Competitive Bidding

Competitive bidding for new security issues, which ICC 13 years ago made mandatory for equipment trusts and which is routine in municipal financing, generally yields issuers higher prices and prevents long-term banker control over companies. But underwriters claim it is rather like asking doctors to bid for a job--it makes for lower bills but lessens the chance of expert work.

Four months ago competitive bidding found a vociferous champion in the person of redheaded Financier Robert Young, who has waged a fight for control of the Chesapeake & Ohio Ry. (TIME, April 25). C. & O. was about to refund $30,000,000 worth of bonds and as usual was going to place them with Morgan Stanley & Co. which planned to pay 96 for them. But a Halsey, Stuart & Co. group offered 100 and got them--saving the railroad $1,400,000, trumpeted Robert Young.

Last February the Cincinnati Union Terminal, in which C. & O. has an interest, proposed a $12,000,000 refunding through Morgan Stanley and Kuhn, Loeb & Co. Again Robert Young leaped into print. Morgan Stanley withdrew, and after this second Young coup competitive bidding was very much in the news.

Month ago Halsey, Stuart & Co. asked SEC to let it bid for a $17,500,000 financing by Northern States Power Co. of Wisconsin which had been allotted to Smith, Barney & Co. Northern States allowed Halsey, Stuart to bid--only to be outbid by Smith, Barney.

Last week newspapers found still another opportunity to headline high finance's new teapot tempest. Although Morgan Stanley and Kuhn, Loeb & Co. had never partaken in competitive bidding, much was made of the fact that these two potent Wall Street underwriting firms had refused to bid for $1,920,000 in Chicago, Milwaukee, St. Paul & Pacific R.R. equipment trust certificates.*

Most of Wall Street agrees with Morgan Stanley and Kuhn, Loeb in opposing competitive bidding. Their prime argument is that competitive bidding is not in the public interest because: 1) underwriters assume all the risks of flotation and face staggering losses if they misgauge market conditions; 2) competitive bidding generally raises the price underwriters must pay issuers, thus increases normal risks; 3) this means that the public is likely to be asked to pay the highest possible price--which is contrary to the SEC spirit of giving the investor a break and which even an issuer may dislike, for he may offer more securities some day and would like the public to have the feeling that it got a good buy the first time.

Underwriters not only assume the risks of security flotation, they also perform the expensive service of preparing the issue (it cost some $380,000 for U. S. Steel's $100,000,000 financing last year). If an underwriter is not picked early in the game, either an issuing company itself must hire a special staff to prepare a flotation (countless blue-sky laws must be met, SEC soothed, etc.), or all bidders must wastefully duplicate the work.

Although competitive bidding may frequently bring issuers better prices, Wall Street argues that it inevitably makes for slipshod work in drawing up the issue, gradually impairs the calibre of offerings. A case in point are equipment trust certificates, still gilt-edged securities, but often drawn up today on far looser terms than in the days before competitive bidding.

*The fact came out only because the two firms politely replied to the railroad's letter. More than 60 other underwriting firms did not even bother to answer the solicitation.

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