FORD STRIKES A SNAG IN RAIL MERGER PLAN Publication: The New York Times Date: 8 August 1926 Subject: American Government Topic: Henry Ford

WASHINGTON, Aug. 7.—Recommendation that the Interstate Commerce Commission reject the application made by Henry Ford and associates to permit acquisition by the Detroit & Ironton Railroad Company of the Detroit, Toledo & Ironton Railroad and the Toledo-Detroit Railroad was made today by Examiner Ralph H. Molster. The plan involves the purchase by the Detroit & Ironton of stock and other securities, and all railroad properties, franchises and assets, except the franchise to be a corporation and certain cash of the other two roads.

The proposal was held by the examiner to amount to a consolidation of the carriers into a single system for ownership and operation within the meaning of Paragraph 2 of Section 5 of the Interstate Commerce act, and he laid down the important ruling that this was not permissible under any section of present law.

The recommendation also opposed an application to issue $213,294,300 of capital stock essential to the completion of the deal.

While the Ford interests own all of the securities of the Detroit & Ironton and about 99 per cent. of the securities of the Detroit, Toledo & Ironton, Examiner Molster discussed at some length the proposed treatment of the minority stockholders in the latter road, holding that the evidence was far from convincing that the conclusions of the road's directors, as to the value of minority holdings, “were reached in a manner consistent with fair dealing.” In this connection the examiner referred to the position taken by the commission in rejecting the Nickel Plate unification plan.

In holding that a consolidation was not permissible under present law Examiner Molster made a summary of his conclusions which may prove of great importance to the general movement in the direction of voluntary consolidation by railroad systems, if it is sustained by the commission, which later must pass judgment on the recommendations. He said:

“Paragraph 18 of Section 1, Paragraph 2 of Section 5 and Paragraph 6 of Section 5 of the Interstate Commerce act were simultaneously enacted in the Transportation act of 1920, and by that statute inserted in the Interstate Commerce act, see Transportation act, 1920, Sections 402 and 407. The provisions of Paragraph 18 of Section 1, pertaining to the extension, construction and acquisition of railroad properties, are aimed at overexpansion, a fruitful source of disaster in any enterprise for pecuniary profit, and, in the business of transportation particularly, a source of undue burden upon rate payers. Paragraph 6 of Section 5 is designed to enable the consolidation of railroad properties for common control management and operation in conformity with a comprehensive plan to be adopted and published by the commission.

“While the commission has agreed upon the tentative plan of consolidation provided for in Paragraph 5 of Section 5, the complete plan has not been adopted. Pending adoption of the plan, Paragraph 2 of Section 5 enables the union of railroad properties in a manner falling short of consolidation, subject to prior authorization from the commission. Assuming authorization from the commission to be prerequisite, it is apparent that a proposed union of railroad properties that cannot be accomplished under Paragraph 2 of Section 5, because involving consolidation within the meaning thereof, nor under Paragraph 6 of Section 5, because the time is not yet ripe, may not be accomplished under the provisions of Paragraph 18 of Section 1 of the act.

The angle of the merger problem has been much discussed in railroad circles, and the Parker bill, which failed to pass in the last Congress, was prepared with the purpose in view of so amending the present law as to make possible voluntary consolidations which received the approval of the Interstate Commerce Commission. Up to this time there has remained some difference of opinion as to the exact status of the present law.

The carriers involved in the present controversy are small ones, the Detroit Toledo & Ironton being the longest, with main lines and branches of about 416 miles and an operation of about forty-five additional miles under trackage rights. A table prepared for the hearings showed that the minority holdings in the Detroit, Toledo & Ironton were as follows: Common stock, $123,700 or 1.90 per cent. of total; preferred stock, $57,448.06, or 0.96; adjustment 5s, $59,539.69, or 0.78 per cent. Par value of the entire principal amount of the securities outstanding was about $20,120,000.

The examiner said that some part of the notable advance in the earnings of the Detroit, Toledo & Ironton, beginning with 1923, “may be attributed to the support of Ford resources and additional traffic obtained from Ford industries,” but that the stockholders of the road “apparently thus far have received no direct benefit through the payment of dividends from the improvement in the earnings of their company.”

The report stated that the price of $104.27 a share fixed as the value of the stock, common and preferred, which minority stockholders might obtain, was an appraisal by the road's valuation engineer. Opponents of the consolidation presented no evidence of their ideas as to the value of the stock of the Detroit, Toledo & Ironton, Mr. Molster said, “but that there is discrimination against the minority appears from the fact that they are given no choice but to accept the cash equivalent of the value placed upon their stock by agencies of the majority.”

The opponents had made the point that the transaction constituted a sale of all the assets and franchises of a growing and increasingly prosperous company, that the minority should be granted the same privileges as the majority, and that the existing relative position of all securities involved be maintained.

The consolidation plan proposed by Henry Ford represented in his second attempt to rid himself of what he regards the “unproductive stockholder,” or the holder of a company's shares who does not actively participate in its management. Mr. Ford has accumulated all but about 4 or 5 per cent. of the stock of his Detroit, Toledo & Ironton Railroad, but his efforts to acquire this small minority have failed. Much of the minority stock is held locally by investors who have frequently reiterated their intentions of “remaining in business with Henry Ford.”

Mr. Ford has continued to improve the road, to electrify its lines and nickel-plated its engines, without consulting the minority interests. He has had his own way in running it, but still cherishes the dream of making it a Ford family property as he has done with the Ford Motor Company.