DATE FILMED: TRACKING # : TECHNICAL MICROFORM DATA REDUCTION RATIO ^oM : /<^)C IMAGE PLACEMENT: iA (1^ IB IIB INITIALS: /?1Srt- O3>p<|o FILMED BY PRESERVATION RESOURCES, BETHLEHEM. PA. ^ ^^^# ^r^ ^ VIa CO en 3 3 O > Is o C/) 1— 1- c X OPQ ^ :c N C/) N) 00 OOM o 3 3 > 0,0 o m (DO do" ^ o O CO N X M o: .xV .-v^ #, a^ '* > o 3 3 .^/ > '^> a^ 8 O P"bi;ecis|5 r» Os 00 b NO in 1.0 mm 1.5 mm 2.0 mm abcoefghuklmnopqrstuvwxy; •bcdc«|hi|klmnopqntuv C ca I TJ J^ 0(0 ; m 3) o m A^^ V a)' 4l> <^ tn 3 3 3 3 .*'. SUMMARY OF REPORT OF THE LIB SCHOOL O COMMISSIONER OF CORPORATIONS ON THE INTERNATIONAL HARVESTER CO. MARCH 3, 1913 ^ ^ So .*^J ft WASHINGTON GOVERNMENT PRINTING OFFICE 1913 A^J^- s Um3^ LIBRARY School of Business ■^ SUMMARY OF REPORT OF THE COMMISSIONER OF CORPORATIONS ON THE INTERNATIONAL HARVESTER CO. MARCH 3, 1913 LIBRARY SCHOOL OF BUSINESS WASHINGTON GOVERNMENT PRINTING OFFICE 1913 ic»\ , ^vcra^"" Co\***'' ^-\jV» LETTER OF SUBMITTAL. C^ev«f yoc^ Department of Commerce and Labor, Bureau op Corporations, Washington, March 3, 1913, ISir: I have the honor to submit herewith a report on the Inter- national Harvester Co. m ORGANIZATION OF INTERNATIONAL HARA-ESTER CO. The International Harvester Co. was organized in 1902 as a con- solidation of the five principal manufacturers of harvesting machines in the United States, namely, the McCormick Harvesting Machine Co., Deering Harvester Co., Piano Manufacturing Co., the Warder, liushnell & Glessner Co., and the Milwaukee Harvester Co. The companies thus consolidated had in 1902 about 90 per cent of the total production of grain binders in the United States, and about 80 per cent of the total production of mowers, the two chief kinds of haiTesting machines. The principal outside makers of harvesting machines were located in New York State, and their market was chiefly confined to the North Atlantic States and to the export trade. The interests included in the combination had previously been in keen competition. An attempt made in 1890 to establish a general consolidation of makers of harvesting machines was a failure, and from that time until the merger, competition was severe. In fact, it has been asserted that the combination was virtually forced by such competition. However, the two most important concerns, namely, the McCormick and Deering companies, were making large profits just prior to the merger, and two of the other companies merged were making at least fair profits. Obviously, therefore, it can not be con- tended that this competition was destructive. It has been represented in formal testimony by officers of the com- pany and its financial promoter, G. W. Perkins, then of the firm of J. P. Morgan & Co., that its organization was not the result of con- certed action by the former competing owners, but merely of the purchase of their properties by new and outside interests. Docu- mentary evidence gathered by the Bureau completely disposes of this contention and shows that the principal competing interests con- sidered and discussed among themselves the formation of this combi- nation and were active in bringing it about. TV LETTER OF SUBMITTAL. The chief features of the International Harvester Co.'s operations are the substantial maintenance of its monopolistic position in the harvesting-machine business, originally acquired through combina- tion, and its extensions on a large scale into new lines of the farm- machinery industry. The company has been able to do this in part through the acquisition of some of its chief rivals in the harvesting- machine business; in part by using its monopolistic advantage in these harvesting-machine lines to force the sale of its new lines; in part by certain objectionable competitive methods; and especially through its exceptional command of capital, itself the result of com- bination. ACQUISITIONS OP COMPETING CONCERNS. Almost immediately after its organization the International Har- vester Co. commenced the acquisition of competing makers of har- vesting machines. In January, 1903, it secretly acquired control of D. M. Osborne & Co., of Auburn, N. Y., its chief competitor. This secret control was maintained for nearly two years, during which the Osborne company was operated and advertised as an inde- pendent concern. Two of the chief stockholders of the Osborne company agreed to refrain from engaging independently in the same lines of business for a period of 10 years. Again, the combina- tion, between 1903 and 1904, acquired and secretly operated several other competing harvesting-machine concerns, namely, the Minnie Harvester Co., the Aultman-Miller Co., and the Keystone Co. In some cases it was contended that the concealment of ownership was employed to facilitate liquidation of certain accounts of the purchased concerns. Negotiations for the acquisition of several other harvesting-ma- chine concerns were not consummated; in some cases the initiative came from the competitors. EXTENSIONS INTO NEW LINES. The company's acquisition of competitors in harvesting machines was followed by extension of its manufacture into numerous new lines, partly by the purchase of established concerns. Among the most important of such lines were tillage implements, manure spreaders, farm wagons, gasoline engines, tractors, and cream sepa- rators. The extension of the company into these lines was directly furthered by its substantially monopolistic control of the harvest- ing-machine business. It is obvious that the possession of a monopo- listic position in that important branch of the business afforded a powerful lever for forcing the sale of its new lines. LETTER OF SUBMITTAL. COMPETITIVE METHODS. The competitive methods employed by the company have been the subject of much complaint. Some of these complaints relate to practices which, like the use of the exclusive clause in agency con- tracts and the operation of purchased companies as independent, were at one time extensively practiced, but which have since been abandoned. As above noted, some of these acquired concerns were openly advertised as independent. Among the most important complaints charged against the com- pany in recent years is an effort to secure an undue proportion of local dealers in farm machinery by allotting, as a rule, only a single brand to any one dealer in the same place, thus tending to restrict the outlet for coippetitors' goods. The company's own records show that this was one purpose at least in making this distribution of its brands, and it appears to have had some practical effect in handicap- ping competition. Compulsion of dealers to take the company's " new " lines by reason of its monopolistic control of harvesting machines (" full-line forc- ing ") has been attempted with more or less success by the company's representatives. Attempts to secure the exclusive handling of cer- tain lines of the company by similar methods were also reported to the Bureau. Special discriminatory prices and terms have been reported in a number of instances, but the general policy of the company is to maintain high prices in the monopolized lines; in the principal new lines, however, where considerable competition is encountered, un- usually low prices and long terms have been generally employed. Another rather general complaint is that salesmen of the Inter- national Harvester Co. represent that purchasers of competing lines of harvesting machines will be unable to secure repair parts, a mat- ter of much practical importance. Officers of the International Harvester Co. admit that this was at one time a common charac- teristic of competition in the harvesting-machine industry, but that the company is opposed to the practice and has used active efforts to eliminate it. The Bureau, however, received rather numerous complaints of this character. The company at one time openly attempted through a clause in its commission contracts, to control the price paid for its machines by the farmer to the retail dealer. Since the elimination of this clause, "suggested" retail price lists have been rather generally circulated by some of its branch offices, apparently for the purpose of indirectly maintaining the retail price, although the company contends that these lists are intended for the use of its employees VI LETTER OP SUBMITTAL. LETTEB OF SUBMITTAL. vn in furnishing information to purchasers and professes to discourage their issuance to dealers. It is evident, however, that it could com- pletely stop this practice if it really wished to. SUPERIOR RESOURCES. The company's exceptional financial resources, including its con- nections with J. P. Morgan & Co. and John D. Rockefeller, constitute one of the chief sources of its power. They not only enable it to secure the economies of large-scale operations, which, as a rule, give it marked advantages in manufacturing costs, but also enable it to maintain a very elaborate selling organization, by virtue of the variety and extent of its business. Furthermore, they give it a great advantage in extending credits to purchasers, an exceedingly im- portant feature of the farm-machinery industry. Wliile apparently any such use of credits has not been a controlling factor in restricting competition, it appears to have been felt to some extent in certain lines, and is one of the chief sources of complaint from manufac- turers as distinct from dealers in farm machinery. PRESENT POSITION. As a result of the developments and practices above described, the position of the combination has changed from that of a maker of harvesting machines only, until it is now an important factor in several other branches of the farm-machinery business. In manure spreaders it appears to have over one-half of the business, and in disk harrows approximately 40 per cent; and it is increasing its proportion in several other new lines, such as wagons and gasoline engines. New competition has, however, begun to appear, especially from certain large plow and tillage-implement makers, whose fields have been invaded by the combination, and who likewise have arranged to establish a " full line ; " that is, a large assortment of the chief kinds of farm implements. This new competition is apparently of great significance. However, in 1911 the company still had about 86 per cent of the production of binders, 78 per cent of the produc- tion of mowers, and 72 per cent of the production of rakes. INVESTMENT AND CAPITALIZATION. The extraordinary overcapitalization which characterized most of the large industrial consolidations of the period 1898 to 1901 was absent in the case of the International Harvester Co. The original capital stock was $120,000,000. The "cash stock" of $60,000,000 appears to have been paid up in full. The appraisal value of the plants, inventories, etc, for which the remaining $60,000,000 of stock was issued was $67,000,000; the Bureau places the value of these physical properties at, roughly, $49,000,000. The bankers and pro- moters received $3,700,000 stock for their expenses and services. It is worth noting that certain ore leaseholds acquired by the Deerings about seven months before the merger for $675,000, of which $500,000 was paid in notes, were valued for purposes of con- solidation, after deduction of this indebtedness, at no less than $7,963,000. The price paid by the Deerings was rather more than ihe current average value of Mesabi leases at the time. It is claimed that during the period that the Deerings had owned these leases there had been some increase in the estimated tonnage of these ore prop- erties, but no evidence was produced to indicate any great increase in their value. However, in order not to undervalue them, the Bureau arbitrarily allowed an increase of $500,000, and also added about $100,000 expended for improvements, etc. This is probably too lib- eral, but the resulting net valuation is over $7,000,000 less than that claimed by the International Harvester Co. The high valuations placed on these ore properties caused much dissatisfaction among the combining interests themselves, especially on the part of the McCor- micks. The banking interests back of the International Harvester Co., however, had only a few weeks earlier claimed an extravagant value for ore in defending the capitalization of the United States Steel Corporation in important litigation then pending, and they were therefore in no position to deny excessive valuations for this Deering ore. In several other respects the appraisal valuations were clearly excessive. However, after deducting such excesses, the Bureau, as indicated, found that the value of the physical properties plus the working capital covered substantially 90 per cent of the capital stock issued. The company claimed a large value for good will, but has not entered any good-will value in its accounts. It is not unlikely that a fair valuation for good will would have covered the difference between the original capitalization and the tangible assets. A much larger capitalization was at one time contemplated. For purposes of consolidation, the fixed properties, good wiU, and in- ventories, exclusive of working capital, were nominally valued in the first instance at $132,000,000. This figure, however, was grossly ex- cessive. Furthermore, the subsequent appraisal value of the physical properties (excluding good will) of $67,000,000, above noted, was later written down to $60,000,000. In this connection it may be noted that inventories which were appraised at $25,550,000 were later reduced for " trading purposes " to $18,155,000. In 1907 the capital stock was rearranged by making $60,000,000 a 7 per cent preferred issue, leaving the common stock at $60,000,000. vm LETTEB OF SUBMITTAL. \ ■ \ In 1910 $20,000,000 additional common stock was issued as a stock dividend, making the total capitalization $140,000,000. The stock of the company has been closely held by the former interests. The McCormick and Deering families have throughout held a large majority of the total stock, while considerable amounts have also been retained by a few other stockholders. This fact assumes especial importance in view of the pending dissolution suit of the Government against the company. Recently, as a result of this suit, the company has been split into two corporations, one of which, the International Harvester Co of New Jersey, retains the old harvesting-machine plants and related business; ih^ other, the International Harvester Corporation, takes over the new lines and foreign business. Each of these concerns is capitahzed at $70,000,000. If this is intended as part of a plan for ultimate disintegration of the combination, in the opinion of the Bureau it is unsatisfactory. PROFITS. ^ There has been a marked increase in the earnings of the Interna- tional Harvester Co. From a distinctly low rate early in its organi- zation they have risen to a rather high rate in recent years. For the entire period 1902 to 1911 the average rate of net earnings on net assets, as computed oy the Bureau (exclusive of good will), is 8 J per cent. However, for the three years 1909 to 1911 the average was 12^ per cent. As computed by the company on capital stock and sur- plus, the average for the entire period is 7^ per cent, and for the years 1909 to 1911, lOJ per cent. The rate in 1911 was somewhat less than m 1909. Returns for 1912 are not yet available. The increase in recent years is more significant because in certain of the new lines, which the company has been pushing aggressively, the rate of return is comparatively low. This means that the rate of return on some of the older monopolized lines has been very high. Thus, the rate of profit for grain and grass harvesting machines is very much higher than the rates for such lines as wagons and ma- nure spreaders, where the company encounters a greater degree of competition ; and the same is true of twine. The rate on some of the new lines, however, has been liberal. Generally speaking, the prices obtained by the company on foreign sales are relatively higher than those in the domestic market, but claims made by the company that the net return is invariably greater were not sustained by its records; in some important instances at least the foreign nettings were lower than the domestic. LETTER OF SUBMITTAL. K-^»»' OONCLITSION. New V»rk rsity It appears, therefore, that the International Harvester Co.'s posi- tion in the industry is chiefly attributable to a monopolistic combina- tion in the harvesting-machine business, certain unfair competitive methods, and superior command of capital. Very respectfully, Luther Conant, Jr., Commissioner of Corporations. The President. i i\ REPORT OF THE COMMISSIONER OF COKPORATIONS ON THE INTERNATIONAL HARVESTER CO. SIBIMARY. This investigation was conducted in pursuance of a resolution of the United States Senate which directed especial attention to the oper- ations of the International Harvester Co., and to the question whether there existed among local dealers in farm machinery a healthy com- petition. On the latter subject a more detailed report is contem- plated later. The essential features of the operations of the Inter- national Harvester Co., as developed by the investigation, are: A substantially monopolistic position — 85 per cent of the total output — in the harvesting-machine business proper at the beginning. .Organization of combination terminated a long period of severe, but by no means destructive, competition among the concerns merged. Combination arranged by the former owners in connection with bankers, and not, as frequently asserted, a mere sale of their proper- ties to new interests. An absence of important overcapitalization. Substantially 90 per cent of the original $120,000,000 capital stock covered by tangible property and working capital. There was in addition a considerable real good will. Acquisitions of competitors and extensions into new lines, until to-day the company is also an important factor in certain other branches of the farm-machinery industry. Low rates of profit in early years, partly owing to imperfect or- ganization and internal jealousies, but much higher rates in recent years, averaging about 12J per cent in 1909-1911 on net assets (exclu- sive of good will) as estimated by the Bureau. Much higher rates of profit on investment in highly monopolized lines, such as harvesting machines, than in certain " new " lines, i. e., wagons, manure spreaders, etc Prices of machines sold in foreign markets generally higher to retailer and farmer than in United States, but in some cases a lower margin of profit in export trade. » \ 2 REPORT ON THE INTERNATIONAL HARVESTER CO. Low manufacturing costs of harvesting machines compared with the average costs of independents; an elaborate selling organization and abihty to grant extensive credits to purchasers. These advan- tages due to large volume of business and superior financial resources Extensive use especially in early years of objectionable competitive practices, e. g., the exclusive clause in dealers' contracts (later aban- doned), monopolization of dealers, "full line forcing," discrimina. tory price