Most of the preceding remarks in this chapter refer to the underwriting of high-grade bond and preferred stock issues by financial houses of the highest standing. However, this is by no means the only situation in which underwriting is frequently advisable. In addition to assuring success in disposing of large blocks of securities for established corporations, syndicates may be formed for the purpose of underwriting the issues of new or of reorganized corporations.

* Dewing's "Corporate Promotions and Reorganizations," p. 350. † Stuart Daggett's "Railroad Reorganizations," pp. 347, 348.

In any of these three cases the issue that is being brought out may be of a speculative character and the syndicate itself may be far less stable and more speculative than has been assumed in what has been said above. Frequently underwriting syndicates are made up, not of first-class banks or banking houses, but in whole or in part of individuals and of second-rate houses. Sometimes even the best houses are led into mistakes which may cause financial loss and in addition prove harmful to their reputation.

At the time the United States Realty and Construction Company was organized, the large working capital which was thought to be necessary for the company was obtained through a syndicate. $11,000,000 was subscribed to this syndicate. The members paid in 20% of their subscription in cash, gave their notes for 60%, and the bank advanced the remaining 20% on the syndicate account. The syndicate received $100 in preferred stock and $100 in common stock for each $100 in cash which it furnished. The subscribers included some of the strongest concerns in New York. The managers received as their compensation $220,000, or 2% of the subscriptions to the syndicate.

On the basis of the first quotations for the shares of the United States Realty and Construction Company, the syndicate had a paper profit of a little less than one million dollars. Although the company had the support of the strongest interests, its securities immediately began to decline in market value and by the end of six months it still had on hand a large proportion of preferred and common stocks which it had received and which, at current quotations, could be sold only at a heavy loss.

On September 11, 1903, the syndicate was dissolved. The managers of the syndicate had originally acquired 110,000 shares of preferred and 110,000 shares of common. Soon after organization the managers sold 67,000 shares of common at $37.50 and refused an offer of $35 a share for the remaining 43,000 shares. They used a large part of the proceeds in purchasing 27,000 shares of common and 17,000 shares of preferred at prices much less than they had originally paid.

At its dissolution, after the managers had taken $220,000 for their services, the syndicate was in possession of 127,000 shares of preferred, 77,000 shares of common, and $675,000 in cash. Approximately $500,000 of the cash had been received from dividends on the preferred stock. On the date of dissolution the preferred stock was quoted at $36 a share and the common stock at $6.50 a share. Each member of the syndicate received for each $1,000 contributed, $1,155 in preferred stock, $702 in common stock, and $61.66 in money, of which $45 was furnished by dividends on the preferred stock held by the syndicate. Eliminating this $45, and figuring the shares at their market values, each member of the syndicate got back less than one-half of the amount he had contributed. Furthermore, a week after the dissolution of the syndicate, the fourth dividend on the preferred stock was passed and the stock went to yet lower levels.*

Dewing cites, also, another instance of even more disastrous failure. At the time of the incorporation of the United States Shipbuilding Company in 1902, the promoters were required to sell enough first mortgage bonds between June 14 and August 11 to have in hand $7,500,000 cash by the latter date. However, the public offering of the bonds was a failure, inasmuch as only $500,000 out of the total offering of $9,000,-000 was subscribed for. The promoters therefore fell back upon their French and American underwritings of the bonds.

* Dewing's "Corporate Promotions and Reorganizations," pp. 233, 235, 238.

Here ensued a very amusing correspondence by cable between the promoters and the French underwriters, most of whom were not bankers but individuals untrained in business affairs. The Frenchmen declined to meet their alleged obligations. They asserted that the promoter had assured them that their underwritings would never be called and had later cabled them that the public offering of the bonds was a success.

The American underwriters, who were better accustomed to such transactions, took their medicine and accepted about $4,500,000 of the bonds at 90. The promoter, John W. Young, went to Paris in a strenuous but unavailing attempt to secure payment from the French underwriters.

In the meantime, Mr. Dresser negotiated, with the assistance of Mr. Schwab and J. P. Morgan and Company, loans of about $2,500,000 under personal indorsement of himself and Mr. Nixon, on the credit of the Trust Company of the Republic, and on the basis of the French underwriting. When the French underwriters still refused to take up their share of the bonds, the results were disastrous for the promoters.*

Still another example is illuminating. In 1910 it became evident that the Consolidated Cotton Duck Company was in need of a considerable amount of new capital, both for the acquisition of additional properties and for investment in its own mills. It was determined that it would be advisable to secure a majority of the stock for a group of Bostonians, who desired to become active in the company. Three syndicates were formed as follows:

May 27, 1910, in order to acquire 53% of the Consolidated Company's stock and a supply of between two million and three million dollars working capital.

* Dewing's "Corporate Promotions and Reorganizations," pp. 489, 490.

April 17, 1911, in order to purchase common stock only of the new company. April 27, 1911, to acquire a minority of Consolidated stock and supply $500,000 new money.

On May 27, 1910, Augustus P. Loring, a Boston lawyer, and Joseph B. Crocker, a stock broker, were made syndicate managers. Each man received $12,500 in compensation for his services, in addition to which Mr. Loring received a fee for his legal services in connection with the incorporation of the new company. Much of the work of organizing the syndicate and of carrying through the reorganization of the company was taken care of by Samuel Untermyer, who also used his influence to secure banking connections for the company.

The syndicate agreement of May 27, which was marked "confidential," contained the following provisions:

1. The new International Company was to issue 52,875 shares of preferred and 45,375 shares of common to the managers of the syndicate.

2. The syndicate was to acquire 61,000 shares of preferred and 71,000 shares of common of the Consolidated Cotton Duck Company ($50 par value).

3. The syndicate was to purchase the preferred and common stock of the International for $5,093,000, which the subscribers were to take in the proportion of ten shares of preferred and ten shares of common, for each $1,000 of their subscription.

4. The managers were authorized to sell the excess of 1,945 of preferred stock and to purchase enough common stock to make their holdings of both kinds of stock 50,930 shares.

The Loring-Crocker syndicate of the International Cotton Mills Corporation was unfortunate in its operation. Syndicate subscribers were allotted $100 in preferred and $100 in common stock, for each $100 cash. Three years later, in the reorganization, the old preferred stock was given $77 in new common stock of the new International, and the old common stock was given $16.33 in new common. For each $100 cash put in by a syndicate subscriber, therefore, he received, in 1913, $93,33 in new common stock, worth about $30 a share on the open market. For each $100 put in, the syndicate subscriber received after three years $28. This was not due to failure of the company but rather to miscalculation at the beginning as to the amount of fresh capital that would be required in order to rehabilitate the property of the company. *

It would be difficult to give any detailed information concerning the inner workings of these speculative syndicates. Their operations have not been in any sense standardized. Each syndicate formed for speculative purposes drives its own bargain. Inasmuch as its compensation ordinarily comes in the form of securities rather than of cash commission, its risk is large and it is generally entitled to a correspondingly large block of stock. The operations of a syndicate of this character in connection with the promotion of a new corporation are really a part of the work of promotion and have been referred to under that head. We shall have occasion in a later chapter to refer to the activities of underwriting syndicates in connection with reorganizations.

* Dewing's "Corporate Promotions and Reorganizations," pp. 382, 403.