Bethlehem Reformation

Last week Bethlehem Steel's Chairman Charles Michael Schwab and President Eugene Gifford Grace wrote a letter to their stockholders which began: "As you know, Bethlehem Steel Corp. is a holding company in that its assets consist chiefly of stocks and obligations of its subsidiary companies and it does not own or operate any physical properties. Its chief income, therefore, has always been in the form of dividends. . . ."

Messrs. Schwab & Grace went on to explain that, thanks to New Deal tax measures, holding companies were now something of a liability. Reasons:

1) Holding companies are no longer permitted to file consolidated Federal income tax returns. Under the old law the losses of one subsidiary were deductible from the profits of another in the same group, thus reflecting operations of the enterprise as a whole. Today every corporation, parent or subsidiary, must file a separate return, pay its own tax. Aside from the nuisance, this is a distinct disadvantage to a company with subsidiaries showing both profits and losses, since no credit is received for the losses.

2) Starting this year inter-corporate dividends are subject to income tax, in the amount of 10% of the dividends received. With the corporate income levy running up to 15%, this may amount to 1 1/2% of a holding company's total income.

Since the case against the holding company was so strong, wrote Messrs. Schwab & Grace, Bethlehem was about to transform itself into an operating company, absorb four subsidiaries, "as the initial steps in a consolidation program." Still outside the fold are some 60 other Bethlehem subsidiaries including the most important ones.

Typical of what a few companies have already done, what many companies will probably do, was Bethlehem's move. Utility holding companies have been madly unscrambling for months. U. S. Steel's merger of its two biggest subsidiaries as Carnegie-Illinois Steel Corp. last autumn was part of the same pattern. How much he U. S. corporate structure will be simplified before the trend is done no man can say, though one thing is clear: simplification is what the Administration wants and what it is getting.

While busy with Bethlehem's reformation President Grace will also attend to some unfinished business. By April 1 accumulated preferred dividends will amount to $21 per share. To clear up arrears would require nearly $20,000,000. Instead of waiting to pay in cash when & if the company returns to big money, Bethlehem proposes to give each preferred stockholder $1 in cash and $20 in new 5% preferred stock.

Another piece of unfinished business was bonuses. President Grace will never live down the $1,600,000 payment that supplemented his 1929 salary of $12,000. Under the terms of a new "Special Incentive Compensation Fund" he is unlikely to live to see it again. Payments to the fund will be 5% of profits available for common stock. Payments from the fund to executives in any one year are limited to one-fifteenth of that year's aggregate common dividends. Bethlehem bonuses in 1929 were almost one-fifth of dividends paid the following year, peak in Bethlehem's dividend record.

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