concessions, attempted control of retail prices. These methods less extensively practiced in recent years, but still the source of much complaint. Of over 800 dealers interviewed by the Bureau, about one-half criticised unfavorably the company's methods; some' of these complaints unimportant. Eecent expansion by some of the largest makers of farm implements into the harvesting-machine business, making them, like the Inter- national Harvester Co., " full-line concerns." This development ap- parently one of great importance. Monopolistic position of the International Harvester Co. in har- vesting machines thus far substantially maintained, while it now controls a considerable and increasing percentage of the business in new lines. CONDITIONS LEADING UP TO ORGANIZATION OF INTERNATIONAL HARVESTER CO. The International Harvester Co. was organized in August, 1902 under New Jersey laws, as a consolidation of the following coni- panies : McCormick Harvesting Machine Co. Deering Harvester Co. (a partnership). Warder, Bushnell & Glessner Co. (Champion). Piano Manufacturing Co. Milwaukee Harvester Co. These concerns were the principal manufacturers of harvestim^ machines. In fact, the only other important manufacturers of such machines were a few companies located in New York State, engaged largely in trade with foreign markets, none of which did an extensive business in the principal domestic market for harvesting machines, namely, the grain-producing States of the Mississippi River basin. The organization of the company followed a long period of keen competition among manufacturers of harvesting machines. An earlier attempt (in 1890) to bring about a general consolidation of the principal manufacturers of such machines proved abortive. Although a temporary organization was effected in that year under the name of the American Harvester Co., with $35,000,000 authorized capital stock, this had hardly been accomplished before the scheme fell through. From that time down to the organization of the Inter- .r ^5 IHBI*^ SUMMARY. S national Harvester Co., the harvesting-machine industry appears to have been peculiarly free both from efforts at consolidation and also from the ordinary price agreements which were characteristic of many industries. In fact, the formation of the International Har- vester Co. has repeatedly been attributed by some of its principal officers to the severity of competition during this period. Cyrus H. McCormick, president of the company, in testimony in judicial proceedings in Missouri in 1908, described this competition as " fierce," and stated that a desire to remove what he termed " un- businesslike methods " was one of the principal reasons for forming the consolidation. He further stated that during this period of com- petition a large portion of the sales of the competing companies were made below the listed prices. Again, J. J. Glessner, formerly of the Warder, Bushnell & Gless- ner Co., makers of the Champion machines, referred to the competi- tion as a " bitter fight," stating that his concern did everything that it possibly could to prevent its competitor from making a sale. Still again, W. H. Jones, formerly of the Piano Manufacturing Co., stated explicitly that the merger was organized to abolish ''fierce competition." This is shown by the following excerpt from his testimony in the Missouri proceedings : Q. So in order to get rid of this fierce competition you formed this new organization ?— A. We had to do it or wind up the busi- ness. If we had not, we would have thrown all our men out of employment. The best thing to do was to get rid of the fierce competition, to get rid of the waste of money in canvassers. We have not half as many canvassers to-day as we did have. Q. The canvassers were necessary to maintain your competi- tion ? — A. Before that, we did it to beat one another out of busi- ness. Q. Is that not what you call competition? — A. Pretty sharp competition. Q. It was to get rid of that you made your combination? — A. Yes, sir ; to better the entire thing ; no question about that. Wliile it has also been claimed that economies of consolidation and the possibility of developing more satisfactorily the export trade were likewise considerations in bringing about the merger, it may be accepted as established that the principal reason for the formation of the International Harvester Co. was the elimination of the com- petition complained of. The severity of this competition has frequently been set forth as a full justification for the combination. It is important to point out, therefore, that notwithstanding this competition the profits in the business were large. Thus, the profits of the five combining concerns during the five years 1898-1902 aggregated nearly $43,000,000, or an average of nearly $8,600,000 a year. In the case of the McCormick concern, the profits for the year preceding the merger exceeded 12 per 4 BEPORT ON THE INTERNATIONAL HARVESTER CO. cent of the net assets as shown by its books, while those of the Deering business were nearly 18 per cent of such book assets, and those of the Milwaukee Harvester Co. over 11 per cent. Data for comparisons in the case of the other two companies are not available, but the profits of these apparently were smaller. These 1902 profits may have some- what overstated the net earnings available for dividends, and the book assets are not an entirely satisfactory criterion for judging their exact significance, but it is certain that such profits were liberal. During this interval, moreover, there was a very great expansion in the voluine of business of these companies. It is apparent, therefore, that while competition was severe it was by no means destructive. It may be noted that many of the basic patents for harvesting ma- chinery had expired, and were open to all who cared to engage in the manufacture of such machinery. METHODS BY WHICH THE COMPANY WAS OBGANIZED. Representatives of the company, and particularly of its financial organizers, have repeatedly insisted, at times in sworn testimony, that the combination was not brought about by the concerted action of the interests united, but instead that the five concerns were purchased independently the.one of the other by the banking interests, and sub- sequently merged into a single organization. These assertions may be sufficiently disposed of by citing from a statement made by Stanley McCormick and Cyrus Bentley, legal counsel of the McCormicks, to G. W. Perkins on June 27, 1902, in New York City, and confirmed by a typewritten memorandum left with Mr. Perkins after having been revised at the head offices of the McCormick concern. This statement, which is given in full in this report, contained repeated references to conferences between repre- sentatives of the harvesting machine companies themselves, as the following excerpts show : The McCormick and Deering people, in talking over how they might get together, estimated in the matter of good will that about two average years' profits ought to represent the good will of each company's business. In negotiations, not a CTeat while ago, the Deerings rather expressed the opinion that if the McCormick and Deerinff companies were to come together it ought to be on a basis of about 53 for the McCormick companv and 47 for the Deering, while the McCormicks' figures had been anywhere from 55 to 60 for the McCormick company and 40 to 45 for the Deering company. ♦ ♦ ♦ nT^^i^T^^^if ^tPJ if president of this [the Champion] company. Mr. Harold McCormick saw hun three or four weeks ago and sounded him as to what he would think of the several harvesting machine companies getting together. Mr. Glessner seemed to be very much interested m having it done, and said that his SUMMABY. F.en Coiuiribi.4 V%rk vtrsiiy company would not be particular as to details or as to what influence would predominate. * ♦ ♦ Mr. W. H. Jones is president of this [the Piano] company, and is the dominating influence. Mr. O. W. Jones, his brother, is vice-president. He visited Mr. McCormick about four weeks ago, and in a casual way asked if something could not be done in the way of combination. He remarked : " If you and I were appointed a committee of two to put this through, it wouldn't take us a week to wind it up " — ^giving the impression that he was anxious to see it put through. * * ♦ Mr. Deering has approached both the Piano and Champion companies, but so far as is known he has no option on either one. ♦ ♦ ♦ The Deerings have indicated that they would prefer not to sell for cash, but would take securities and" keep an interest in the management of the new organization. Mr. Deering has urged that the whole trade be taken into the combination. Against this it has been suggested to him that if only 90 per cent were brought in, it wouM be quite possible to deal with another of the minor companies if any one made ex- cessive demands. That is, no minor company is probably essen- tial to the combination, although the five named are undoubtedly the most desirable. It is therefore conclusively established by documentary evidence that a consolidation of the five leading harvesting- machine makers had been considered, not merely by the bankers, but actively con- sidered and discussed by the leading interests themselves, and this for a considerable period prior to the organization of the company. These discussions had specifically covered the relative values of some of the combining companies, the policy to be adopted with respect to other concerns than the five mentioned, and also the question