This section is from the book "Business Finance", by William Henry Lough. Also available from Amazon: Business Finance, A Practical Study of Financial Management in Private Business Concerns.
Among the fields for promotive activities probably the one that has attracted the most public attention is the formation of combinations of previously existing companies. Most concerns are developed at the outset as isolated enterprises. At a later stage, however, nearly every expanding company comes into closer and closer relations with the concerns from which it buys and sells, and may even establish some financial connections with them. It is likely, also, to come into increasingly bitter competition with rival concerns, which competition may either seriously cut its profits or may greatly limit the field of its operations. Thus, there exists an almost universal tendency toward combination along one or both of the following lines:
1. The first type may be called "vertical combination," which means the establishment of joint control over two or more concerns that are buying and selling from each other.
2. The second type may be referred to as "horizontal combination," which means the establishment of joint control over two or more competitive concerns.
Vertical combination is especially common between purchasers of raw materials, which may be wholly or partially monopolized, and the manufacturers of these materials. It is also common, on the other hand, between manufacturers who do not sell direct to the final consumers of their products and some of the middlemen who intervene. The United States Steel Corporation is a notable example of a complete vertical combination, since it includes great iron-mining companies, ships and railroads for the transfer of ore, blast furnaces, manufactories of finished iron and steel products, and selling agencies, notably the United States Steel Products Company, which handles all the export selling. Here is a complete integrated organization which carries on the whole process of mining, manufacturing, and selling. The United States Steel Corporation in some of its aspects also is a horizontal combination. Examples of combinations between competing concerns are not difficult to find, and will readily occur to every reader.
Naturally, the large combinations, with their hundreds of millions of dollars of capital, have attracted most attention. It is not always realized that the combination movement is going on also among comparatively small concerns, and that the aggregate importance of smaller combinations is probably even greater than the aggregate importance of the huge combinations that have their securities listed on the stock exchanges. The idea of taking over an interest in another concern, or the idea of forming a new corporation which shall hold control of two or more other concerns, is now entirely familiar and is being applied in hundreds of cases. In a great many of the smaller cities, manufacturers who have been operating on a comparatively small scale have in recent years combined their facilities. The remarkable growth of business associations made up of competitive manufacturers or traders has been a factor of importance in facilitating this movement toward small combinations.
If the combination is purely a case of one concern purchasing a controlling interest in one or more other concerns, there is no distinct process of promotion. In cases, however, where a new corporation is formed to take over two or more previously independent corporations, promotion is an essential feature of the arrangement. Some person, or group of persons, must conceive the combination, must carry on investigations, work out a financial plan, assemble their proposition, see to its preliminary financing, and finally dispose of the securities put out by the new corporation. The process of promoting a combination differs in many particulars from the promotion of a single enterprise, and in view of its importance is worth some separate study.