It was in this spirit that Carnegie began writing Frick in the spring of 1898, expressing the hope that he and his family would visit him at his new Scottish Highlands home, Skibo Castle. The previous year, at the request of his wife, who wanted a permanent summer home for their new family, Carnegie had paid £85,000 (perhaps $80 million in contemporary terms) for the estate, the former residence of the Roman Catholic bishops of Caithness. Carnegie was now involved in the reconstruction of a new manor house, as well as the creation of a long-sought waterfall and any other number of improvements, and was eager to show off his new holdings to someone who could appreciate the scope of the undertaking.
“Delighted here,” he told Frick, “so far beyond all expectations. Highland and lowland, grand trees equal to any in the best English park, and yet the heather hills, lochs and streams around us—never saw anything like it, climate mild and yet more bracing than Cluny. The only fear in regard to your coming here is that it would render you dissatisfied with any other life, but in case that should happen I have my eye on an adjoining estate, castle and all. . . . We have a splendid musician from Edinburgh for the season, plays the organ and the grand piano . . . so that we begin every morning with a religious service of music. . . . Come over and see for yourself, and don’t you fail to read this to Mrs. Frick and Helen.”
Many of his letters of the period suggested that Carnegie had finally found contentment. “Yesterday was Margaret’s first birthday,” Carnegie closed one letter to Frick. “Her conversation is limited yet, but she knows what is said to her and kisses papa sometimes, not always, when requested. You should see how well we all are—truly if you have sickness in the winter, this is the place.”
Furthermore, Carnegie seemed sincere in his desire that Frick should join him in his happiness. If Margaret and Helen were to be seen together, Carnegie enthused, “people will vote them a prize pair.” Indeed, and though Frick declined Carnegie’s invitation, explaining that his wife, Adelaide, was in need of a restorative stay in warmer climes, it seemed that any acrimony that lingered from the contretemps of 1895 had disappeared.
When summer came, Frick took his family to France, installing his wife and children at the spa of Aix-les-Bains in the south, and then traveled with his old friend Andrew Mellon to Paris, where he purchased the first of four works of Jean-Baptiste-Camille Corot that he was destined to own. Ville d’Avray, Frick assured Carnegie, was a painting that would constitute “the gem of my collection.”
That these two old warhorses from the business front should be corresponding over castle building, the winsomeness of their young daughters, and the finer points of art acquisition was a telling measure of how far their personal interests had evolved. But with Carnegie sixty-three and Frick nearing fifty, it seems only natural that they would relinquish a degree of involvement in matters that had grayed and bent them both.
Both had suffered bouts of illness that had nearly killed them, and both had endured worldwide scorn and outrage at their business dealings. But both were now wealthy beyond the reckoning of nearly all men. They had developed cultured tastes and interests, and were devoted husbands and the fathers of young children. Why on earth, with their ably tended company producing egg after golden egg, would they not seek, at last, some measure of personal harmony? “These are no Helen or Margaret by a long sight,” Carnegie wrote Frick, referring to Frick Coke and Carnegie Steel.
It had been rumored, in fact, that “the old man” was willing to contemplate a total withdrawal from business if only an individual or group with sufficient bidding resources could be found. Senior partners Henry Phipps and George Lauder had been ready to sell out since the days of the Homestead strike, and now Frick, too, having had a taste of the leisured life, was ready to retire to New York and devote himself almost fully to art collecting.
Frick, Phipps, and Lauder might have sold their holdings even earlier, but for the existence of one major stumbling block: the Iron Clad Agreement of 1887, which all had signed. According to its provisions, which were meant to protect the other partners in the event of Carnegie’s untimely death, a partner who wished to retire could do so, but his shares would be redeemed at “book value” and the payment made in installments, the length of the period tied to the size of the interest redeemed.