as to who should have a controlling interest in the new organization. Moreover, the McCormick interests assisted the bankers in arranging for the acquisition of the Milwaukee Harvester Co. TERMS OF CONSOLTOATION. The process by which the merger was actually accomplished in- volved a number of formal legal transactions. On July 28, 1902, four separate agreements were entered into between the McCormick, Deering, Piano, and Champion concerns, respectively, called the " vendors," and William C. Lane, called the " purchaser," all in sub- stantially the same general form, but differing in certain details. These contracts set forth that the respective vendors were the owners of certain plants for the manufacture of harvesting machines, and that Lane, the purchaser, desired to acquire them for the purpose of selling them to a company to be formed subsequently, and referred to as the " purchasing company." In pursuance of these contracts and supplemental contracts of August 11, 1902, it was arranged \ 6 BEFOBT ON THE INTERNATIONAL HARVESTER CO. that for the plants and other physical properties thus conveyed, together with the entire property of the Milwaukee Harvester Co., which was put in by the bankers as a going concern, and for the payment of the bankers' commission, $60,000,000 of stock was to be issued. An additional $60,000,000 of stock was to be issued for $60,000,000 cash. Of this amount $19,000,000 was to be contrib- uted by the bankers and their associates, and $41,000,000 by the four vendor companies, as follows: McCormick, $20,000,000; Deer- ing, $16,000,000; Piano, $4,000,000; Champion, $1,000,000. By a subsequent arrangement, however, the McCormick and Deering in- terests agreed to contribute about $9,000,000 additional working capi- tal, so that only about $10,000,000 was directly raised by the bankers. The payment of most of the working capital provided by the vendor companies was arranged through the assignment of bills receivable for collection. The contracts further provided that the purchase price of the phys- ical properties should equal their appraised value. Provision was made for valuing the good will on the basis of two years' profits, plus 10 per cent. These arrangements were subsequently modified by additional contracts. Immediately after the contracts of August 11, 1902, were entered into, the International Harvester Co. was organized by a group of temporary or " dummy " incorporators, the certificate of incorporation being filed in New Jersey on August 12, 1902. Temporary directors were elected, who at once took under consideration a written offer from W. C. Lane to transfer the plants, good will, and other prop- erty, excluding receivables, of the McCormick, Deering, Piano, and Champion concerns, together with the Milwaukee company as a whole, and working capital of $60,000,000. The plants, good will, etc., were nominally valued at $132,000,000, thus making a total nom- inal value of $192,000,000. In payment therefor Mr. Lane offered to accept the entire capital stock of the International Harvester Co., namely, $120,000,000 par value, subject to a provision that if any additional stock were issued by the company prior to July 1, 1903, on account of the nominal surplus of $72,000,000, then this original $120,000,000 of common stock should become preferred stock and the additional stock should be common stock, to be issued to the holders of the preferred, pro rata. On August 13, 1902, W. C. Lane and E. H. Gary (chairman of the United States Steel Corporation) appeared before the temporary board of directors and explained Lane's offer, which was promptly accepted. Resolutions were adopted to the effect that the properties and working capital were worth the amount stated by Lane ($192,- 000,000), and that the treasurer should enter the proper amounts in the books of account, including a surplus of $72,000,000. SUMMARY. 7 This surplus of $72,000,000 was entirely arbitrary, and, in fact, wholly fictitious. It is obvious that at the time it had not been defi- nitely decided whether the company should be organized with a capitalization approximately commensurate with the value of its assets or whether it should issue stock greatly in excess of that capitalization. On the same day (August 13) the new stockholders took control of the company. The temporary directors resigned, and 18 directors were elected in their places. Of these 18 directors, 10 were largely interested in the four companies merged ; 3 others had been connected with such concerns or individuals as counsel; 4 represented either the bankers (J. P. Morgan & Co.), or capitalists associated with them; the only remaining director was put in to comply with the corporation laws of New Jersey requiring a resident director. On the same day also the temporary officers of the company re- signed and the principal officers elected in their places were as fol- lows: Cyrus H. McCormick, president; James Deering, Harold F. McCormick, AV. H. Jones, and J. J. Glessner, vice presidents; Rich- ard F. Howe, secretary and treasurer. The executive committee, of which Charles Deering was made chairman, included the principal representatives of four of the companies merged, and G. W. Perkins, who was also made chairman of the finance committee. An important step in carrj^ing out the original contracts of July 28, 1902, with the principal companies entering the merger, namely, the establishment of a voting trust, was made on August 13 by execution of the voting trust agreement and the appointment of the following persons as voting trustees, namely, George W. Perkins^ Charles Deering, and Cyrus H. McCormick. The actual consummation of the merger, as explained in more de- tail in the full text of the report, involved certain additional con- tracts. This was due to the fact that since the contracts of August 11, 1902, limited the total issue of capital stock to $120,000,000, and since $60,000,000 of this was to be issued for working capital, there would have been nothing left for the bankers and promoters or for the purchase of the Milwaukee Harvester Co. in case the appraisal of the physical properties of the four vendor companies amounted to as much as $60,000,000. The contemplated compensa- tion of the bankers was $3,000,000 in stock, and the cost of the Mil- waukee company (put in by the bankers), together with certain ex- penses, amounted to more than $3,500,000. If these items were to be provided for, therefore, there would be only about $53,500,000 of stock left to pay for the plants and other physical properties of the four vendor companies. It was agreed, therefore, by an addi- tional contract dated August 17, 1903, that certain specified amounts 79958—13 2 I 8 REPORT ON THE INTERNATIONAL HARVESTER CO. of stock should be allotted to each of the vendor companies in lieu of the amounts to be determined by the appraisals. The amounts agreed upon, subject to slight adjustments, were as follows: McCormick company $26, 321, 656. 86 Deering company 21, 362, 554. 64 Champion company 3.372,185.91 Piano company 2,193,603.09 Total 53. 250. 000. 50 It will be seen, therefore, that the elaborate appraisals made of the physical properties of the vendor companies really did not determine the amounts of stock issued. Subsequently, however, these ap- praisals, when completed, were used to some extent for bookkeeping purposes. The final allotment of the $120,000,000 capital stock of the International Harvester Co. is briefly summarized in the following table : DISPOSITION OF ORIGINAL 1120,000.000 CAPITAL STOCK OF INTERNATIONAL HARVESTER CO. Plant stock, J. P. Morgan & Co. : Commission %X 000, 000. 00 Less contribution to Champion and Piano companies 42, 857. 14 2, 057, 142. 96 Milwaukee Han'ester Co 3, 000, 000. 00 $5, 957, 142. 86 McCormick Interests : Original allotment 26. 321. 656. 86 Less contribution to Champion and Piano companies 59, 142. 86 26, 262, 514. 00 Deerlns; Interests : Original allotment 21, 362, 554. 64 Less contribution to Champion and Piano companies 48, 000. 00 21, 314, 554. 64 piano interests : Original allotment 2, 193, 603. 09 Plus contributions from other in- terests 75,000.00 2, 268, 603. 09 Champion interests : Original allotment 3, 372, 185. 91 Plus contributions from other in- terests 75,000.00 3, 447, 186. 91 Organization expenses (excluding Mil- waukee company and incorporators' stock) : Sold 611,803.34 On hand 138, 196. 16 749, 999. 50 $60, 000, 000. 00 SUMMABY. StU^^^^^ t \'-'^ ?. Cash stock. ^ ^^WlJ^ ^ , rM J. p. Morgan & Co. : ^^ ^^^.w '^ ^. > Cash $9,940,000.00 v\ ^"^ \\ Incorporators 60,000.00 .■ cXS^ ^ \^^ «^^ Milwaukee excess 148, 190. 66 ,A>^^' ^^"^ \\^^^ $10. 148, 196. 66 v%\«^ , ,,t>^ McCormick interests: V^^ \»j ^ Original subscription 20, 000, 000. 00 W^ ^«i Subsequent subscription 4, 886, 190. 13 — ; 24, 886, 190. 13 Deering interests : Original subscription 16, 000, 000. 00 Subsequent subscription 3, 965, 013. 21 19,965,613.21 Piano interests 4, 000, OOO. 00 Champion interests 1, ooo, 000. 00 $60, 000, 000. 