The $2.7 Billion Question

For the first few hours after the U.S. Supreme Court laid down the antitrust law to Du Pont last week (see NATIONAL AFFAIRS), Wall Street reacted with anticipation. Du Pont stock shot up 6 points to 202 1/2 in the hope of big stock dividends following the court's ruling that Du Pont interests must give up their 23% control (64 million shares) of General Motors stock, worth $2.7 billion. But when Wall Street took a more careful look, Du Pont stock slipped back down. Both Du Pont and G.M. stock fluctuated nervously for the rest of the week, as everyone tried to figure out what the ruling meant--not only for Du Pont and G.M. but for the U.S. business community as well. The impact was as stunning as it was to the Justice Department itself, which up to the last minute had only the slimmest hopes of winning.

What worried businessmen was the sweeping nature of the decision, putting a new emphasis on the nation's antitrust philosophy. As Justice Harold H. Burton wrote in his dissenting opinion: The ruling "disregards the language and purpose of the statute, 40 years of administrative practice and of the precedents . . . except one District Court decision. To make its case, the court requires no showing of any misuse of a stock interest--either at the time of acquisition or subsequently--to gain preferential treatment. All that is required, if this case is to be our guide, is that some court in some future year be persuaded that a 'reasonable probability' then exists that an advantage over competitors in a narrowly construed market may be obtained as a result of a stock interest." Moreover, added Burton, the decision marked the first time the Clayton Act has been applied to a vertical acquisition, i.e., a case where a company gets substantial control of a customer rather than a competitor.

Trouble All Around. As a result of the decision, businessmen could descry trouble ahead for dozens of big and little U.S. companies. Sears, Roebuck & Co. owns big blocks of stock in such suppliers as Whirlpool-Seeger Corp., Florence Stove Co., and Armstrong Tire & Rubber Co.; Gulf Oil has a 12% interest in Texas Gulf Sulphur, which supplies Gulf with sulphur; Olin Mathieson Chemical has 25.8% of Marquardt Aircraft and 50% of rocketmaker Reaction Motors, for which it is helping develop rocket fuel. And by successfully going back 30 years to trip Du Pont, trustbusters had won the right to try any company for things it did in long years past.

No businessman seriously believes that Du Pont bought into General Motors merely to wrap up a market for paint. Although the Supreme Court ruled that by its working control of G.M., Du Pont had been able to force its products on the automaker (specifically that Du Pont had supplied General Motors with about 67% of its paint and finish supplies, between 38% and 52% of its textile requirements in the years 1946 and 1947), the two items together make up only about 2% (or $20) of an auto's total cost. Du Font's total G.M. business amounted to only about 3% of the company's $795 million sales in 1947; Du Font's real profit from G.M. is from its stock investment, which last year paid the chemical company $126 million in dividends--nearly 6% of its total gross income.

Off the Rocks. Far from restraining G.M., Du Pont was one good reason why G.M. grew; without the stock purchase there would quite likely have been no

General Motors in existence today. When Du Pont took control during the post-World War I depression, the young auto giant was headed for the rocks. Brilliant, mercurial William Crapo Durant, who put the company together, was $80 million in debt and on the verge of bankruptcy. Du Pont had already put $49 million into the company's stock. By risking another $31 million of its capital, Du Pont bailed out Durant and put the company back on course, not only with cash, but also with managerial talent. Du Pont President Pierre S. du Pont, who had been actively interested in G.M. since 1915, stepped in as G.M. president in 1920, set about reorganizing the company. Du Pont was responsible for replacing Durant's old-fashioned one-man rule with a new kind of decentralized management in which the company was broken up into divisions and the division bosses got real autonomy, were encouraged to compete with each other, buy supplies from whom they pleased. By its very nature the management concept imposed by Du Pont worked against the kind of control charged by the Government.

As G.M. has grown stronger over the years, Du Pont has steadily loosened its ties to the automaker. In recent years Du Pont's role has been largely confined to helping set overall policy, chiefly financial. Only six of G.M.'s 33 directors are usually identifiable as being in the Du Pont faction--Donaldson Brown, Du Pont treasurer until he switched to G.M. in 1921, Lammot du Pont Copeland, Emile F. du Pont, Henry B. du Pont, Chairman Albert Bradley, Executive Vice President Frederic G. Donner. As in many another company, there have often been arguments between the financial men in Manhattan and the automakers in Detroit. But did Detroit knuckle under? Says one former General Motors boss, Defense Secretary Charles E. Wilson: "Du Pont never exerted any pressure on me.

I don't take pressure very well from anyone."

Last week's decision of the Supreme Court will not cripple G.M. nor will it knock a dent in Du Pont's business. G.M. will probably keep right on buying from Du Pont so long as the price and product are right. What will hurt is the order to get rid of stock that pays a handsome $126 million annually in dividends. Through Christiana Securities Co., Delaware Realty & Investment Co. and individual stockholdings, the Du Pont family owns 28% of Du Pont itself, and in turn some 18 million shares of General Motors stock worth $756 million. Yet while the trustbusters want Du Pont to sell its G.M. stock, they have never spelled out how it should be done. Neither has the court suggested how Du Pont might divest itself of all or part of its holdings. Some possibilities:

P:Outright sale of Du Pont's G.M. holdings on the open market. Though such a disposal would undoubtedly satisfy the Government, it would hardly please Du Pont stockholders. The offering would be history's biggest, by far, and financial men doubt that the market could handle it, except over a long period of time. Du Pont would also be forced to pay an estimated $600 to $700 million capital-gains tax on the sale. And if it then kicked back the proceeds to Du Pont stockholders, they would have to pay straight income taxes on the subsequent cash dividend.

P: Direct distribution of the stock to Du Pont stockholders as a dividend. One, stumbling block is that the Government would probably disapprove, because the Du Pont family would still wind up with 6.4% of G.M.'s total stock. Another problem is that since the stock is not Du Pont stock (which would not be taxable when distributed), but G.M. stock, it would be considered a regular dividend taxable at full market value and normal income tax rates.

P:Creation of a special nonvoting stock for the 64 million shares held by Du Pont interests. While this method would effectively bar Du Pont from control, it has the advantage of allowing the company to continue to get its General Motors dividends for the benefit of its business and stockholders, while avoiding the enormous capital gains tax. Even so, some stockholders may grumble that one of the reasons why they had bought Du Pont stock was for its voice in G.M. affairs, and that the value of their equity had decreased materially.

No one knows how the matter will finally be settled. In Chicago last week Federal Judge Walter LaBuy, ordered by the Supreme Court to make the final disposition, announced that it might take six months or more before he could start hearings. It will be years before the U.S. hears the last of the case. In other smaller cases, the courts have taken as long as five years to dispose of stock interests. With Du Pont, it may take a decade to sever its ties to G.M. and the U.S. auto industry.

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