Since Carnegie had always opposed periodic revaluation of the company, the book value of Carnegie Steel in 1899 remained at $50 million, even though the most conservative estimates placed its true value at between $200 and $250 million, around ten to twelve times its net earnings of $21 million. While Phipps reckoned the actual value of his 11-percent interest to be $27.5 million, the Iron Clad Agreement dictated that a sale would bring him only $5.5 million. Frick’s 6 percent would bring him $3 million instead of $15 million; and Lauder’s 4 percent would get him a paltry $2 million instead of $10 million. No wonder, then, that all three were now on the lookout for a potential buyer.
The impasse was finally broken in April 1899, when Frick and Phipps informed Carnegie that they had been approached by a buyer willing to meet the $250 million price. Under the proposed terms, Carnegie would receive $157 million, with $57 million in cash and $100 million in 5-percent bonds issued by the new company.
Carnegie pondered the offer only briefly. While he had always condemned the growing practice of companies overstating their value in advance of a public offering, thus allowing the principals to profit “by manufacturing nothing but stocks,” he privately agreed with the $250 million valuation of Carnegie Steel and felt that continued operations would easily support his annual payments of $5 million.
After agreeing to the terms, Carnegie asked Frick and Phipps who the prospective buyers were. In Carnegie’s mind, Rockefeller was one suspect, and another was J. P. Morgan, who had recently formed a $200 million consortium of Illinois, Minnesota, and Lake Erie interests into the Federal Steel Company. Or perhaps it was Andrew Mellon, whom Frick and Phipps had coaxed into the game.
But Frick and Phipps told Carnegie that they had been sworn to secrecy by this prospective suitor and that they were acting solely as intermediaries. There was one other thing as well: the buyer was asking for a ninety-day option to prepare for this sizable transaction.
Carnegie must have worked hard to conceal his incredulity. Just how naïve did his partners think he was? Yes, they were all friends and longtime associates, but this was business, and very big business at that. For all he knew, there was no buyer. Frick and Phipps could be asking him to sign an irrevocable agreement to sell at a fixed price. Once he’d put his name on the dotted line, there would be nothing to stop the pair from scurrying off with carte blanche to sell his holdings to any “Jim Crack” who fancied becoming a steel baron.
With $157 million dangling before him, a lesser man might have signed and taken his chances. But Andrew Carnegie was hardly a desperate man.
After some reflection, he told Frick and Phipps that he would go along with this proposal but would require a $2 million payment for the ninety-day option. If the offer was genuine, he reasoned, such a payment would be no obstacle. It would not indeed, said Frick and Phipps, and quickly produced a check for $1,170,000, reflecting Carnegie’s 58-percent share of Carnegie Steel and its subsidiary, Frick Coke. They told Carnegie that in order to speed the process along, the other partners had agreed to forgo their own option payments.
Carnegie, who cared little whether the junior partners lacked good sense, pocketed his proceeds and, in late April, sailed off for Skibo. He had not been there long, however, when disquieting rumors reached him about the true identity of the buyers.
As it turned out, the men who intended to buy the Carnegie Steel Company were, in the eyes of its majority stockholders, common scoundrels and speculators. The principals included William H. Moore of Chicago, who, along with his brother, had formed the ill-fated Diamond Match Company consortium, the collapse of which had closed the Chicago Stock Exchange for three months in 1896. Another principal was John W. Gates, a notorious
Wall Street speculator and a storied gambler who had once placed a sizable wager on which of two fat raindrops running down a windowpane would reach the sill first. When Carnegie ascertained that “Bet A Million” Gates was involved, he was mortified.
Despite Frick’s best efforts, the truth had come out. On May 16, Frick, distressed at a leak of their plans, wrote an urgent letter to fellow conspirator Colonel James M. Schoonmaker: “I notice a bungling statement in the newspapers of this morning, from Chicago. I assume, of course Mr. Moore’s brother is not responsible for this, but certainly has not exercised the proper care or it would not have appeared. Please say to Mr. Moore if statements of this kind appear in the press I will feel called upon to deny them . . . there was no publicity to be given this matter until we all agreed just how and when it should be done.”