00 The table is in the main explained by the preceding discussion. It will be noticed that certain small amounts were deducted from the "plant stock" issued to the bankers and to the McCormick and Deering interests, together aggregating $150,000, this amount being divided equally between the Champion and Piano interests. Again, while $3,000,000 of stock was allotted for the acquisition of the Milwaukee Harvester Co., on actual appraisal the value was estab- lished at $3,148,196.66. The excess was issued to the bankers out of the cash stock. The banking interests also raised $10,000,000 of cash capital (including $60,000 paid in by the temporary incor- porators). The remaining cash capital was raised by the various manufacturing interests as indicated in the table. Of the $120,000,000 capital stock of the company, $103,144,660.98, or 86 per cent, was received by the McCormick, Deering, Champion, and Piano interests. The McCormick interests alone received $61,- 148,704.13, or 42.6 per cent, and the Deering interests $41,280,167.85, or 34.4 per cent. These two groups together, therefore, received no less than 77 per cent of the total capital stock. As a matter of fact, while the voting trust technically gave the McCormick, Deering, and Morgan interests equal voice in the management of the company, the predominating influence appears to have been with the McCor- mick interests. POSITION OF THE INTERNATIONAL HARVESTER CO. AT ITS ORGANIZATION. At its organization the International Harvester Co. controlled approximately 85 per cent of the total production of harvesting machines in the United States. While exact data on production are not available, statistics of sales show that in binders the companies composing the new combination had handled approximately 90 per cent of the business in the year prior to the merger; in mowers, about iBi 10 REPORT ON THE INTERNATIONAL HARVESTER CO. 81 per cent ; and in rakes, about 67 per cent. This is shown by the following comparison of sales in the 1902 season : Binders Mowers Rakes.. Sold by International Harvester Co. companies, season of 1902.1 Number. 180.024 297,880 165,219 Percent. 90.9 81.2 67.0 Sold by independent OMnpanies, of 1902.« Number. 18,128 68,890 >81,37S Per cinU 9.1 18.8 33.0 » Number produced in case of the Milwaulcee company. > Number produced in case of the Osborne company. * Number for independents partly estimated. The important machines were binders and mowers, and combining these it may be safely said that 85 per cent of the business was handled by the new consolidation at its organization. The McCormick company had much the largest production for each class of harvesting machines; the Deering company was second in each case. The Champion concern stood third with respect to binders and mowers, while the Milwaukee had the smallest output for all the principal machines. COMPABISON OF CAPITALIZATION WITH INVESTMENT. As already shown, of the capital stock of $120,000,000 at the time of organization, $60,000,000 was issued for plants, inventories, and similar property, and $60,000,000 for working capital. The appraised value of the property acquired by the $60,000,000 of " plant stock," so called, was $67,000,000, exclusive of good will, and the company claims therefore that it started with a surplu.s of $7,000,000. This surplus was later written off. As a matter of fact, this appraisal of $67,000,000 for the property acquired by the plant stock was in excess of a fair valuation, exclusive of good will. As shown below, the Bureau has arrived at a valuation for this property of only about $49,100,000. The difference between this and the $60,000,000 of stock issued therefor, so far as covered by any value whatever, must be set against good will. VALUE OF PHYSICAL PROPERTIES AND INVENTORIES. In the first instance, it should be noted that the Bureau experienced great difficulty in arriving at a satisfactory valuation of the property acquired by the company. The company has repeatedly asserted that it did not have the original books or records of the constitutent com- panies, and the representatives of some of those companies, moreover, persistently refused or evaded compliance with the Bureau's request that they produce them. Moreover, the available records were in unsatisfactory shape. No such records were secured for the Cham- juon and Piano concerns. For the McCormick, Deerincc and Milwau- SUMMARY. 11 kee companies, however, certain data taken from the books or submitted to the bankers were obtained, and since the property acquired from these three companies together comprised 90 per cent of the total appraised value of the plants and inventories the data secured covering them enabled the Bureau to arrive at a fairly close determination of the total value of this class of property. The results of the Bureau's analysis for the McCormick and Deer- ing concerns are compared with the old book values and with tho values adopted by the International Harvester Co. in the following table : Mccormick harvesting machine co. : valuations of physical proper- ties, 1902. Factory real estate Factory buildings and machinery . Agency property Illinois Northern Ry Timber Miscellaneous Inventory Book. $1,341,149.12 5,845,858.10 1,176,306.11 0) 314,950.65 620,764.23 2 10,562,793.59 Total .. 19,761,821.80 Harvester Co. $4,993,909.00 7,401,692.92 1,571,905.85 2,553,944.31 314.363.86 886.842.39 11,738,822.70 29,461,481.03 Bureau. $3,772,032.80 6,895,942.99 1,549,557.71 485,264.71 314. 363. 86 655,150.80 9, 818. 476. &4 23,490,789.41 DEERINO HARVESTER CO.: VALUATIONS OF PHYSICAL PROPERTIES, 1902. Factory real estate Factory buildings and machinery. Agency property Ore, coal, iron, and steel Timber Miscellaneous Inventory Total $670,642.45 2,579,231.38 226,495.26 • 1,589,093.31 275,567.88 « 356, 773. 01 6 8,060,598.58 $1,563,165.63 5,523,041.88 471,898.94 9,511,400.44 1,560,436.36 546,511.66 8,905,059.78 13,758,401.87 28,081,514.69 $1,260,775.86 5,070.274.73 417,904.31 1,795,588.57 525, 189. 12 515,706.32 7,271,265.98 16,856,704.89 I Leasehold and equipment not separately booked by McCormick Co.; equipment included apparently In item of factory buildings and machinery (appraised at $53,944.31). * Includes on hand freight and duty ($231,504.15) as shown by appraisal; not shown in McCormick bal- ance sheet. » Without deduction of purchase-money obligations of $916,753.40, which are deducted in the EUirvester Co. and Bureau valuations. Not including Mann property, appraised at $28,414.89 and at $34,532.68, respectively. Includes $240,590.18 on band freight and duty, not shown in Deering data. In explanation of these tables it should be stated that for most of the property of the two chief vendor companies the organizers of the International Harvester Co. had two appraisals made. Almost invariably the higher of these appraisals was selected by the Inter- national Harvester Co. in making up its valuations. This fact alone is strongly suggestive of a tendency to overvalue. In most cases even the lower appraisals were decidedly higher than the old book valuations. Representatives of the International Harvester Co., •^m IS BEPOBT ON THE INTEBNATIONAL HABVESTEB CO. SUMMARY. 13 however, have insisted that the entries on the books of the prede- cessor companies were not a reliable indication of the true values of the property in 1902. While in the opinion of the Bureau these book valuations certainly appear in some cases to be a far better indication of the real value of the property than are the values adopted by the Harvester Co. itself, nevertheless, in view of the element of doubt, the Bureau as a rule did not use these book valua- tions, but instead established valuations according to its best judg- ment in the light of all available data and after full consultation with the Harvester Co. representatives. In some cases the Bureau adopted the lower appraisals, while for the Champion and Piano companies all the properties except the inventories have been put in at the appraised values adopted by the International Harvester Co. In some cases collateral evidence sustained the book valuations. The most striking differences between the valuations adopted by the Bureau and those adopted by the International Harvester Co. occur in the ore and timber properties of the Deering interests, in the factory real estate and in the industrial r«iilroad of the McCormick interests, and in the inventories of materials and products for all companies combined. Deering ore properties. — The Deerings purchased about January, 1902, or about seven months before the merger, two ore leaseholds on the Mesabi range, the Hawkins and the Agnew, for $525,000 and $150,000, respectively. Of the purchase price of the Hawkins, $350,- 000 was in notes, making the net investment value at the time of purchase only $175,000. The Deerings expended $46,996.57 on this property for development, etc. It was valued for purposes of consoli- dation, after deduction of indebtedness, at $5,770,000. In the case of the Agnew the entire purchase price, $150,000, was in notes. The Deerings had expended $54,284.18 for improvements, etc. It was valued, after deduction of indebtedness, at $2,193,750. In both cases the notes were still outstanding at the time of transfer to the International Harvester Co. and were assumed by it. In the case of leasehold ore property the current value of the equity is ordinarily expressed by the bonus; that is, the price at which the leasehold is or can be transferred. The bonus value in the case of the Hawkins mine was about 4 to 6 cents per ton of the estimated deposit, and in the case of the Agnew mine about 3 to 4 cents. The Bureau in this investigation and that of the steel industry found that the aver- age rate of bonus on ten Mesabi leasehold mines, including the Haw- kins and Agnew, which were transferred during 1902, was approxi- mately 3J cents. The valuations assigned the equity in these mines by the International Harvester Co., however, amounted to 42J cents for the Hawkins per ton of ore in the ground and 37^ cents for the