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.
A noteworthy English combination, effected in 1914, was the acquirement of A. & F. Pears, Limited, manufacturers of Pears Soap, by Lever Brothers, Limited, manufacturers of "Sunlight" and other well-known brands of soap. A. & F. Pears had outstanding £320,000 ordinary shares, on which dividends of 12% had been regularly paid for some years. Under the terms of the combination, these ordinary shares were converted into 12%; cumulative preferred ordinary shares of the company of Lever Brothers, Limited, which rank next after its 5% debentures and 6%. preference shares. A. & F. Pears, Limited, then increased their capital by issuing 150,000 new ordinary shares, which were purchased by Lever Brothers, Limited, for £150,000. This £150,000 was then invested in Lever Brothers 15% preferred ordinary shares at par; the market value of these shares in normal times being about two and one-half times par.
The purpose of this transfer evidently was two-fold: first, to give Lever Brothers all the voting shares in A. & F. Pears, Limited; second, to provide additional security for the continued payment of the 12% dividends on the new preferred ordinary shares. In addition, A. & F. Pears, Limited, held on June 30, 1914, investments in outside securities which had cost £220,390, but which showed a depreciation at that time of about £33,000. It was agreed that A. & F. Pears, Limited, should retain £94,843 of these securities which could be held as reserve funds to offset depreciation of the plant and of the leasehold on certain pieces of real estate.
The balance, amounting to £125,547, was taken over by Lever Brothers in payment for which they gave to A. & F. Pears, Limited, Lever Brothers' preferred ordinary shares to the amount of £55,800, worth at the market value of £2 5s. per share, £125,550. The reason for this last transfer was not explained, but it may be presumed to have been intended to simplify the financial relations between the two concerns, and to provide still further security for the continued payment of the 12%, dividends on Lever Brothers' preferred ordinary shares.
The principle upon which this combination is based is evidently that of assuring the stockholders of the absorbed company that they are to continue to receive indefinitely the same rate of dividends which they had been receiving in the past. In other words, in exchange for the privilege of controlling A. & F. Pears, Limited, and for the chance of building up still higher profits, Lever Brothers were willing to assume all the risk of the undertaking.
This type of combination is not at all unusual when one or two corporations are to be taken over by a previously existing corporation of high credit standing. It is especially common in the United States in connection with the long-term leases much used by railroad companies. For instance, the New York Central Railroad Company leases the Boston and Albany Railroad Company for a 99-year term, the rental consisting of a guarantee of 8% dividends on Boston and Albany stock, plus the payment by New York Central of all organization expenses, taxes, and other possible deductions from Boston and Albany income. Similarly, the Western Union Telegraph Company leases the property of a subsidiary company for a 50-year term, the rental consisting of a 5% payment on the stock.