It was too late, however, and soon Carnegie divined the worst of it. Gates and the Moore brothers had persuaded Phipps and Frick to put forward their offer to Carnegie in return for a broker’s fee of $5 million, which would be paid to them once the sale went through. Even more galling was the discovery that Frick and Phipps had put up $170,000 of the $1,170,000 paid to Carnegie to secure the option. The truth was that neither the Moores nor Gates had anything approaching the capital necessary to make the purchase. It was just what Carnegie had suspected: a despicable exercise in speculation, made all the more distasteful by the secretive and self-serving participation of his longtime partners.
Over the years, Carnegie had put up with a great deal from Frick. And he understood the Machiavellian impulse at the heart of mergers and buyouts. But the fact that Frick and Phipps had tried to dupe him and stood to profit at the expense of the other partners by the sale of their company was more than he could bear. Good old-fashioned business machinations were one thing; outright thievery was another.
In a series of letters to Schwab, Carnegie complained bitterly that Frick had utterly betrayed his trust and that his former CEO should have felt honor-bound to disclose what he knew.
But, despite his outrage, Carnegie, for the moment, had little recourse. He had taken the option, signed the agreement, and was obligated to accept the payment for his share of Carnegie Steel the moment that the Moores and “Bet A Million” Gates showed up with the cash in hand. All Carnegie could do was wait and stew . . .
. . . until fate once again saved him. A sudden downturn on Wall Street made many investors skittish, and even those with the wherewithal, such as J. P. Morgan, shied away from dealing with the likes of Moore and Gates. In the end, no one stepped forward with the necessary funds.
In desperation, with time running out, the syndicate proposed the formation of a Pennsylvania corporation that would fund the purchase by issuing $250 million in stock and another $100 million in bonds. While the appearance of the scheme had changed, the essence remained the same. Frick and Phipps would receive $5 million as part of the proceeds of the sale, plus interest in the newly formed company.
This second maneuver met the same fate as the first, however. No investment house would underwrite the dubious venture, and in the end, Frick and Phipps were forced to travel to Skibo Castle and grovel for an extension of the option.
One can only imagine the satisfaction with which Carnegie listened to their pleas, and the relish with which he delivered his reply: “Not an hour!” The buyout was doomed.
It was more than an emotional disappointment to Frick and Phipps. At the time they had made the option payment, they had extracted a verbal promise from Carnegie that he would refund any part that had been put up by Carnegie Steel partners. But the Scotsman drew the line at honoring promises made to men he now considered thieves, and his refusal to return any monies to Frick and Phipps must have given him great glee.
It should also be noted that Frick would later dispute Carnegie’s claim that he and Phipps would have profited at the expense of the other partners. In a letter written in 1913 to James Bridge, Frick insisted that there was never any provision for a broker’s fee for him and Phipps. He suggested that Carnegie had simply lost his nerve at the prospect of stepping away from the company in which he had invested so much of his very being. And there was another possibility: perhaps the canny Scotsman had simply decided that he could find someone of the ilk of Morgan or Rockefeller able to pony up a sweeter price.
As far as Frick was concerned, his tight-fisted former partner had simply fastened upon an excuse to keep Frick’s $170,000 in his pocket. This was the real perfidy.
Whatever the truth, it is said that, in later years, Carnegie would delight in taking guests on a tour of his new manor at Skibo, renovations to which had cost just a bit over $1 million. Following the inevitable burst of compliments, Carnegie would respond with an airy wave of his hand. “It’s nothing,” he would say. “Just a nice little present from Mr. Frick.”
25
PUT ASUNDER
IN RETROSPECT, ONE WONDERS HOW MUCH of Frick’s so-called villainy—actual or embellished—would have been forgiven by Carnegie had Charles Schwab not been on the scene. Frick had resigned twice before, only to be coaxed back into the fold. But now, with profits headed for an astronomical $40 million in 1900, Carnegie and those around him could afford to spurn the manager they had once touted as without peer.
In any case, the aborted sale of the company set in motion a series of cataclysmic battles between Frick and Carnegie—battles that might be understandable in hindsight, but which no one, least of all the principals, could have anticipated.