Agnew, or several times the respective bonuses actually paid. These were absurdly high valuations. The Bureau is satisfied that there were no unusual conditions surrounding the purchase of the Hawkins and Agnew mines which indicated that the value of these leaseholds was exceptional. Kepresentatives of the International Harvester Co. claimed, however, that there had been some increase in the estimated tonnage of the deposit during the interval that the Deerings had held the property. While the Bureau is disposed to regard the price paid by the Deerings as fairly expressing the value in August, 1902, it arbitrarily added $500,000 to that price to make certain not to undervalue this ore. Adding thereto the cost of im- provements, etc., made in the interim, and deducting, as in the ap- praisal, the purchase-money obligations, gives a net value of $776,- 280.75 instead of the appraised value of $7,963,750. It is undoubt- edly true that these leaseholds are to-day worth much more than this sum, but this obviously has nothing to do with their value in 1902. It is important to consider that the bankers who dominated the organization of the International Harvester Co., also organized the United States Steel Corporation, officers of which had only a few weeks before in important litigation then pending against that com- pany submitted affidavits to the effect that the value of its ore, tak- ing leaseholds and fee indiscriminately, was $700,000,000, or ap- proximately $1 per ton. Mr. Perkins, to whom was left the appraisal of these ore properties and who was also chairman of the finance committee of the Steel Corporation, was therefore in no position to deny an excessive valuation for this Deering ore. The valuation placed on this Deering ore was vigorously opposed by the McCor- mick interests, and a final book value was reached only after several years of controversy, and after the distribution of the company's stock had been decided upon. Deering timber properties. — ^In the case of the Deering timber properties, there was likewise a very great overvaluation. The most important of these properties, namely, that in Missouri, was acquired by the Deering interests mostly in 1899, at a total cost of approxi- mately $250,000, which was the value entered on their books. This was transferred to the books of the Harvester Co. at about $1,535,000. This valuation, however, was not established before 1905, and then only by a single appraiser, who was largely interested in the timber business. The valuation was admitted by a representative of the Harvester company to be excessive. The timber was almost entirely hardwoods. Information obtained by the Bureau in the course of its investigation of the lumber industry indicated that for hard- woods in this particular locality the advance in value during the three-year period from 1899 to 1902 (that is, during the period that this timber was held by the Deering interests) would on the average 11 REPORT ON THE INTERNATIONAL HARVESTER CO. be less than 50 per cent. In order to be liberal, however, the Bureau Of $000,000 This, It will be seen, is about $1,035,000 less than the valuation claimed by the International Harvester Co f^^f^^r^"" "^^'' ^^'^"=— In the case of the factorv real estate II Par MOwankee company includes net working capital after deducting $148,196.66 for plant stock excess. TTa- - -A 16 REPORT ON THE INTERNATIONAL HARVESTER CO. SUMMARY. The Bureau believes that while this valuation might be somewhat reduced if all the facts were available, any adjustment which would be made would not be of decisive importance. This maximum valu- ation of $49,100,000 compares with $60,000,000 " Plant stock " issued for such property and for promoters' expenses and services. This, as already noted, leaves a difference of, roughly, $10,900,000 to be represented by intangible considerations, such as good will. GOOD WILL. The Bureau has not attempted to value any good will which the constituent concerns of the consolidation may have brought into the merger. In the original contracts on whidi the combination was based it was agreed that good will should be valued at the sum of the profits of the two preceding years plus an additional 10 per cent. By this method of valuing good will, which was more or less commonly used among manufacturers, the total value of the good will was placed at about $20,800,000. If good will be allowed for the Mil- waukee company on the same basis, the total good will of the combi- nation would be about $21,300,000. Without indorsing this valuation, the Bureau is nevertheless of the opinion that there was a substantial good-will value brought into the merger. The McCormick, Deering, and Milwaukee companies, as already shown, made a liberal rate of profit while operating inde- pendently. This fact, together with the fact that their business had been long established, and that their machines were always sold under brand name, indicates that these concerns must have had a large good will. Against this there should be set the fact that the harvesting- machine business had apparently been somewhat overdone prior to the merger, and that there was some danger of a loss of good will as the very result of the formation of a combination or trust like thie International Harvester Co. WORKING CAPITAL. The stock issued for working capital, so far as the vendor compa- nies are concerned, was paid in chiefly through the collection of bills I'-eceivable of the principal constituent companies. About $10,000,000 of this cash stock was subscribed for at par by the bankers. The Bureau made an extended investigation of the accounts relating to this provision of working capital, and so far as these may be relied upon they indicate that the full amount of $60,000,000 was actually paid in in cash. Representatives of the International Harvester Co., moreover, repeatedly declared that there was no deduction or allow- ance from this cash payment, but that the full amount was actually paid in as represented. Statistical ^-^W Kent tmfl avj y SUBSEQUENT ACQUISITIONS AND EXTENSIONB^ bi^ V niversitf^ Immediately after its organization and almost continuously there- after the International Harvester Co. pursued the policy of ex- panding its control over the farm-machinery business, not only in harvesting machines but also in various other branches. This process may be divided into three parts: (1) Acquisition of compet- itors in the harvesting-machine business; (2) acquisition of con- cerns making other lines of farm machinery; and (3) construction of new plants in the United States and in various foreign countries for the manufacture of harvesting machines and other farm ma- chinery. Shortly after its organization, namely, in January, 1903, it ac- quired secret control of D. M. Osborne & Co., of Auburn, N. Y., the most important manufacturer of harvesting machines not originally taken into the combination. This secret control was maintained for nearly two years. During this period the Osborne company was operated and advertised as an independent concern, and these rep- resentations were supported by its managers in sworn statements that it was an independent company. The International Harvester Co. claims that this was done to enable the original owners to collect cer- tain obligations due them and that it was done at their request. While the Osborne company had a valuable line of tillage imple- ments, its chief importance lay in the production of harvesting ma- chines, in which it had an extensive foreign trade. In selling this concern the two largest active stockholders of the Osborne company (T. M. Osborne and Edwin D. Metcalf) covenanted with the Inter- national Harvester Co. that they would refrain from engaging inde- pendently in the same business for a period of ten years. In a similar secret way the International Harvester Co., between 1903 and 1904, acquired control of several other concerns which com- peted in the manufacture of harvesting machines and twine, namely, the Minnie Harvester Co., of St. Paul, Minn, (harvesting machines) ; the Aultman-Miller Co., of Akron, Ohio (harvesting machines and twine) ; and the Keystone Co., of Sterling, 111. (harvesting machines and hay tools), and operated them without disclosing such control for various periods. In the case of the Minnie Harvester Co. it is claimed that this method was used merely to facilitate the liqui- dation of the company. Negotiations were also had with a number of other competing makers of harvesting machines with a view to acquiring their prop- erties or business, in whole or in part. Among these were the Walter A. Wood Mowing & Reaping Machine Co., of Hoosick FaUs, N. Y. ; the Acme Harvester Co., of Peoria, 111.; and Massey-Harris Ca (Ltd.), of Toronto, Canada. These negotiations, however, were pfl 18 REPORT ON THE INTERNATIONAL HARVESTER CO. SUMMARY. 