Kidder, Peabody invested considerable time and money to secure electric and gas financings. The firm's underwriting staff was expanded to include several newly recruited utility experts, among them Henry Witt, a utility analyst formerly with the General Electrical Securities Company. Witt, the partners, and other employees with close ties to executives of the divested companies were assigned to assist the underwriting staff. To add still more strength to its utility operations, the firm also made extensive use of outside consultants. The partners continued to rely heavily on their Stone & Webster connections and developed others, one of the most important of which was with W. C. Gilman & Co., a firm of engineering consultants specializing in utility work. William C. Gilman, the head of this concern, was a McGill University graduate with an engineering degree from the Massachusetts Institute of Technology. Widely known among utility company executives throughout the country-he had served as the first chief of the Securities and Exchange Commission's public utility division before going into business for himself-Gilman provided Kidder, Peabody with information and detailed studies of companies seeking to raise capital, which the firm used to solicit business. The purpose of Kidder, Peabody's utilities group, which in 1963 was made independent of the underwriting department, was two-fold: to seek new clients and service old ones. Alfred E. Borneman, who had joined Kidder, Peabody in 1928 after graduating from the Harvard Business School, was put in charge of the firm's utility department. Widely experienced-he had moved up from statistics and research through the advertising and sales departments to a partnership in January 1953-Borneman developed close ties with utility executives and gained the confidence of many of them. Aided by the firm's research department, Borneman and the new group prepared detailed, long-term estimates of the industry's capital requirements, the projected costs of new plant and equipment to meet the energy needs of a growing population, and the probable terms upon which the financing could be accomplished. Similar studies were prepared for companies likely to need financing. Armed with this information, Gordon crisscrossed the country, calling personally on utility executives to solicit their business. Together with Borneman, Webster, and other members of the firm, Gordon appeared before federal and state regulatory agencies to testify on problems confronting the industry, as well as on specific rate and financial questions concerning Kidder, Peabody's actual or prospective clients.
The firm's efforts to cultivate the utility business proved successful. Between 1947 and 1960 Kidder, Peabody managed or co-managed public offerings of nearly $2.3 billion of utility issues, an amount representing almost 58.7 percent of the firm's total corporate securities sold publicly. During the same period Kidder, Peabody's privately placed utility issues amounted to $721.1 million, or about 36.6 percent of its total direct sales. The marked increase in private placements owed much to the partners' efforts at trying to educate gas and electric company officials to alternative methods of raising capital. Speaking before the Edison Electric Institute in June 1968, Gordon advised utility leaders that the electric industry was "in a rugged competition for the savers' dollars," that they should follow the example of industrial corporations and "tailor make their securities to fit the changing [financial] markets," and he urged them to impress upon their regulators the need to allow them more flexibility in deciding upon the method to be used in raising capital, not only between public and private sales but also between competitive and negotiated transactions. Competitive bidding, Gordon said, was ordered "to reduce underwriting spreads and to cut the alleged historical ties to Wall Street firms," but "today," he emphasized, "the spreads on negotiated public offerings are substantially lower than for competitive bid offerings, and the differential for privately placed offerings is even greater."
Kidder, Peabody was prepared to assist utilities in seeking exemptions from the compulsory competitive bidding requirement if a negotiated sale appeared to be more advantageous to the issuer. Gordon cited evidence from the firm's record to show issuers that in most cases a negotiated sale was preferable to a competitive one, not only because underwriting spreads often were smaller in a privately arranged offering than in one sold at bids, but because the former method allowed for greater flexibility in timing an issue and in planning a strong sales effort, both of which generally proved beneficial to the company. Effective nationwide distribution-the ability to sell was Kidder, Peabody's greatest strength as an underwriter. It was the basis upon which Gordon had rebuilt the firm's reputation, and it also was the principal reason it could get an issuer a better price for its securities than could be obtained by a competitive sale. The combination of brokerage and underwriting strength, both carefully supervised by Gordon, proved beneficial to both the issuer and the firm; for the former it meant a lower cost of money, for the latter it served as an effective means of attracting new corporate clients.
The techniques employed to cultivate the utility business also were used to attract industrial and other corporate underwritings. During the years 1946 through 1969 Kidder, Peabody managed or co-managed 841 public offerings of corporations totaling slightly more than $11.1 billion. By the latter date the firm clearly had established itself as a major underwriter, one of the leading firms in the industry and among the top ten both in the number and dollar value of issues managed or co-managed.
Kidder, Peabody's record in private placements was even more impressive. During the period 1946 through 1969 the firm arranged 1,342 private sales ranging in size from $95,000 to $100 million and totaling some $5.5 billion. Over $50 million of Kidder, Peabody's direct sales during the years 1951 through 1955 were for independent telephone companies. The firm's financing of these corporations helped establish their credit with institutional investors and brought Kidder, Peabody a group of new clients that, like many of its gas and electric utility customers, turned to the firm repeatedly for assistance in raising the growing volume of capital they required. Corporate finance-direct placements, managements, and underwriting participations-accounted for approximately 30 percent of Kidder, Peabody's gross annual revenues between 1945 and 1969, with the peak for the period (34 percent), reached in 1965.
