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 questions that should be fully and clearly answered before any combination of going concerns is attempted, are the following:
1. What is the financial history of each concern that is to be considered as a possible member of the combination? How long has it been in existence? Is its organization stable? Are its earnings increasing or decreasing? Are adequate depreciation and other reserves deducted before estimating profits? Is the plant and physical property in good condition?
2. Who are the men engaged in this industry who have shown the most enterprise and good judgment? Will they join in the proposed combination and work together on harmonious terms? Will it be necessary to give positions to incompetents or to make unfair concessions in order to influence men who are essential to the combination?
3. What, if any, advantages as a money maker will the proposed combination have over the separate, independent concerns? Will the combination be in violation of any laws? Will it be necessary to raise prices or otherwise incur any unpopularity in order to secure larger profits? Is it possible to introduce more efficient methods into the management of the various plants without arousing undue hostility at the beginning?
4. Assuming that the combination is agreed to, what should be the financial plan of the proposed combination? Upon what basis can its securities be exchanged for the securities of the independent concerns? On what basis can other securities be underwritten and sold to the public? How much fresh capital will the combination need? Will there remain a block of securities sufficient to compensate all who took part in the promotion, for their respective risks and expenditures?
The questions above suggested are by no means exhaustive but merely indicate the lines which the promoter will follow in his own preliminary investigation. If the promoter is himself engaged in the industry in which the combination is to be formed, he will probably be familiar at first hand with the answers to most of the questions listed above. Nevertheless it is unsafe for him to depend altogether on his personal knowledge, which will probably be inexact. The promoter must in any case proceed with much discretion and even with secrecy in gathering the preliminary information that he needs; otherwise, he is likely either to arouse suspicion, which would interfere with his later plans, or to stir up premature discussion and arguments that might lead to personal differences or might even favor the promotion of rival plans.
After the promoter, or his immediate associates if there is a group of promoters, have gathered all the preliminary information available, it will be possible to form a tentative plan indicating about what capitalization the proposed company should possess, and what terms should be offered to all the concerns that are to be included. It is usually safe to assume that this tentative plan will be greatly modified during the progress of negotiations.
The next step, usually, is to meet each of the parties whom he hopes to interest, in a separate, personal conference, go over the whole proposition, and, if possible, bring each concern into line to the extent of expressing interest and willingness to agree to some recent reasonable basis of combination. Usually it would not be considered necessary or desirable to attempt to close definite contracts by this process of holding conferences with the separate interests. The final agreement should result after a general conference where the united views of all the participants in the combination will be expressed.
However, it has already been pointed out that in the. case of the Mount Vernon-Woodberry Company the promoters proceeded to purchase outright a considerable number of separate plants, and then went ahead with their financial plans and their sale of securities to the public on their own terms. In other instances, options have been secured or definite contracts have been closed with the large independent stockholders in the constituent companies for the exchange of securities. All these methods of promotion have been utilized at one time or another in order to obtain a complete mastery of the situation, so that no meeting of the various parties interested and no general agreement as to a basis of combination will be called for.
In the usual and typical case, however, the next step after the promoter has assured himself of the favorable reception of the general plan, is to bring together the important representatives of interests that are to be included in the combination, in an endeavor to reach an agreement regarding a basis of combination.