19 not consummated. Massey-Harris Co. was one of the companies apparently under consideration as a desirable acquisition at the time the merger was being arranged, and when negotiations for its pur- chase finally fell through the International Harvester Co. proceeded to enlarge the factory already begun in Canada. Several other concerns were apparently offered to the Interna- tional Harvester Co., or proposals made with reference to their ac- quisition by that company, including Adriance, Piatt & Co., of Poughkeepsie, N. Y. ; and the Johnston Harvester Co., of Batavia, N. Y. These negotiations occurred during the period 1903-1905, but the offers or proposals were ultimately declined by the International Harvester Co., for reasons which do not appear. EXTENSIONS INTO NEW LINES. Aside from these acquisitions of competing concerns, the Interna- national Harvester Co. has greatly expanded its business by branch- ing out into new lines of manufacture or sale. Among the most im- portant lines which the company entered in this way were manure spreaders, wagons, plows, and seeders. Here again expansion was accomplished in part by the acquisition of concerns already organ- ized. In 1906 two plants for the manufacture of manure spreaders, operated by the J. S. Kemp Manufacturing Co., were acquired, one at Newark Valley, N. Y., and the other at Waterloo, Iowa, the latter being leased. In 1904 the company acquired the Weber Wagon Co., and in the same year, moreover, entered into a selling arrangement with the Bettendorff Axle Co., of Davenport, Iowa, for the sale of all its output of steel wagons. Still again, about 1909, the company en- tered into a contract for the sale of the plows of the Parlin & Oren- dorff Co., of Canton, 111., in Canadian markets only, and somewhat later, it made a similar contract with the Oliver Chilled Plow Co., of South Bend, Ind., for the sale of the latter's plows in Canada. It also acquired, in 1910, an interest in this company's new Canadian plow works. Very recently— namely, in 1912— the international Har- vester Co. made an arrangement for the distribution and sale of the entire output of the Richmond, Ind., plant of the American Seeding Machine Co. At a much earlier date the International Harvester Co. had considered the advisability of obtaining a large stock in- terest in the latter company, but finally decided not to do this be- cause it deemed the price excessive. By thus extending its business into a number of new lines the In- ternational Harvester Co. not only increased the extent of its busi- ness, but where it was thus provided with satisfactory goods, it was able to accomplish their sale more successfully than some of the former owners, partly on account of its larger financial resources and elaborate selling organization, and also in part on account of the pressure it was able to exert to induce dealers to handle these new lines. To a considerable extent such dealers were not allowed to handle its harvesting machines (in which it had obtained, as already shown, a substantially monopolistic position by means of combina- tion), unless they would take these new lines also. It is apparent, therefore, that not only did the company's strong position in the har- vesting-machine business facilitate its entrance into new lines, but also that these new lines in turn afforded a further means of main- taining its position in the harvesting-machine business itself. CX)N8TRUCT10N OF NEW PLANTS. The International Harvester Co. extended its business in the manu- facture of harvesting machines, and also in the production of new lines by building new plants, both in the United States and in foreign countries. Some of the old harvesting-machine plants were remodeled and used for making new lines of farm machinery. The most important new plant built in the United States was a large tractor plant at Chicago. The company, furthermore, greatly en- larged its plants for the manufacture of iron and steel. The most important new construction of the company was in for- eign countries, where large factories have been built for the manu- facture of harvesting machines and other farm machinery, namely, in Canada, Sweden, France, Germany, and Russia. ORGANIZATION OF THE INTERNATIONAL HARVESTER CO. OF AMERICA. One important feature of the policy of the combination was the use of the Milwaukee Harvester Co. as a selling agency for the International Harvester Co. of New Jersey. For this purpose the name of the Milwaukee company was changed in September, 1902, to International Harvester Co. of America; the capital stock, fixed at $1,000,000, is all held by the New Jersey company. The officers and directors of the America company were until 1910 all officers or direc- tors of the International Harvester Co. ot New Jersey. Apparently, a separate organization was adopted in order to avoid heavy taxa- tion and the delay and difficulty of procuring new licenses to do business required in various States. Such licenses were often pro- hibited in case the foreign corporation applying was a trust or com- bination in restraint of trade. REARRANGEMENT OF CAPITALIZATION. In 1907 the International Harvester Co. divided its capital stock of $120,000,000 into $60,000,000 of preferred and $60,000,000 of com- mon stock. Furthermore, in 1910 a stock dividend of $20,000,000 of common stock was declared from surplus, making the capital stock of the company $140,000,000, consisting of $60,000,000 pre- ferred and $80,000,000 common. In this connection it should be noted that the voting trust was finally dissolved in August, 1912, and the 20 REPORT ON THE INTERNATIONAL HARVESTER CO. Stock distributed among the holders of the stock trust certificates. The great bulk of the stock of the company has throughout been closely held by a comparatively few interests, who have also been active m the management of the concern. It will be recalled that ihe McCormick interests had approximately 43 per cent of the stock at organization and the Deerings about 34 per cent. On January 29, 1913, the directors of the International Harvester Co. announced that they had transferred to a new concern, the International Harvester Corporation, aU of the foreign plants and all of the foreign business, also certain domestic plants engaged in the manufacture of the so-called new lines, together with certain assets pertaining thereto. This company is capitalized at $70,000,000, consisting of $30,000,000 of 7 per cent preferred stock and $40,000,000 of common stock. The present International Harvester Co., the name of which it is proposed shall be changed to International Har- vester Company of New Jersey, will retain the remaining assets, and Its capital stock will be reduced to $70,000,000, likewise con- sistmg of $30,000,000 of 7 per cent preferred and $40,000,000 of common. For the $70,000,000 stock of the present company can- celed, the stockholders will be entitled to receive cash or a pro rata distribution of the stock of the new International Harvester Corpo- ration. This action by the company is admittedly taken in view of the pending dissolution suit of the United States Government agamst the company. This rearrangement of capitalization was approved by the stockholders on February 10, 1913. If intended as part of a plan of disintegration the Bureau regards this method of division as very unsatisfactory. PRESENT POSITION OF THE INTERNATIONAL HARVESTER CO. The original monopolistic position of the International Harvester Co. in harvesting-machine lines had been substantially maintained up to the close of 1911, as the following table shows; PROPORTION OF THE HARVESTINO-MACmNE BUSINESS OF THE UNTTED STATES CONTROLLED BY THE INTERNATIONAL HARVESTER CO. IN mu Machines. Grain binders. Mowers Rakes factured in United Steteau Percent, 87.0 76.6 72.0 Sold in United States. Percent. 87.2 74.6 6&0 » Percentages based on practlflally complete returns for binders and mowers, but parUy on estimatea tor rakes lor which the returns covered about 93 per cant of the total business. For the new lines of farm machinery it is not possible in most cases to show the precise position of the International Harvester Co., but SUMMARY. 21 in several of them it has acquired a very considerable proportion of the trade. For spreaders the Bureau has obtained statistics covering a large majority of the independent production and sale in the United States, and has made estimates for the remainder which it is satisfied are approximately correct. A comparison of these figures with those of the International Harvester Co. shows that the company has about 55 per cent of the 1911 production in the United States and about 50 per cent of the sales. A comparison for disk harrows on a similar basis, for which the Bureau also had returns for a substantial majority of the total independent business, indicates that the Harvester Co.'s proportion of the number produced was at least 43 per cent, and its proportion of the number sold at least 37 per cent. For certain other lines also the International Harvester Co. has ac- quired a large proportion of the business, but satisfactory data are not available to show its percentage. In the case of wagons, the International Harvester Co. had nothing at the start, but according to the best estimates that can be made by the Bureau, had in 1911 about 15 per cent of the number manufactured in the United States and about 13 per cent of the number sold, although the total produc- tion of farm wagons in the United States has decreased in recent years. It is apparent, therefore, that the International Harvester Co. not only has maintained a high degree of monopoly in the harvesting- machine business proper, but has also become an important factor in several new lines. A noteworthy recent development of the farm-machinery business has been the expansion of several old concerns not previously engaged in the harvesting-machine business into that line of manufacture. This development has occurred particularly with respect to certain large concerns making plows and a variety of other lines, such as Deere & Co., the Emerson-Brantingham Co., and the Moline Plow Co., while certain other important concerns, such as the J. I. Case Threshing Machine Co. and