Michael Sol wrote:
>
>
> --- In MILW@yahoogroups.com <mailto:MILW%40yahoogroups.com>, "ComSoPac"
> <usspc5551@...> wrote:
> >
> > "Brown Brothers & Co. have issued a special pamphlet on the Northern
> Pacific-Great Northern Railways,
> ....
> > "The pamphlet report of the Northern Pacific Railway Company for
> 1921, issued yesterday, shows net corporate income of $22, 005,300, an
> increase of $2,971,over the previous year. Total gross business was
> $94,538,059, compared with $113,084,407 for 1920, but the management
> scaled down expenses from $100,983,874 in 1920 to $77,630,867 for 1921,
> a saving of $22,853,006. Non-operating income was $26,552,582 for 1921,
> compared with $7,265,213 for 1920, the big increase being accounted for
> the jump of $17,505,094 in dividend income received largly from the
> Northern Pacific's holdings in the Chicago, Burlington & Quincy." (New
> York Times May 25, 1922)
> >
> > "The report of the Chicago, Burlington & Quincy Railroad for the year
> ended Dec. 31.1921, shows gross revenue of $168,712,268, compared with
> $155,483,805 in the previous year. Net income available for the common
> stock and other items, was $25,609,973, compared with $22,924,363 in
> 1920. Dividend payments last year, as a result of the extra payment in
> December, totaled $19,300,382, against $8,867,128 in 1920. Most of this
> was distributed to the Northern Pacific and Great Northern Railway,
> which own almost all of the capital stock of the Burlington." (New York
> Times June 6,1922)
> >
> > "The Great Northern Railway Company for the year ended Dec. 31.1921,
> reports gross operating income of $101,317,203, compared with
> $124,916,776 in 1920.
> --------------------------------------
> What this underscores to some extent is a long-time corporate practice
> utilizing subsidiaries to inflate "apparent" income. Or, by the same
> token, to understate income for tax purposes. Milwaukee Road used the
> Milwaukee Land Company in both directions, but it might be easier to
> explain in the context of the Northern Lines.
>
> The Year 1921 underscores this in particular with regard to the Northern
> Lines in conjunction with the glowing language of the "special
> pamphlet." And trying to simplify the explanation, this is simply a
> hypothetical using real names. If, between the NP and the Q, for
> instance, they wanted to maximize overall income, this offers a strategy.
>
> So, for instance, if the NP were going to earn $10 million in net
> income, and the Q was going to earn zero, this would upset the applecart
> in terms of bond ratings, stock prices, etc.
>
> So, by traffic diversion (in this case, one that was mandated by the
> Billings Traffic Agreement), NP diverts $10 million to the Q's treasury.
> GN does the same thing. The Q now earns a profit of $20 million. It
> issues a dividend to the NP of $10 million, and $10 million to the GN.
>
> Now NP and GN can report incomes of $10 million (net corporate), while Q
> looks very prosperous reporting $20 million (NROI). Each looks like
> they're doing just fine, but in fact, they have simply each booked for
> publication purposes the same $20 million of profit split between the
> owner roads, adding up to the $20 million in profit apparently "also"
> earned by the owned road.
>
> But, there was not, ever, $40 million in total profit made between the
> three companies. Half of the apparent total profit is simply phantom,
> and this is the danger of evaluating companies locked into these kinds
> of relationships. They can always be made to look better than they are,
> by a substantial margin.
>
> The danger is because the apparent substance of $40 million in profit is
> supporting the capitalization of all three companies and that is twice
> the actual support for that capitalization. It is or can be hugely
> misleading. Indeed, it could cover substantial losses at the owned
> company, and still make all three look quite profitable because the
> owned company essentially is used to leverage the apparent
> profitability. Because of that leveraging, as a corporate strategy, it
> would be hard to resist and the companies could always be made to appear
> overall twice as profitable in such an arrangement as they actually are.
>
> And that would not necessarily mean they are all or any of them doing
> horrible, it just means that they can look really good on paper, much
> better than competing roads, and not really be much different in terms
> of economic reality.
>
> And while this represents a hypothetical with regard to the Hill Lines
> in general, the cautionary tale is that this "can" be done, and the
> "special pamphlet" shows quite clearly that this was exactly how this
> was being represented in 1921.
>
> best regards, Michael Sol
>
>
------------------------------------
Yahoo! Groups Links
<*> To visit your group on the web, go to:
http://groups.yahoo.com/group/CBQ/
<*> Your email settings:
Individual Email | Traditional
<*> To change settings online go to:
http://groups.yahoo.com/group/CBQ/join
(Yahoo! ID required)
<*> To change settings via email:
CBQ-digest@yahoogroups.com
CBQ-fullfeatured@yahoogroups.com
<*> To unsubscribe from this group, send an email to:
CBQ-unsubscribe@yahoogroups.com
<*> Your use of Yahoo! Groups is subject to:
http://docs.yahoo.com/info/terms/
|