Cash & Comeback

Bound morally if not legally to ponder the new Federal tax on undistributed earnings are the directors of all profitable U. S. corporations except banks and insurance companies. Before the year end they must decide on how much of this year's profit they will pass on to stockholders to avoid the levy, running as high as 27% on earnings retained in the business. Last week in Chicago the directors of Sears, Roebuck & Co. made their decision. After marking the company's 50th anniversary by voting a special $1,500,000 "Jubilee" wage bonus, the Sears board declared a $1.75 extra dividend representing an estimated one-half of the year's profits not needed for the $2 Sears regular. In December, when full-year figures can be estimated more closely, the directors will meet again, probably vote another extra of at least the same amount. In effect, the No. 1 U. S. mail-order house committed itself to paying out approximately all it earned.

Promptly raised by this decision was a corporate question which President Robert E. Wood undertook to explain in a letter to his 34,500 stockholders. This year, he declared, Sears would probably do a $500,000,000 business, a record. Only four years ago total sales were $276,000. To handle this tremendous increase in volume Sears had to carry bigger inventories, more accounts receivable. The rise in these two items alone required $60,000,000 of additional working capital, a sum provided part by bank loans, part by profits. In the normal course, wrote President Wood, the bank loans would have been paid off out of earnings, thus perpetuating the Sears tradition of financing its own growth.

Since the normal Sears course had been interrupted by the new tax, President Wood proposed to raise the necessary funds by selling common stock to stock holders and employes for the first time since the original public offering in 1906. Subject to their approval, stockholders will be given rights to buy one new Sears share for every ten of old, at not less than $60 per share (current price: $98). That meant the sale of approximately 600,000 shares, which will provide at least $36,000,000 and constitute the biggest common stock offering since 1929.

This deal will be underwritten by a banking group headed by Manhattan's Goldman, Sachs & Co., which floated Sears's first public offering 30 years ago. The price then was $50 per share. Through split-ups and stock dividends each original share has multiplied to nearly 16 shares, worth close to $1,500.

At No, 30 Pine Street. Manhattan, home of Goldman, Sachs & Co., the proposed Sears deal had a significance all its own: it signalled the most remarkable investment banking comeback of Depression.

In the beginning there were no Sachs in Goldman Sachs. Today there are no Goldmans. The business dates back to 1869 when the late Marcus Goldman started to buy from Manhattan tobacco and diamond dealers the promissory notes given them by their customers. Clapping the notes in his high black hat, Founder Goldman would then make the rounds of the banks, selling the notes as short-term investments at a slight profit.

In 1882 Founder Goldman took his son-in-law, Samuel Sachs, into the business, and by the century's turn Goldman, Sachs & Co. was the largest commercial paper house in the land. It still is. The commercial paper business was the chief reason for the firm's emergence as the leading industrial banking house of pre-Depression days. As it is done now the commercial paper business consists of buying promissory notes direct from the borrower instead of secondhand. For corporations needing money for short periods, commercial paper is often cheaper than bank loans. This type of business keeps Goldman Sachs in close touch with corporate treasuries, often gives it an inside track to security deals.

While J. P. Morgan & Co. and Kuhn, Loeb & Co. skimmed the cream of railroad financing, Goldman Sachs concentrated on industrials, which to a large extent meant selling stock, not bonds. Its clients include Woolworth, Goodrich, General Foods, Continental Can, The Lambert Co., Pillsbury Flour, United Biscuit, Phoenix Hosiery, Endicott Johnson, National Dairy Products.

In fame and fortune Goldman Sachs reached an unenviable peak in 1929 under the domination of Waddill Catchings, leading apologist of the New Era, co-author of The Road to Plenty. It was the imperious Mr. Catchings who led the conservative old house into the investment trust fireworks of Goldman Sachs Trading Corp., Shenandoah Corp. and Blue Ridge Corp. When his road to plenty ran up a tree, Mr. Catchings got out, joining his old friend, Utilitarian Harrison Williams.

The wreckage Mr. Catchings left behind him in Goldman Sachs was appalling. Market value of Goldman Sachs Trading shriveled from $500,000,000 to less than $10,000,000. Funnyman Eddie Cantor, who lost a sizable fortune in the stock, made the name of Goldman Sachs a sure-fire gag from coast to coast. Law suits received so much publicity that Wall Street pranksters used to call up Goldman Sachs, ask for the "litigation" department.

To a Senate committee the firm reported a $12,000,000 loss for 1930. Rich, the firm stood the loss, tightened its belt for rehabilitation of its name. Of the three sons of Samuel Sachs, only one remained in the firm, Walter Edward Sachs, who sold his yacht and set to work on the wreckage. His brother Paul had long since retired to an art professorship at Harvard and an associate directorship of Harvard's Fogg Art Museum. Brother Arthur retired last year to the life he preferred in France. Dignified, cultured Walter Sachs, a Harvard classmate of Franklin D. Roosevelt has only one family partner, Howard Sachs, a son of Founder Sachs's Brother Harry. The others are Henry Bowers, Ernest Loveman, and Sidney Weinberg, who is the most active partner today.

Sitting on the boards of 31 corporations, restless little Sidney Weinberg started in Goldman Sachs as a porter in 1907 after a short Manhattan career as a newsboy and Western Union messenger. It was years before the partners even knew him by name. By his own account he got ahead by being "such a fresh kid." During the War he was cook on a submarine chaser, until yanked into the Navy's Intelligence Department. Brilliant, blunt, energetic, he takes vast interest in the affairs of any company in which he is a director. Occasionally at board meetings he pulls out an essay on the duties of a director, reads it to his fellow board members. At his home in Scarsdale, outside Manhattan, he keeps a private office for night work, which he uses several evenings each week.

To Sidney Weinberg's ability as a director belongs most of the credit for preserving Goldman Sachs's invaluable corporate connections, not the least of which was Sears, Roebuck. When financing revived, corporations turned to Goldman Sachs as they had done before Depression. Last Spring National Dairy Products came in for a $62,000,000 refunding deal.

Even more cheering last week to Walter Sachs and his partners than the proposed Sears underwriting was the final interment of Goldman Sachs Trading Corp. Though the firm was stuck by its own investment (originally $12,000,000) in that ill-fated venture, control was acquired by Floyd Odium's Atlas Corp., which changed the name to Pacific Eastern Corp. Last week in a corporate simplification program, Pacific Eastern was submerged into Atlas.

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