[1940] Ch. 48 SOME ASPECTS OF CORPORATE PYRAMIDING
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Summary:

This chapter delves into the concept of corporate pyramiding in finance, which involves creating a speculative capital structure using holding companies. The primary aim of such structures is to allow organizers to control a large business with minimal capital investment while reaping significant profits.

The chapter uses the Van Sweringen Pyramid as a case study. This example demonstrates how the Van Sweringen brothers, starting with the purchase of the New York, Chicago, and St. Louis Railroad (Nickel Plate), rapidly expanded into a vast railroad empire through various strategies. These included forming private corporations, using resources of controlled railroads to acquire others, and establishing holding companies to control individual roads and sell their securities to the public.

The chapter also discusses the issues associated with corporate pyramiding. These include the creation and sale of unsound senior securities, the production of volatile common stocks of holding companies, inequitable control by those with minimal capital investment, and financial practices that exaggerate earnings or dividend returns. It also highlights the tendency of holding companies to overstate their earning power and the distortion of dividend returns and book values.

The chapter concludes by acknowledging that not all holding companies are created for pyramiding and that some serve legitimate purposes, such as United States Steel Corporation, American Telephone and Telegraph Company, and General Motors Corporation. However, it also notes that legislative measures have been taken to restrain pyramiding practices, especially in the public utility sector, to prevent future financial debacles similar to those experienced in the past.