Company Reports – Capitalisation Adjustments -A Trying Year – Optimistic Views

«The Economist», 14 aprile 1928, pp. 763-764

Turin, March 31

The usual March shareholders’ meetings of the joint stock companies afford interesting glimpses into the state of trade and industry in Italy. Shareholders, who hoped against hope that the revaluation and stabilisation crisis would not touch their dividends, were concerned at too frequent announcements of reduction and passing over of dividends. Sometimes things seem worse, as, for instance, when the shareholders of the Snia Viscosa Company, the great artificial silk concern, were invited, at the meeting on March 29, to sanction the reduction of the capital from 1,000 to 800 million lire, and to utilise the 200 millions thus made free and another 300 million lire taken from the ordinary and extraordinary reserves to reduce the book value of various items on the asset side. After having thus put their house in good order the directors again raised the capital from 800 to 1,000 millions by the issue of 1,617,667 ordinary and 50,000 preference shares at the price of 150 lire, i.e., 120 face value and 30 lire premium. So far as capital reductions are prompted by the desire of rearranging book values of assets perhaps originally bought or built at the inflated prices of the times when the lira hovered between 25 and 30 lire per dollar, no harm and some good will result from changes in capital accounts. A keen discussion is going on in the economic Press on the expediency of adapting book valuations of assets and liabilities according to the new legal level of the lira. At present book valuations in many companies are of the most heterogenous and haphazard kind; some items are written at ridiculous prices on the basis of the old prewar lira, and others at the various changing purchasing-power levels from 1914 to the present day. Balancesheets give little indication of the real value of assets and liabilities and of the current true probable valuation of capital proper and reserves. Would it not be better to put all values on the up-to-date basis of 19 lire to 1 dollar, which is, moreover, the present law of the land?

As in Germany, Austria, Yugoslavia, Hungary, where the same problem was dealt with previously, many difficulties bar the way to a truly satisfactory solution of the problem. On what basis should the revaluation be made – on that of the rule-of-thumb relation between the level of foreign exchanges at the time of buying or building each specific asset or of the current present value, or on that of the probable future income capitalisation? Current values are sometimes not a good guide, because nobody would think of investing fresh money in machinery bought at current prices if the probable yield appeared unremunerative; which simply means that equilibrium in the special field is as yet not reached. Another, and to the eyes of directors of companies a more formidable, bar to revaluation was the income-tax bugbear. It was, not without reason, feared that if, for instance, an item originally valued in 1910 at one million lire were revalued, on the present prudent basis, at three million lire, the difference would be deemed by the taxing authorities as taxable profit or income subject to a tax amounting in all to about 20 per cent. The point was brought by the Turinese Nebiolo Company before the highest administrative tribunal. The result was that these revaluation differences were declared not to be profit and income, and therefore not taxable. The way is, from this point of view, open to rearrangement of balance-sheets. The Edison Company, the great electricity concern with a capital of 712,500,000 lire, was contemplating a revaluation of old assets, the result of which would have been the increase of the net capitalisation from the above said 712.5 to 950 million lire, and of the nominal value of each share from 375 to 500 lire. As the present dividend is 45 lire per share, it bulks somewhat large on a nominal capital of 375 lire. If the nominal value could be increased to the true value of 500 lire, the dividend of 45 lire would work out at only 9 per cent. – not an excessive figure for an industrial investment, and a more convenient one in relation to electricity selling prices and to the wages level. As, however, directors were informed by their legal advisers that no Italian company can increase its capital, even if the increase is a mere book-keeping transaction, without leave from the Finance Ministry, all action is in suspense until the Ministry has made up its mind about the new problem.

Reports of directors, especially of bank directors, are unanimous in observing that 1927 was rather a trying one for Italian economic life, but that there are signs of better times ahead. As official statistics are more or less belated, improvements are as yet not visible. The total number of unemployed reached the maximum of 439,211 in January, 1928, against 225,346 in January, 1927, a maximum of 414,283 in December, 1927, and a minimum of 214,603 in June. The number of partially unemployed was, however, only 76,327 in January, 1928, against a maximum of 134,251 in August, 1927. Number of subsidy days was 18,680,274 in 1927, against 6,330,665 in 1926 and 4,019,062 in 1925. Failures are on a rising scale: -617 was the monthly average in 1913, 474 in 1923, 607 in 1924, 602 in 1925, 654 in 1926, 944 in 1927, and 1,040 in the first two months of 1928. Imports for the first two months of the year amount to 3,266.7 million lire, against 4,010 millions in the same period of 1927; exports were 2,247.9 millions, against 2,518,1 millions; so that the excess of imports over exports decreased from 1,491,9 to 1,019.8 million lire. Bourses, which always look to the future, are moderately optimistic. Bachi’s average index number for variable-dividend securities is 129.8 (basis 100 = December, 1913) for February, 1928, against 123 for December, 1927, and 104.5 for December, 1926. Clearly the Bourses think that the reduction and passing over of dividends are a good policy from the point of view of sound finance, and that the strengthening of reserves is conducive to better dividends in years to come.