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.
It is well known that a few large engineering firms of high standing have organized and financed and now manage thousands of street railway and other public utility corporations, especially in the smaller cities and towns. Among the most important of these firms may be mentioned H. L. Doherty Company, Stone and Webster, J. G. White Company, and H. M. Byllesby and Company. All of these firms, it is stated, have more or less drifted into their present promotion activities. The business of each firm was primarily to carry on professional engineering work. As they grew in size and the expense of maintaining a large staff of high-priced experts became a greater and greater burden, it was found necessary to go beyond merely seeking profitable work for these men and to embark upon the policy of creating work for them. This could be done only by actively organizing and financing new corporations with which the firm then made contracts for engineering service. Promotion at the beginning, then, was a side issue; but it has grown and grown until one, at least, of these firms is regarded as much more distinctly a financial house than an engineering firm.
We might include with this group some of the large manufacturing companies which are actively engaged in financing new enterprises with a view to obtaining their orders for machinery and other equipment. The concern that has followed this policy with the greatest enterprise and success is the General Electric Company, which through its Electric Bond and Share Company and other subsidiary corporations disposes of the securities of a great number of enterprises which it desires to see developed.
The essential feature of all these arrangements is that the concern which has services or a product to sell does not sit back and wait with folded arms until some one else has succeeded in interesting capital and in building up the enterprises which constitute a market for their services or products. Instead, they look for the opportunities where their services or products can profitably be used, and then proceed to promote the enterprises to handle the opportunities.
All such concerns, after this policy becomes known, are deluged with a constant stream of applications for their assistance in developing new enterprises in which it is thought they might be interested. After receiving these proposals, those which appear to be worth while are investigated along the lines that have been suggested in the preceding chapter. In case the investigation yields a favorable report, they proceed to incorporate and capitalize the new enterprise in accordance with the principles previously discussed. The procedure thereafter differs. Some of the firms work in close connection with banking houses which underwrite the securities of their corporations and proceed to sell them to the general public. Other firms have their own departments or subsidiary corporations for the sale of securities, thus carrying through the whole enterprise from its inception through the investigation, the flotation, the construction of the plant or property, and even beyond this, through the initial stages of its management.
German electrical companies follow much the same policy and in the international markets work in direct competition in this respect with American companies. It is said, however, that engineering firms in other countries have not developed as financial agencies to anything like the same extent as some of the American firms.