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.
We have spoken above chiefly of combinations among manufacturing concerns; and this is probably the field in which the tendency has in recent years been strongest. However, it should not be forgotten that there are other fields for combination. Among the trading companies there have been a great many mergers or alliances of department stores and of groups or "chains" of small retail stores. Sometimes these chains of stores have grown up in a very loose association, held together really by the personality of one or two men who are interested in each of the separate stores or plants. This loose association, it may be remarked, is especially common in the trade publication field, where one man will often possess a controlling.interest in a number of trade papers, each one of which has its own separate corporation and organization.
An example of a similar arrangement in the retail store field is the so-called Besse System Stores in New England, all of which are directed by L. W. Besse. There is a different partner in each store. The management has already announced that this arrangement is not sufficiently stable and does not admit of scientific methods of administration; and presumably it will be replaced sooner or later by a single corporation which will be a combination of all the Besse stores. This is the manner in which loose associations of business interests usually develop into formal combinations. Much the same process has been gone through by the F. W. Woolworth Company and the Knox Company, both being owners of systems of chain stores.
The movement toward combination has recently been strong among companies in the moving picture field. In 1913-1914, three film companies, with an aggregate capital of $1,500,000, were floated by a stock exchange house. At about the same time there was a $5,000,000 merger of three film-producing companies. In the early part of 1914, a $25,000,000 amalgamation was being talked of.
Combinations among banks are also not uncommon; the great Continental-Commercial National Bank of Chicago being a noteworthy example. This tendency has been particularly prominent in English finance for the last twenty-five or thirty years. According to Huth Jackson, the number of individual banks in England and Wales declined from 366 in 1887, to 133 in 1913; 209 banks disappearing through purchase or amalgamation. The tendency is successful because it produces stronger banks with a more diversified clientele, which are less likely to be swamped by local disturbances.
Another field in which there has been a great deal of combination is among public utilities - including gas and electric light and power companies, street railways, water works, irrigation works, and the like. Combinations in the public utility field are of a slightly different type from those in the manufacturing field. Usually they include a considerable number of local companies, each one operating in its own community, which communities may be far distant from one another. In fact, it is regarded as a point of strength if the various companies in a public utility combination are not affected by the same geographical or economic conditions, thus minimizing the danger that all of them may be seriously depressed at the same time. While a combination of this type may be classed as "horizontal," it is evidently made up, not of competing enterprises, but of enterprises which may profitably co-operate in such activities as the purchase of raw materials, securing high-grade engineering talent, comparing experiences, and the like. The great advantage, however, which the public utility combination has to offer is the fact that it can float bond and stock issues on a large scale and give them a national market, whereas the local public utility company experiences difficulty in selling its securities outside its local market. As a result, "about 78.5% of the total gas, electric light, and traction capital of operating public utilities is now owned by holding companies. The average electric light company has about $342,000 of securities outstanding. The undertaking is too small to finance itself efficiently when it has to increase its capital investment about 20% per annum; that is why the holding company is efficient as a financial medium."*