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.
In the promotion of the United States Leather Company, in 1893, the initiative was taken by certain manufacturers who mutually agreed upon the necessity of forming a combination and who carried through the whole project with very little outside advice or assistance, even on the part of bankers. After securing the agreement of the principal concerns in the leather industry to the general principle that a combination was desirable, the leaders of the movement proceeded to appoint committees for the purpose of appraising the physical properties of the independent concerns. It was agreed that the new company should issue $100 in preferred stock and $100 in common stock, in return for each $100 of the appraised value of the physical properties. In this way the new corporation acquired approximately no tanneries controlled by 60 different leather houses, about 400,000 acres of bark land, and bark rights on 100,000 acres additional. This was a very simple basis of combination. The plan gave no consideration whatever to good-will, patents, contracts, and other intangible assets - or rather the plan assumed that these intangible assets were uniformly equivalent to the value of the tangible assets. On this basis, the new corporation acquired all the physical properties that it needed. The next problem was to raise working capital, which was secured through an issue of $10,000,000 debenture bonds, of which $6,000,000 were underwritten and issued at par. The underwriting syndicate in this case received $600,000 par value of common stock as a 10% commission for underwriting. It is, of course, to be borne in mind that the common stock did not have a market value even approaching par, so that the actual underwriting commission was far below 10%.
* The statements in this section as to the leather and starch combinations are based upon the exceptionally able and graphic accounts contained in Dewing's "Corporate Promotions and Reorganizations".
The later history of the leather combination was unfortunate, but this need not concern us here. The manner in which the combination was carried through and the agreed basis of combination seem, on the whole, to have been fair. The tanners who joined the combination considered the appraisals of their property just; outside tanners, however, criticized the appraisals on which stock was issued as being in all cases considerably inflated.
The first consolidation in the starch industry was the National Starch Manufacturing Company in 1890. In this case the promoter, after making his preliminary investigation and forming his financial plan, secured options on twenty starch manufacturing plants. All the options stipulated that the vendors should receive 25% of the value of their mills in cash; 32 3/4%. in bonds; 22 1/2 % in first preferred stock; and 18 3/4 % in second preferred stock. In addition, each manufacturer was to receive a common stock bonus of 27 1/2 %.
The working capital of each independent concern was taken over and paid for in cash.
It was part of this general plan that the promoter himself, through a company of which he was president, should furnish $1,545,750 cash, for which he received an equal amount in bonds and preferred stock and 100% bonus of common stock. Assuming that the promoter was able to market these securities at the prices prevailing during the first two years following the promotion, his compensation amounted to $722,677.
It is evident that in this instance, although the promoter was acting on his own responsibility, there was a common basis of valuation and terms of payment for the plants which were turned into the combination. When securities are exchanged it is, in fact, necessary that there should be some such common agreement - or at least an informal understanding - for otherwise there is no method of judging the probable value of the securities received in payment for the plants.
In 1889 another promoter planned to organize a second starch combination, and a meeting was held in the office of Charles R. Flint of New York for the purpose of deciding upon the basis of combination. The minutes of this meeting have been preserved, and are extremely interesting as showing the first stages in the process of organizing a combination.
Memorandum of Meeting held in the office of Charles R. Flint, June 30, at 10 a.m.
Present: Messrs. Flint, Auerbach, T. P. Kingsford, Higgins, Duryea, Morton, and Allen.
It is agreed to organize the United States Starch Company with a capital of $2,500,000 preferred 6% cumulative stock and $3,500,000 common stock. And that the former shall be held in trust by the United States Mortgage and Trust Company, and issued later through bankers to be provided by Mr. Flint. The common stock shall also be held in trust for the owners for such a time as they may elect.
It is agreed and understood that the vendors shall receive $950,000 in cash, $1,550,000 preferred stock, and $3,000,000 in common stock, for their plants and inventories, to be provided for as follows:
First, a loan shall be made by the United States Mortgage and Trust Company for $950,000 for nine months, same to be paid from the proceeds of the sale of an equal amount of preferred stock to be issued at such time as in the judgment of the Directors may be proper. The proceeds of this loan to be used as follows:
To pay Kingsford...........
Second, in addition to the cash paid as above, preferred stock shall be assigned to the vendors as follows:
$1,100,000 on plant and inventory
Which shall be held in trust by the United States Mortgage and Trust Company for account of the owners until the time of issue.
$3,000,000 of common stock is to be issued to the vendors in part payment of real and personal property turned over to the new company, as follows:
Included in the property turned over by the vendors, it is estimated that there will be about $750,000 of quick assets, consisting of grain, package materials, and starch, manufactured and in process.
$500,000 in common stock shall be paid to cover the entire costs of promoting the company, including the charter, the organization, the commission paid in stock for securing the loan, the fee of the bankers who issue the preferred.
Common stock to vendors..........
Common stock to promoters............