M. Rumely Co., according to reports, have contemplated an expansion into the harvester business. The expansion of these various concerns is one of the most signifi- cant features of the farm-machinery industry to-day, and one involv- ing possibilities of great importance. It is important to note that these new developments have been made on the principle of carry- ing a so-called full line of farm machinery, although it should be understood that no company, not even the International Harvester Co., has a really complete line. PaOFITS OF THE INTEBNATIONAIi HABVESTER CO. The chief feature of the profits of the International Harvester Co. IS the increase from a low rate in the early years of the organization to a rather high rate in recent years, averaging about 12^ per cent 22 REPORT ON THE INTERNATIONAL HARVESTER CO. on the net assets, as computed by the Bureau, for the period 1909- 1911; figures for the year 1912 are not available. It should be explained that the Bureau met with exceptional difficulties in verifying and analyzing the accounts of the Harvester Co., because of the fact that the accounts were for several years kept in an extraordinarily loose manner, and that the company, accord- ing to the statements of its comptroller, had actually made no com- plete and authentic balance sheets prior to that for December 31, 1906. Furthermore, the opening entries in respect to certain ac- counts, at least, were not definitely established by the International Harvester Co. until it made up this 1906 balance sheet during the first part of 1907. At the request of the Bureau, the company pre- pared balance sheets for the earlier years. In computing the net profits the Bureau made certain revisions both of the reported assets and profits, particularly with respect to the opening entries on the books and the treatment of certain reserves. As already noted, the International Harvester Co. at an early date in Its operations readjusted the opening entries of inventories, reduc- ing them from about $25,550,000, the figure at which they were ap- praised, to approximately $18,155,000, on the ground that, the ap- praisal valuations were altogether too high for trading purposes The Bureau, it will be recalled, does not accept this treatment, main- taming that the same valuations should be used both for figuring the investment and for computing profits. The Bureau established these inventories, after an arbitrary allowance of $1,500,000 for de- preciation, which in its opinion is liberal, at about $21,230,000. The Bureau also treated differently certain expenses, amounting to $1,780,000, in the fall of 1902, charging these against the profits. The effect of these changes is chiefly shown in the year 1903 (this really covering a period of 15 months), for which the Bureau's computation shows a total profit of, roughly. $797,000, whereas the company figures a profit of $5,641,000. The Bureau also made certain revisions of the reserve accounts of the company, particularly the contingent reserve to cover deferred profits on forward sales, the special maintenance reserve, and the de- preciation and extinguishment reserve. The first of these reserves amounted at the end of 1911 to $2,500,000. The Bureau takes the ground that while this is a provision which, as a matter of prudence, the company might set up, it does not really represent a deduction from profits, but is merely surplus in another form. In the case of the company's special maintenance reserve, which amounted at the close of 1911 to approximately $1,340,000, the Bureau IS of the opinion that rather more than $1,000,000 really represented SUMMARY. 23 profits, inasmuch as to this extent the expenditures had not yet been iucurred or any liability definitely accrued. Owing to the excessive valuations placed by the company on its ore properties, the extinguishment charged therefor was excessive, and consequently the Bureau restored a large portion thereof to earnings. In this connection, as an interesting side light on the company's ore valuations, it may be noted that in the first year of its operations the company charged an extinguishment of 10 cents per ton on ore mined from the Hawkins leasehold, and the same amount per ton on that mined from the Agnew, whereas the extinguishment subsequently charged amounted at the maximum to 52J cents on the Hawkins and 37 J cents on the Agnew. Certain other minor depreciation charges which the Bureau regarded as unwarranted, and which had been charged against the property account, were restored to property and to earnings. On the other hand, certain amounts charged by the company to in- surance and pension funds, parts of which, in the opinion of the Bureau, might properly have been i*estored to earnings if readily ascertain' able, were accepted, as shown by the company's books. The collec- tion expense reserve of $1,000,000 on receivables and depreciation reserves for bad debts, amounting to over $3,000,000, were likewise accepted by the Bureau. RATE OF PROFITS ON INVESTMENT, AS COMPUTED BY BUREAU. The net assets and profits of the company and the rate of profit on the net assets for 1903-1911, as thus computed by the Bureau in both cases, are shown in the following table. The rates are com- puted on the net assets at the beginning of each year; this is the method adopted by the company in computing the rates on capital and surplus. ^iilor^Jc^P EARNINGS OF THE INTERNATIONAL HARVESTER CO ON NET ASSETS EXCLUSIVE OF GOOD ^VILL, AS COMPUTED BY THE BUREAU, BY ^ARS^Q^iml' Year ending Dec. 31— Not assets, ex- clusive of good wllL Net earnings. Profit on assets at begin- ninK of year. Per cent. i '^'enr 1 ending Dec 31— Not ns«?efs, ex- clusive of good will. Net earnings* Profit on assets at begin- nintj of year. 19021 1109,117.366.08 106.314,179 00 107,196,624.97 109,907.909.12 112,514,855.99 116,542,572.83 1908.... 1909.... 1910.... j 1911.... tI-'2. 522.298,85 134, 7«' 1, 142. 61 H4.iSs),739.96 110,179,726.02 16,458,843.76 17,208,597.34 16,638,703.28 Per cent. 1903 1904 1905 $796,822.92 5,682,445.97 7,511,284.15 7,406,946.87 8,227,710.84 '0.73 5.34 7.01 6.74 7.31 8.73 13.43 12.77 1906 Total. 11.51 1907 f 1,063,486,679.40 90,111,087.15 8.47 This oovere 15 months, but no change has been made for this period nor for the average of all the vMn on that account. This Is In harmony with the company's method of treatment. For ^n a^rJio^o!.!?" the exceptionally low earnings of 1903, see text. 79958—13 3 treatment. For an explanation ol H 24 REPORT ON THE INTERNATIONAL HARVESTER CO. I*-- From the foregoing computation of the Bureau it appears that the average net earnings on the net investment of the company for the nine years and three months ended December 31, 1911, was 8.5 per cent. The rate of earnings for 1903 (really 15 months) was les.s than 1 per cent, and only in this year does the Bureau^s percentage differ very markedly from that of th? company ; the reasons for this differ- ence have been already fully explained, and relate chiefly to the different method of handling the inventory. Leaving this excep- tional period out of consideration the rate of earnings ranged from 5.3 per cent in 1904 to 13.4 per cent in 1909. The average rate of earnings for the last three years, namely, 1909 to 1911, inclusive, was 12.5 per cent. It will be noted that the rate of profit for 1911 was about 2 per cent lower than the maximum in 1909. The company claims that on account of the reduction of prices beginning in 1912 its rate of profit will prove to have been lower in that year, but it has not as yet completed its figures for this period. In the foregoing computations of profit the net assets of the com- pany as revised by the Bureau have been used without any allowance for good will. In view of the diflSculty of establishing a fair valu- ation for the good will, which might change from year to year, and furthermore in view of the fact that the company makes no entry for good will on its books, any attempt to compute a rate of earnings which would include this would be more or less problematical. Had any considerable allowance been made in the net assets for good will, the rate of profit would necessarily have been lower. Hence, while the profits of the International Harvester Co. on the average for the whole period of its operations have not been exces- sive, the profits for the three-year period, 1909 to 1911, inclusive, have been distinctly high. In judging of the reasonableness of this rate of profit it is proper to consider the fact that the risk of the company's business is comparatively small, owing to its world-wide character, which to a large degree is an insurance against the effects of local disturbances of business prosperity. It is also important to bear in mind the fact that the business rests in part on a monopolistic basis, which not only tends to reduce the element of risk, but also makes it desirable from a public standpoint that the rate of profit should not be higher than a reasonable return to the capital invested. For purposes of comparison, the net earnings as computed by the International Harvester Co. itself and the ratio of these earnings to the capital stock and surplus are shown in the table following. SUMMARY. Co New ^.-^~k RATE OP NET EARNINGS OF INTERNATIONAL HARVESTER CO. ON CAPITAL STOCK AND SURPLUS, AS SHOWN BY COMPANY'S ACCOUNTS, BY YEARS, 1903-1911. Year. Net earnings. Rate of net earnings to capital stock and surplus at beginning of year. Year. NeteamingB. Rate of net eamin^7 /isH o\ViO NEH SEP 06Wy4 JUN 2 5 1926 Bm END OF TITLE