The postwar years also witnessed an increase in the number and dollar value of Kidder, Peabody's management and co-management of state and municipal issues. Prior to World War II the firm's sponsorship and underwriting of tax exempt securities had accounted for about 5 percent of its total annual gross revenues; in the years 1947 through 1969 its state and municipal business grew to a high of 17 percent in 1955 and averaged about 8.6 percent for the entire period. The annual number of tax-exempt issues headed by Kidder, Peabody exceeded forty for the first time in 1958, hit fifty-nine in 1967, and reached seventy-one in 1968, the all-time high until then.
Kidder, Peabody's rise to a major position in the state and municipal bond business occurred at a time of intense competition which threatened to increase still further. During the early 1960s the nation's giant commercial banks, led by First National City Bank in New York and Bank of America in San Francisco, sought to expand their underwriting activities by getting Congress to lift the ban imposed on them by the Glass-Steagall Banking Act of 1933. That law, which separated commercial and investment banking, permitted banks of deposit to underwrite only general obligation bonds, those backed by the full faith, credit, and general taxing power of the state or municipality that issued them, but denied these institutions the right to sponsor revenue bonds, securities whose redemption generally depended upon the tax receipts of the government that sold them. Commercial banks argued that an amendment to the law allowing them to underwrite revenue bonds would help state and local authorities by reducing the cost of borrowing, a claim that was not substantiated by independent studies conducted by the Federal Reserve and Professor Bertrand Fox of the Harvard Graduate School of Business Administration, the investment banking expert responsible for compiling the statistical tables used in the antitrust trial. Both studies disclosed that the slight interest rate differential between general obligation and revenue bonds of comparable quality and maturity (about 0.12 percent) was "solely due to the difference between the lesser security of revenue bonds and the all-resources type security of general obligations." The statistical evidence presented at the House Banking and Currency Committee hearings, combined with strong pressure from investment houses, kept the proposed bill stalled, but the threat remained and Kidder, Peabody's partners prepared to meet the challenge by strengthening still further the firm's state and municipal capacity.
Expansion of Kidder, Peabody's ability to underwrite and sell state and municipal issues began in the decade after the end of World War II, when the volume of securities offered by these authorities started to climb appreciably. In May 1958 Joseph Vostal succeeded Frank Gallagher as manager of the firm's municipal section. Vostal had started with Kidder, Peabody as a clerk in 1926, had worked closely with Gallagher and other members of the firm's municipal staff from 1934 until September 1946 when he left to open his own house. In May 1948 he returned to Kidder, Peabody's municipal department; ten years later he headed the group, expanding it considerably. Together with John A. Hoff, another longtime employee who started with the firm as a messenger and rose to become New York sales manager for municipals in 1954, and in 1961 a partner in charge of general sales, Vostal revitalized Kidder, Peabody's tax exempt business, turning several years of decline into impressive gains.
Outside of New York the Philadelphia office launched the firm's most innovative sales technique for municipals. In September 1953 the tax-exempt group at Philadelphia negotiated the sale of $300,000 of Akron Borough (Lancaster County, Pennsylvania) School Authority bonds. Instead of selling the lot in bonds of $1,000 each, the traditional denomination for issues of this type, Kidder, Peabody offered some in denominations of $100 and $500, advertising their availability in five local newspapers. The response proved so encouraging that the experiment was repeated in the Philadelphia office's next municipal offering, a $285,000 issue of Williamsburg Community (Blair County, Pennsylvania) Joint School Authority bonds. This time the entire offering was sold in bonds of $500 and $1,000 denominations. "We expect to continue this type of financing in Pennsylvania," said Willard M. Wright, Jr., the manager of the Philadelphia office's municipal department. The smaller denomination bond, Wright explained, attracted investors interested in helping finance their own community's improvements, publicized municipals among individuals generally unfamiliar with the tax-exempt features of these securities, and widened the firm's list of clients.
Still more strength was added to Kidder, Peabody's state and municipal department in June 1966 when the firm absorbed B. J. Van Ingen & Co., Inc. Founded in 1916, the firm started as and remained a specialized bond house, heading the offerings of a distinguished clientele of government authorities, among them the Pennsylvania, Ohio, Oklahoma, and Kentucky turnpikes, as well as managing others for several large hydroelectric projects in the Pacific Northwest. The firm continued to be a major underwriter of tax-exempt bonds-in 1965 it ranked twenty fifth, four places below Kidder, Peabody among the nation's leading managers of municipal and state securities-but its business, like that of other specialized houses, had been declining. Falling municipal bond prices had lowered Van Ingen's profits, forcing it to close all of its offices outside New York City. The decision to merge with Kidder, Peabody, explained a Van Ingen executive, was "a very deliberate move on our part to become part of a large diversified firm." Two of Van Ingen's senior executives, each widely experienced in consulting work for and negotiating with tax-exempt issuers, joined Kidder, Peabody's municipal finance department.
The Van Ingen takeover, like Kidder, Peabody's earlier absorption of Kissel, Kinnicutt, disclosed more than Gordon's determination to augment the firm's ability in an important area of the securities business. It also confirmed his strategy of expansion-taking up the offices of faltering houses. Such a policy, he believed, not only was easier and less expensive than opening a new office, but it also allowed Kidder, Peabody to incorporate in its own organization experienced personnel and, hopefully, hold on to the clients and goodwill of the assimilated house.
