Security Analysis : Sixth Edition, Foreword by Warren Buffett: Additional Aspects of Security Analysis. Discrepencies Between Price and Value

still commanded an aggregate market quotation of nearly $50,000,000, a figure that bore a ridiculous relationship to the exceedingly low values placed upon the senior securities. The following table shows how absurd this situation was, the more so since it existed in a time of deflated stock prices, when relative values are presumably subjected to more critical appraisal.
    (000 OMITTED IN MARKET VALUE )

    By the end of 1938, as the table indicates, a good part of the absurdity had been corrected.
    Some Holding Companies Not Guilty of Excessive Pyramiding.
    To avoid creating a false impression, we must point out that, although pyramiding is usually effected by means of holding companies, it does not follow that all holding companies are created for this purpose and are therefore reprehensible. The holding company is often utilized for entirely legitimate purposes,
e.g.
, to permit unified and economical operations ofseparate units, to diversify investment and risk and to gain certain technical advantages of flexibility and convenience. Many sound and important enterprises are in holding company form.
    Examples:
United States Steel Corporation is entirely a holding company; although originally there was some element of pyramiding in its capital set-up, this defect disappeared in later years. American Telephone and Telegraph Company is preponderantly a holding company, but its financial structure has never been subject to serious criticism. General Motors Corporation is largely a holding company.
    A holding-company exhibit must therefore be considered on its merits. American Light and Traction Company is a typical example of the holding company organized entirely for legitimate purposes. On the other hand the acquisition of control of this enterprise by United Light and Railways Company (Del.) must be regarded as a pyramiding move on the part of the United Light and Power interests.
    Speculative Capital Structure May Be Created in Other Ways.
    It may be pointed out also that a speculative capital structure can be created without the use of a holding company.
    Examples:
The Maytag Company recapitalization, discussed in an earlier chapter, yielded results usually attained by the formation of a holding company and the sale of its senior securities. In the case of Continental Baking Corporation—to cite another example—the holding company form was not an essential part of the pyramided result there attained. The speculative structure was due entirely to the creation of large preferred issues by the parent company, and it would still have existed if Continental Baking had acquired all its properties directly, eliminating its subsidiaries. (As it happened, in 1938 this company took steps to acquire the assets of its chief subsidiaries, thus largely eliminating the holding-company form but retaining the speculative capital structure.)
    Legislative Restraints on Pyramiding. So spectacular were the disastrous effects of the public-utility pyramiding of the 1920’s that Congress was moved to drastic action. The Public Utility Holding Company Act of 1935 includes the so-called “death sentence” for many of the existing systems, requiring them ultimately to simplify their capital structures and to dispose of subsidiaries operating in noncontiguous territory. Formation of new pyramids is effectively blocked by requiring Commissionapproval for all acquisitions and all new financing. Similar steps are in prospect to regulate present railroad holding companies and to prevent creation of new ones. 5
    5 See Senate Resolution 71 of the 74th Congress and 21 volumes of hearings thereon which have appeared to date (December 1939). See also Senate Report No. 180, 75th Congress, 1st Session, and Senate Report No. 25, pts. 1, 4 and 5, 76th Congress, 1st Session.
    We may say with some confidence that the spectacle of the Van Sweringen debacle succeeding the Rock Island Company debacle is not likely to be duplicated in the future. The industrial field never offered the same romantic possibilities for high finance as were found among the rails and utilities, but it may well be that the ingenious talents of promoters and financial wizards will be directed towards the industrials in the future. The investor and the analyst should be on their guard against such new dazzlements.
Chapter 49

C OMPARATIVE A NALYSIS OF C OMPANIES
IN THE S AME F IELD
    S TATISTICAL COMPARISONS of groups of concerns operating in a given industry are a more or less