Wall Street History

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Wall Street History

12/10/1999

U.S. Steel - The IPO

Today''s bedtime story is about the first truly big IPO, U.S. Steel.
U.S. Steel?! Well, I figured with all of the froth in the market
these days you all deserve the truth. OR MAYBE YOU CAN''T
HANDLE THE TRUTH!! Sorry.

It seems, boys and girls, that in the late 19th century, financier J.P.
Morgan (not to be confused with the washed up singer, Jaye P.
Morgan, who appeared as a regular on "The Gong Show" back in
the ''70s) was in the process of building a little steel empire by
merging several companies into one of his holding companies,
Federal Steel Co.

Meanwhile, Andrew Carnegie, founder of Carnegie Steel, was
beginning to turn his attention to various philanthropic
enterprises. Back in 1897, Carnegie had hired a 35-year old
whippersnapper by the name of Charles Schwab. [Yes, this WAS
the grandfather of The Charles Schwab]. By 1900, Carnegie
Steel was netting about $40 million per year.

One day, Charles Schwab was giving a rather forceful
presentation on the future of the steel industry to some of the
New York elite. Schwab advocated that a single large company
which owned the largest and most efficient mills which generate
economies of scale which, coupled with specialization, would
allow it to undersell both British and German companies and thus
dominate the world market. Sitting in the audience, chomping on
a cigar, was J.P. Morgan. After the presentation he approached
Schwab about setting up a meeting with Carnegie.

True story, the meeting took place over a round of golf (a sport
which was then exploding in popularity among wealthy
businessmen). Carnegie had wanted $500 million, an amount that
would make him the richest man in the world. Morgan agreed to
the price (about $492 million). Carnegie''s actual share was in the
neighborhood of $300 million. There were many who felt
Morgan got a good deal.

In his book "Devil Take The Hindmost," author Edward
Chancellor refers to one Alexander Noyes, the financial editor of
the New York Times in the 1920s, who had the following
thoughts on the beginning of the 20th century.

The stockmarket boom at the beginning of the century was
created by the giant "trust" companies, such as U.S. Steel (which
is what Morgan then called his new company), as "the first
speculative demonstrations in history which based (their) ideas
and conduct on the assumption that we were living in a New Era,
that old rules and principles and precedents of finance were
obsolete; that things could safely be done today which had been
dangerous and impossible in the past." Hmmm.wonder what
Mr. Noyes would say about today''s "noise?"

So it came to pass that on April 1, 1901, J.P. Morgan proceeded
to offer his new company to the public while retaining a large part
for himself. The issue became the largest stock offering to date,
$1.4 billion, representing the first $1 billion-plus corporation in
America. According to author John Steele Gordon, "The Great
Game," there were 300 underwriters and the issue was an
enormous success.

Now to put the $1.4 billion into perspective, the federal
government''s budget for the year was only $525 million and the
entire manufacturing capacity of the U.S. was capitalized at
$9 billion. And within a month U.S. Steel stock had jumped
nearly 50%. Back then the Wall Street Journal confessed to
"uneasiness over the magnitude of the affair."

Actually, in 1903 the stock market was hit hard by speculation
and the price of U.S. Steel common fell from the mid $50s to
around $10. The company cut its dividend and said it would
close 25% of its factories. But the market, and U.S. Steel, soon
rallied back until the next crisis, the Panic of 1907 (I''ll cover this
next week). At the height of the panic, Morgan convinced Teddy
Roosevelt (an ardent supporter of anti-trust legislation) that he
should be allowed to acquire a major competitor, Tennessee Coal
and Iron Company, for $45 million, when the actual value of the
assets was about $700 million! J.P., my man! As rapper M.C.
Hammer would say, "Leave me a love offering at the gate!"
[Hammer is bankrupt and he likes to talk about his "bro''s"
leaving money at his front porch].

But as the years went by U.S. Steel was a dog. The company had
been added to the Dow Jones the first day it commenced trading
in 1901 and for the 90 years it was in the Dow (when it was
removed after splitting off Marathon Oil), the stock rose 509%
compared to the 4,408% gain for the overall average. Big deal.
Qualcomm is up something like 1,200% this year alone!!!

Sources:
"Devil Take The Hindmost," by Edward Chancellor
"The Great Game," by John Steele Gordon
"Wall Street: A History," by Charles R. Geisst
Wall Street Journal article written by Georgette Jasen.

Brian Trumbore

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