Midwest Merger

Cyrus Stephen Eaton made no headlines last week. No one called him "Cyrus the Great." (Admiring Clevelanders used to call him that.) No one described him as a "ruthless Napoleon." (Newton D. Baker once described him thus.) Greying at the temples but still in his early 50'S, apparently Cyrus Eaton was going inconspicuously about his personal business in a one-room office at Otis & Co. in Cleveland.

Some newspapers carried a small item about the receiver of Continental Shares, Inc. filing a settlement proposal for $16,000,000 of claims. The last time most people could remember seeing his name in print was in mid-August when Mrs. Eaton got a divorce from him in Akron on charges of mental cruelty (TIME, Aug. 27).*

But as Mr. Eaton puttered around his 200-acre estate in nearby Northfield, he must have smiled grimly over headlines in Cleveland newspapers: $323,000,000 STEEL MERGER STARTED. Until Depression tripped his destiny Mr. Eaton dreamed mighty dreams of a great Midwest industrial empire, the heart of which was to be steel. Because of these dreams he filled up Continental Shares with $156,000,000 of industrial stocks, largely in Midwest companies. Because of them, he waged a great legal battle to keep Youngstown Sheet & Tube out of the hands of Bethlehem Steel (TIME, March 24, 1930 et seq.). The proposed steel merger that blossomed in last week's headlines was, to be sure, not a direct outgrowth of the Eaton dreams to give the Midwest a company fully integrated from mine to mill and able to compete on nearly even terms with U. S. Steel Corp. But it was the kind of alliance of which Mr. Eaton would have approved. It was. moreover, an expansion of the most lasting monument Mr. Eaton ever reared--Republic Steel, third biggest in the U. S. industry.

Republic was launched in 1930 as a merger of a number of Midwest steel companies, the largest of which was old Republic Iron & Steel. Squeezed between Depression and the organization troubles incident to any big merger, Republic has since then piled up $29,000,000 in deficits and accumulated another $14,000,000 in preferred dividend arrears. Deficits and dividend arrears are common to most of the steel industry, and Republic quietly consolidated its $268,000,000 assets. It is now the world's largest producer of alloy steels and turns out practically every type of product except building steels and steel rails (for neither of which has there been any real market since Depression began). Like most steel companies, its best customer today is the automobile industry. With its biggest plant in the Mahoning Valley, however, it is short of locations on all-water transportation routes.

Corrigan, McKinney, the second company involved in last week's merger plan, is a jig which fits neatly into the Republic puzzle. It has efficient plants on deep water at Cleveland and a subsidiary--Newton Steel--near Detroit. Until 1930 Corrigan, McKinney was a $65,000,000 family affair, controlled by women relatives of the founders. Price McKinney shot himself to death in 1926. James Corrigan lived to build himself a castellated pile on the precise spot in the Thousand Islands where he first set foot on U. S. soil as a poor Canadian immigrant boy. His son. James Jr., after a desert interlude in which he became the most popular bartender in Goldfield, Nev., returned to the family mills, married a beauteous onetime waitress named Laura. He died in 1928.

Laura Corrigan, by now a smart London hostess, decided to sell out to the Mather interests. Picking up some other holdings, Cleveland-Cliffs thus gained control of Corrigan, McKinney, leaving Mrs. Price McKinney as the biggest minority stockholder. And in any merger both Mrs. McKinney and Cleveland-Cliffs wanted at least part of the price in bonds, so that they can be unharried by steel's shifting fortunes.

Truscon is not a steelmaker but a fabricator, buying a large part of its raw materials from Republic.* It likewise dropped logically into the Republic set-up because it is the country's largest fabricator of building steel. A small unit ($13,000,000 in assets), it sells everything from window frames to bottle crates. With a model distributing organization and a warehouse in almost every principal city in the land, Truscon would be a valuable division when & if the building industry picks up.

Ready to Go. If the various interested stockholders approve of the merger of these three Midwest companies, Republic will have an annual capacity of 6,000,000 tons of steel--still behind Bethlehem's 9,000,000 tons, far behind U. S. Steel's 27,000,000 tons. But other Midwest steel companies like Otis and Cleveland-Cliffs are logical blooms for the Republic mill, and, once started, President-Chairman Tom (not Thomas) Mercer Girdler is not likely to shut down.

