Vicious Circle

Financier Leopold D. Silberstein, who won only an active ulcer in his attempt to take over Fairbanks, Morse & Co. last May, bad reason for more pain. To help pay off the huge debts contracted in the proxy fight, his Penn-Texas Corp. last week was forced to 1) omit a quarterly dividend on preferred stock, 2) sell a major subsidiary, Industrial Brownhoist Corp. of Bay City, Mich., one of the first companies in the Silberstein empire. An undisclosed buyer picked it up for $3,000,000 in cash--half of what Penn-Texas paid for it in 1954. Other subsidiaries that will probably go up for sale before the end of the year: Liberty Aircraft Products Corp. of Farmingdale, N.Y. and radiomaking Hallicrafters Co. of Chicago.

In addition, Silberstein conceded that he is trying to find a customer for the biggest single asset on his books--478,250 shares of Fairbanks, Morse stock worth about $20 million. But it is turning out to be his biggest liability. To buy the stock, Silberstein has to dig into scarce working capital. To replenish this capital, Penn-Texas has pledged 436,670 of the shares as collateral on emergency loans totaling $10.5 million. But to keep up the value of the shares, Penn-Texas has been forced to support the price of the stock by buying more and more.

New Invasion? To Fairbanks, Morse President Robert H. Morse Jr., who licked Silberstein in the proxy war, the heavy buying seemed a new Penn-Texas invasion. Fortnight ago, Morse angrily charged Penn-Texas with "flagrant" contempt of the Federal Court that ordered Silberstein to stop trying to take over F-M for five years. Since May, said Morse, Silberstein has bought "some 132,000" additional F-M shares "with the intent and desire of acquiring control," now owns at least 44.4% of the Chicago equipmentmakers' outstanding stock. Morse also charges that sale of the Penn-Texas holdings to another company would violate the court's trucemaking order.

Actually, Silberstein's renewed stock buying was regarded by Wall Street as less a new take-over attempt than a desperate move to save his skin. As a recent Penn-Texas report to the Securities and Exchange Commission made clear, Silberstein has "Blundered into one of the weirdest financial squeezes in Wall Street history. To buy his F-M stock, Silberstein had to scour the U.S. for loans, some carrying interest rates and other costs totaling 15%, and almost all due within a year. Just to get some of the loans from "24 banks in various parts of the U.S.," Penn-Texas had to pay finders' fees of $98,296 to those who arranged the loans, plus extra "service" charges of $119,798. Whenever the market value of F-M stock falls below the price at which it was pledged as collateral, Penn-Texas can be required in some cases to make up the difference with only 24 hours' notice.

Example: Penn-Texas posted 90,000 F-M shares as collateral for loans of $2,395,000 at 6% from Manhattan Speculator Jacques Sarlie, who cleared $1,000,000 last March by selling F-M shares to Silberstein at premium prices during the proxy war (TIME, March 25). Since the Sarlie loans on 40,000 of the shares guaranteed a $53 market value per share, the F-M market price of $40 last week meant that Penn-Texas had been forced to tie up at least $520,000 in ready cash to oblige just one creditor. Sarlie loans on another 40,000 shares, guaranteed at $43, have tied up $120,000 more.

New Pressures. The F-M stock has fallen steadily despite Penn-Texas' heavy purchases. Since May these purchases have never been less than 79.2% of the total monthly market volume in the stock, have been as much as 91%.

Only about 15% of the stock is now still being traded publicly. Wall Streeters guessed that Silberstein would have to sell off more Penn-Texas companies to get the money to buy the stock to support the price, while he shopped for a buyer for his F-M holdings. But Bob Morse apparently had no intention of letting him get out of the bind in that fashion, hoped to squeeze him even harder. Morse had no great worry that Silberstein could find a buyer for his Morse holdings, even if the court permitted him to sell, because the buyer would also be purchasing a lawsuit. But if Morse could persuade the court to make Silberstein stop buying, then the price of Morse stock might well continue to fall and drain Silberstein of cash until he is forced to settle on Morse's terms.

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