Public Policy: Du Font’s Billion Dollar Problem

Convinced that their 44-year-old marriage involved a “tendency” toward monopoly, the U.S. Supreme Court last week forced a divorce upon two of the nation’s industrial giants. In a 4-to-3 decision, the court directed E. I. du Pont de Nemours & Co. to divest itself within ten years of its 63 million shares of General Motors stock, worth about $2.8 billion at current market prices. The decision was the climax of a twelve-year legal struggle. A lower court had earlier ruled that Du Pont could hold onto its G.M. shares provided it gave up voting rights. The Supreme Court ruling was harsher. Within 85 days Du Pont must submit to the court a plan for complete divestiture, one that hopefully will involve the least amount of damage to the company’s 210,840 common stockholders.

Hardship Case. “Unfortunately,” says Du Pont President Crawford Greenewalt, “the burden of the Supreme Court decision falls not on Du Pont as a manufacturing entity but on the stockholder.” If Du Pont sold its G.M. stock on the market over the next decade, the sales would almost double recent New York Stock Exchange volume in G.M. stock every business day for the whole ten years, and would depress both Du Pont and G.M. stock prices. Alternatively, Du Pont could distribute its G.M. stock to Du Pont stockholders in place of or in addition to regular cash dividends—at a ratio of 1.37 shares of G.M. stock to 1 of Du Pont.

The trouble with the dividend-distribution plan is that Du Pont stockholders would have to pay hefty income taxes on the distributed stock, would also suffer a decline in the value of their Du Pont stock because of the divestiture. Since many are in higher-income brackets, the taxes would average out at an estimated 55% to 60% a share. President Greenewalt guesses that about half the distributed G.M. stock would have to be sold to pay taxes.

Surfeit of Money. Du Pont hopes that the Government will look favorably on proposed legislation that would either 1) postpone taxes on distributed G.M. shares until the shares are sold, when only a capital gains tax would be paid, or 2) enable stockholders to pay income tax only on the average $2.09 a share that Du Pont paid for G.M. stock, and capital gains tax on whatever profit they might make when they sold. If Congress turns these proposals down, Greenewalt leans toward Du Pont’s selling the stock itself through an underwriter, so as to be able to control its sale better.

“We’ll make a good hard try for legislation,” says Greenewalt. “Depending upon the nature of the relief, we could then switch over to distributing the stock to our stockholders rather than selling it ourselves.” If Du Pont can persuade one of the four majority judges on the Supreme Court to agree to a rehearing, it may also ask for a longer period of divestiture—perhaps 20 years—to make the task “less of a hardship.”

The G.M. stock accounted for 30% of Du Pont’s 1960 earnings. Du Pont is currently spending $200 million on construction and expansion, does not need for its own operations the huge cash pile it would take in by selling G.M. stock on the market. It would therefore have to look around for new investments to make up for the earnings it loses on the G.M. stock. “The wisdom we show in reinvesting our cash proceeds from the sale,” says Greenewalt, “will really determine how Du Pont will fare.”