Tom Girdler's professorial appearance is misleading. Having sifted upward through various steel plants from foreman to Republic's undisputed boss, he is primarily a millman with a millman's gift for purple speech. Last spring in Manhattan he Drought a meeting of steelmasters to its feet with a definition of his attitude toward outside unions: "Before I spend the rest of my life dealing with William Green, I'm going to raise apples and potatoes. . . . We are not going to deal with the Amalgamated [Iron, Steel & Tin Workers] or any other professional union, even if we have to shut down."

Tom Girdler was vice president of Pittsburgh's Jones & Laughlin when he first heard Cyrus Eaton trumpeting for him in Ohio. Not anxious to lose their smallish, tough-thewed executive, the Joneses & the Laughlins made him presi dent. He promptly bought a $140,000 mansion but continued to arrive at the works at 8:40 every morning and to annoy his lady secretaries by always keeping his hat on. When Cyrus Eaton trumpeted again he did not have to stop for his hat. After watching him take Republic through Depression, the industry agrees that Tom Girdler is one of the ablest steelmasters of the day.

Money Matters. Well-advised by Kuhn, Loeb & Co. and Field, Glore & Co., Tom Girdler perceived that he could strike a better deal in the merger if he first toned up the Republic securities he would have to offer for Corrigan, McKinney and Truscon. So hand-in-hand with the merger goes a recapitalization plan which will: 1) eliminate the preferred dividend arrears by exchanging one share of a new convertible preferred and four shares of common stock for every two shares of old preferred; 2) provide, from a legal viewpoint, a better type of bond for future financing; 3) include $24,000,000 of new financing.

Now able to pay dividends if he ever earns them, Tom Girdler offered big blocks of his common and new preferred for Corrigan, McKinney, along with $15,000,000 in purchase money bonds to provide Mrs. McKinney and Cleveland-Cliffs with the steady income they wanted. In the case of Truscon, he made the exchange offer direct to the Truscon stockholders--no deal unless 75% accept. For their services and advice Kuhn, Loeb and Field, Glore will get 50,000 shares of Republic common, worth at last week's price about $650,000.

Of all the aspects of last week's merger plan, none excited Wall Street more than the bankers' fee. Senior partners who had long since forgotten that they could command a price for anything except security merchandising, started rummaging in musty files. It was widely felt that the Republic deal might easily touch off a whole train of mergers that have been pigeonholed for years.

And Wall Street was further impressed by the fact that Tom Girdler & friends gayly waved their plans in the faces of businessmen now deep sunk in the jitters. The idea of registering and selling a $24,000,000 industrial bond issue was enough to give most bankers white hair, but topping that was the incredible state of the steel trade, operating last week at 19% capacity--lowest level since March 1933. Steel buyers had crammed their warehouses last spring when a steel strike seemed inevitable and they were still coasting along on inventories. A substantial upturn was not expected until late autumn.

Reflecting the foggy outlook. U. S. Steel last week put its 20,000 white-collar workers on a five-hour day, thus cutting salaries about 10%. Most other units were expected to follow Big Steel's lead. Thus Steel became the first major industry to reduce salary scales under NRA.

Blithely oblivious to the industry's vast unused capacity, Henry Ford made great headlines last week by announcing that he was about to spend $13,000,000 rounding out his private steel plant. He will nearly double the output of his great River Rouge power plant at a cost of $4,000,000, will install $6,000,000 of new cold and hot rolling mills with all accessories. Ford Motor Co. already has blast and open-hearth furnaces, blooming mills and bar mills but it has never rolled finished steel. When the expansion program is completed, the company will have an annual capacity of 900,000 tons--enough, said Mr. Ford, to build 3,000 cars per day without buying a pound of steel off the premises.

*Included in the property settlement was the stipulation that Mr. Eaton must buy Mrs. Eaton a $35,000 house if his net worth ever rises above $105,000.

*Truscon's President Julius Kahn and his directors were severely criticized last year when the listing of additional Truscon stock on the New York Stock Exchange revealed a new wrinkle in corporate financing. Pressed for funds to meet a bank loan, the company sold 65,000 shares of stock it did not own, partly in the open market, partly by option. The stock was borrowed from President Kahn and other big shareholders. After the stock was sold, the company issued new stock to Mr. Kahn & friends. What Truscon did, in effect, was to sell short, but instead of buying back the stock as every other market operator must eventually do, it merely printed new certificates.

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