During the negotiations with the Moores, two other matters had arisen to threaten the internal unity at Carnegie Steel. One involved the normally cozy relationship between the parent company and its virtual subsidiary, the Henry Clay Frick Coke Company, which provided the former with a steady supply of fuel. Though the price charged Carnegie for this fuel was lower than for competitors, the arrangement to sell large quantities of coke on a steady basis nonetheless resulted in handsome profits for the vendor.
Late in 1898, Carnegie had taken Frick aside to discuss these prices. He later claimed that Frick had verbally agreed to sell coke to Carnegie Steel at the rate of $1.35 a ton for the next three years, some fifteen cents per ton less than the rate for other customers. Told of the deal, the always fearful Henry Phipps wondered, “But where will we be if the price for the coke drops below $1.35?”
The response stopped a happy Carnegie in his tracks; it was a possibility he had never considered. “Then you had better get a concession from Frick,” Phipps suggested. “You had better get that promise in writing.”
Though Carnegie agreed, other concerns, among them the proposed sale of the company, apparently distracted him. Meanwhile, the price for coke had actually risen dramatically, and by early 1899 Frick Coke was selling its product to competitors such as Duluth Steel and Ohio Valley Iron for as much as $3.25 a ton—a fact that distressed Frick greatly.
Responsibility for what happened next remains a matter of conjecture. Instead of the $1.35 that Carnegie assumed was fixed, Frick Coke raised its prices for product shipped to Carnegie to $1.45 for the first quarter, $1.60 for the second, and $1.75 for the remainder of 1899. Presented with these invoices, Schwab approved the payments but instructed that all remittances above the rate of $1.35 should be marked as “payments on advance accounts only.”
When word of these maneuvers finally reached Carnegie, he demanded that the matter be resolved at a late-October board meeting of the HCF Coke Company. The minutes show that when confronted by members loyal to Carnegie, Frick dissembled, claiming that he had no authority to make contracts on behalf of the company and would never have suggested otherwise to Carnegie.
“Mr. Carnegie and I had considerable talk about what the price of coke should be for, as he called it, ‘a permanency.’ For the sake of harmony I was personally willing to agree to almost anything. I am willing to talk the matter over with Mr. Carnegie at any time,” Frick insisted. But he was simply the chairman of the board of directors of HCF Coke. So f
ar as any binding agreements went, such matters would have to be referred to Thomas Lynch, the president of the subsidiary.
George Lauder was hardly put off by such transparency. “You and Mr. Carnegie represent a vast majority of stock in the two companies, and if you cannot fix the matter it is a very strange thing.”
Strange, perhaps, Frick responded. But nonetheless true. The effects of such an unfair agreement upon those who held stock only in HCF Coke and not in Carnegie Steel would have to be taken into account. Those stockholders, he argued, clearly deserved a say in any agreement that would diminish their position. With that said, Frick pushed through a motion that denied the existence of any such contract and stated that no claim against HCF Coke on the basis of an alleged verbal agreement between himself and Andrew Carnegie would be entertained.
The meeting adjourned on an acrimonious note, with an angry Lauder pointing out that Frick’s coke holdings would have been nothing without the beneficence of Carnegie Steel, a point at which Frick took umbrage. Only one thing seemed certain: such an internecine dispute favored no one, and a resolution that favored either side simply moved cash from one internal account to another. It seemed that in the end only ego was at stake. But in the case of Carnegie versus Frick, that was more than enough.
There was another complicating issue taken up at the subsequent board meeting of Carnegie Steel in early November, which was attended by Carnegie himself. A short time before, Frick had acquired a tract of land downriver from Homestead, a parcel well suited for a specialized steel-tubing plant that the Carnegie partners were considering building. The property had been appraised for $4,000 an acre, but Frick offered to sell it to the company for $3,500. It seemed fair enough, and with little discussion and no dissent, the board voted to make the purchase.
In the corridors outside, however, Carnegie suddenly found a great deal to say. He reckoned that Frick, who had purchased the tract for less than $700 an acre just a few months before, would make a profit of more than $1 million, which Carnegie considered unconscionable.
Meet You in Hell Page 25
