in return for the physical properties of the five companies (including bills receivable in the case of the Milwaukee company). The value of these properties as appraised by the organizers was approximately $67,000,000; as determined by the Bureau of Corporations only about $49,000,000.1 Neither of these valuations, however, made any allowance for good will. It is clear, therefore, that the purchase price was substantially reasonable. Another block of the stock ($49,851,803) went to the McCormick, Deering, Plano, and Warder interests in exchange for cash subscriptions. In considerable measure these cash subscriptions took the form of an assignment to the International Harvester Company of bills receivable guaranteed by the vendor companies; but a considerable amount of cash was raised in addition.2 The bills receivable being guaranteed, there was no stock inflation on this score. The balance of the stock ($13,707,142) went to J. P. Morgan and Company, the bankers. This sum, it should be observed, does not include the $3,148,197 of stock given to the bankers in exchange for the Milwaukee Harvester Company, which was acquired by the bankers on behalf of the combination, and for which the bankers received stock equal to the actual value of the company as a going concern. What service did the bankers perform in return for this large issue of stock? In the first place, they agreed to subscribe to $10,000,000 of the stock of the company at par.3 In the second place, they incurred certain expenses in the formation of the company. These expenses, amounting to $749,999, were covered by a specific allotment of stock, which is included in the $13,707,000. The balance of the stock received by them ($2,957,143) represented therefore their commission as bankers. Was this commission excessive? The Bureau of Corporations maintained that it was. It pointed out 1 Cf. p. 236. 2 Report on the International Harvester Company, p. 77. Companies selling harvesting machines have unusually large bills receivable because of the necessity of granting long terms of credit. 'They originally agreed to raise $19,000,000, but the amount was later reduced to $10,000,000. that since this payment to the bankers did not correspond to any property conveyed or expenses incurred, it could be justified from the point of view of the company only on the ground of merger value-which did not materialize in the early life of the company-or on the ground of the value of an alliance with the firm of J. P. Morgan and Company. Even on this score, that is, disregarding the welfare of the public, it held the payment to be excessive. As bearing on this matter it should be borne in mind that the risk of the bankers was comparatively slight. The bankers acted largely as the agents of a very small group of manufacturers, who were anxious to effect a combination, and who were in a position to deliver the requisite properties, since the stock of the companies was closely held. Moreover, the bankers assumed no obligations as underwriters, since payment for the properties was taken by the manufacturers in the form of stock. The main contribution of the bankers, therefore, outside of the purchase of the Milwaukee Company and the organization of the Harvester Company (for which services they were specifically remunerated) was the raising of $10,000,000. For this cash they did not, as was common in trust promotions, receive $200 in stock for each $100 in cash; they merely received stock dollar for dollar. The vital question, therefore, is: what was the value of the stock for which they subscribed at par? Was it anticipated that the organization of the trust. would result in increased profits? In that case their commission was undoubtedly excessive. On the other hand, was there danger that the stock would fall below par? In that event their commission may have been distinctly moderate. The Report of the Bureau of Corporations did not discuss this question, and the lack of quotations for the company's securities during the early years makes it difficult to return a satisfactory answer. The fact is, however, that the profits of the Harvester Company during its early years were rather low, and its dividend payments distinctly low. It would appear, therefore, that the bankers did take considerable risk. It is conceivable that the company might have been able to avoid the issuance of the $3,000,000 of stock 1 Report on the International Harvester Company, pp. 127-128. that represented the bankers' commissions by the sale of $10,000,ooo of stock at par to the public (which ordinarily receives no commission), but in view of the fact that a great mass of undigested trust securities was then hanging over the market this is by no means certain. In any event, it is clear that the promoters' profits in the formation of the harvester trust were distinctly small as compared with the other trusts of its size that were organized during the same period. The profits of the promoters of a number of other trusts will be briefly reviewed. Unless stated to the contrary it should be understood in each instance that these profits are subject to some deductions for promotion expenses. They do not ordinarily, therefore, represent net profits. The promoter of the starch trust (1890) secured options on a number of plants and raised $1,545,750. In return he received securities (bonds and stocks) that had an average market value during the first two years of the company's life of $2,268,427. His nominal profits, therefore, were $722,677.1 The promoters of the rubber boot and shoe trust (1892) received $1,300,000 of common stock, which at the average quotations during the first year had a value of approximately $560,000. Out of this sum the promoters had to meet organization expenses, but unlike many promotions their risk was small, since the amount of stock they received did not depend on their skill as bargainers, but was a definite percentage (5 per cent) of the total issue of stock.2 The promoters and financial backers of the glucose trust (1897) raised $4,500,000 in cash; and were given approximately $14,500,000 in securities, or over 38 per cent of the total issue. The average market value of this stock was $9,000,000; and the paper profit was therefore $4,500,000.3 The promoters of the malt trust (1897) received $500,000 in preferred stock and $7,750,000 in common stock (or nearly onethird of the total capitalization) to cover the expenses of promo 1 Dewing, Corporate Promotions and Reorganizations, pp. 53-552 Industrial Commission, XIII, pp. 48-49. 3 Dewing, op. cit., p. 82. tion. These securities were worth nearly $3,400,000 at their maximum quotations, but they declined rapidly and as a result most of the promoters made but slight profits.1 The promoters of the silver-ware trust (1898) received only $600,000 of common stock (equal to 3 per cent of the total capitallization), and out of this they had to meet the expenses of organization.2 The market value of this stock during the first year was only about $100,000. It is clear, therefore, that the profit was small. The promoters of the asphalt trust (1899) took their pay in considerable measure through the sale to the trust at fancy prices of a company which they organized for that particular purpose.3 The properties of this company cost them $618,000; and they sold them to the trust of their creation for $3,670,000 in bonds, or more than five times their cost. In addition, as manufacturers they received bonds exceeding by nearly $2,500,000 the value of the properties transferred to the trust. Their profits as promoters were thus the realizable value of some $3,000,000 of bonds. The average price at which these bonds first sold was around $93, but the promoters could not have sold all of their bonds at this price without spoiling the market. There can be little doubt, however, that their profits were handsome. The promoter of the bicycle trust (1899) after effecting the requisite transfer of securities for properties retained as his compensation $2,000,000 in debenture bonds, $2,600,000 in preferred stock, and $6,700,000 in common stock, or a total of $11,300,000 (equal to 31 per cent of the company's capitalization). This does not include such profits or losses as might have been made by the underwriting syndicate which supplied the requisite funds in return for bonds at 922 cents on the dollar. Notwithstanding the fact that most of the manufacturers attested their faith in the company by taking securities, the promoter, because of the sudden collapse of the industry, realized only a small profit.4 The promoters and bankers that organized the cotton yarn 1 Dewing, op. cit., pp. 276, 279. 3 Dewing, op. cit., pp. 428-430. 4 Ibid., pp. 253-254. trust (1899) received nearly all the common stock ($5,000,000). The consolidation did not prove successful, and as a result the promoters realized no profit at all.1 Substantially the same was true of the cotton duck trust, organized in 1901. The promoters of this trust after meeting the initial organization expenses had left $6,250,000 of common stock, of a value of at least $1,500,000. Having confidence in the company they not only retained this stock, but bought more; and in the end they sustained heavy losses.2 3 In the promotion of the foregoing trusts promoters' profits figured more or less prominently. In the organization of a number of other trusts, however, promoters' profits were insignificant or even entirely absent. This appears to be true of the oil, powder, sugar, cash register, cordage, leather, aluminum, wall paper, shoe machinery, news print paper, glass table ware, and salt trusts. In the formation of some of these trusts, notably the sugar trust, large profits were made by the organizers, but these profits came to them as the owners of stock rather than as promoters. In the formation of others, notably the cordage and leather trusts, there was some underwriting of securities, but this was a detail in the formation of the trust rather than an important contributing cause. How, it may be asked, was it possible to organize this large number of important trusts without offering large rewards to the promoter, who is supposed to perform a necessary function? The answer is two-fold: (1) some trusts became such through the expansion of a concern already in the field, rather than through a combination at one time of most of the plants in the country. For instance, the Standard Oil Company, organized in 1870 to take over the business of the partnership to which it succeeded, bought first this property and then that, financing these purchases partly out of its enormous earnings, partly out of cash subscribed by the stockholders, and partly by an exchange of securities. Obviously no trust promoter was re 1 Dewing, op. cit., p. 313. 2 Ibid., p. 341. 3 There were large promoters' profits in the reorganization of this trust in 1902; but none in the original organization. |