It sometimes happens that the promoters of a combination have in mind, not so much the immediate cash profits which they may realize from combining and recapitalizing certain properties, as the ultimate profits which they may realize through obtaining control of the properties. If two or more companies are already capitalized at a high figure, it may be difficult to put through an exchange of securities that will realize much profit; yet the object of securing control with a very small expenditure of cash may be attained.

One of the most remarkable illustrations of this type of combination is the Rock Island Company, which in 1915 went into a receiver's hands. The original company was the Chicago, Rock Island and Pacific Railway Company of Illinois, which up to 1901 had outstanding capital shares amounting to $50,000,000. In 1901 a controlling interest was acquired through the open market by a group which came to be known as the "Rock Island Crowd" made up of W. H. Moore, Daniel G. Reid, William B. Leeds, James H. Moore, and some minor participants. With the exception of Mr. Leeds, none of these men had had any special experience or interest in railroad affairs. Their activities in Rock Island were almost wholly in connection with its finances.

* As the facts cited in this section are not matters of public record, the names and some of the identifying details are altered.

In June, 1901, within three months after they had secured control, the capital stock was increased from $50,000,000 to $60,000,000, the new shares being sold to the public at par. In 1902 the authorized capital stock was again increased to $75,000,000 and the new shares sold at par. This $25,000,000 was used to construct and buy small lines or "feeders" for the railroad.

Shortly afterwards a new corporation, the Chicago, Rock Island and Pacific Railroad Company of Iowa, was organized with an authorized capital stock of $125,000,000, and an authorized issue of collateral trust bonds of $75,000,000. The collateral trust bonds were exchanged, dollar for dollar, for the outstanding capital shares of the Chicago, Rock Island and Pacific Railway Company.

At about the same time another new corporation, the Rock Island Company of New Jersey, was incorporated and at once issued $96,000,000 of common and $54,000,000 of preferred shares. This $150,000,000 was exchanged for the capital shares of the Chicago, Rock Island and Pacific Railroad Company of Iowa. A peculiarity of the Rock Island Company of New Jersey was the fact that the preferred stock elected a majority of the board of directors. Hence, control of slightly over $27,000,000 of the $54,000,000 outstanding preferred stock would give control of the corporation. Inasmuch as the preferred stock sold below par in the open market, the actual cash investment required was $16,000,000 to $17,000,000. As the stock was good banking collateral, a large part of this investment could be borrowed.

It is evident that the Rock Island Company controlled the Chicago, Rock Island and Pacific Railroad Company of Iowa, which in turn had control of the Chicago, Rock Island and Pacific Railway Company of Illinois, the operating corporation. In other words, a relatively slight cash investment would be sufficient to control a corporation having stock outstanding of a book value of over $75,000,000.

The manner of holding control of the various corporations included in this remarkable scheme, is graphically shown below: