A modification of this second form, illus trated by the St. Louis & San Francisco 41s, due August, 1912, seems almost ideal for a corporation looking forward to systematic expansion of this kind. Such comparatively small issues, as railroad finance goes, of two or three millions sell at a disadvantage com pared with a larger issue. They are not large enough to form a basis for general active trading such as the big issues afford. Any bonds which have a really active market sell at a considerable advantage over bonds of equal security which may have a good, but not a quick and very close market. An in vestor can at any time either buy or sell a really quick bond at a selling price of not more than a quarter of a point less than the price at which he could buy. With a less active security, though still one with a good market, in trying to make a quick sale he might find that he would have to take a point or more less than the price at which lie could buy. The constant quotation and the close market make a really active security much more desirable collateral at the bank.
Such issues as the $14,376,000 Missouri Pacific Railway Company 5 per cent 30-year gold bonds, due January 1, 1917, show an appreciation of these principles on the part of those controlling the finances of the cor poration. The authorized issue amounts to $15,000,000, and the right them out is limited to so much per mile of actually com pleted mileage of railroads whose first mort gage bonds are deposited in trust to secure bonds of this issue. The bonds outstanding are secured by the deposit in trust of $17,215, 000 first mortgage bonds covering 1120.43 miles of railway of seven subsidiary compan ies. A similar issue of the Missouri Pacific, the $9,636,000 of an authorized $10,000,000, are protected by a stipulation that they shall not be issued to exceed 80 per cent of the par value of the first mortgage bonds of the sub sidiary companies deposited to secure them. This issue is secured by the deposit of the first mortgage bonds of no less than twenty sub sidiaries ranging from two miles to one hun dred and thirty-one miles of line.
A general collateral mortgage of this kind provides an issue large enough to assure act ive close trading in the market. It has all the advantages of being a direct obligation of the well-known parent company and essentially a first mortgage on the property of the subsidia ries. By having a large authorized amount, with proper restrictions as to issuing only on the deposit of stipulated quantity of collateral comprising securities of actually operating properties, the parent company can keep on financing extensions out of the one issue. As it requires new funds from time to time, it has an actually existing market for the securities it wants to finance on. In case of default, the
bondholders occupy a better position in bar gaining on a reorganization than the bond holders of small properties not bound to gether in this way. That is to say, a railroad needs all its branches more than it needs any single one.
So far the discussion has assumed a cor poration expanding simply through an ex tension of its own enterprise. We have not touched on the possibility of expanding through joining in some way with an existing independent enterprise. The words "con solidation," "merger," and sometimes "com bination," are loosely used to indicate such an expansion without any discrimination as to the manner of joining. They may indicate one of two very different things: (1) physical merger, or (2) combination through stock ownership. That is, a corporation may ex tend either through acquiring title to the assets of another corporation or by acquiring all, or a controlling amount, of the stock of another corporation.
We shall leave for a little later considera tion the matter of creating a new corporation for the purpose of consolidating two or more existing corporate enterprises through taking over their assets, or combining them by stock ownership.
Provided the shareholders of one corpora tion act in a situation giving them the legal right, they can vote to sell the assets of their corporation to another corporation. Under such circumstances any of the methods of financing already indicated will serve to finance the acquisition of the new assets. If the selling corporation has bonds outstanding that are not to be retired before the merger, the purchasing company can assume them, just as an individual might purchase any property subject to a mortgage and assume the mortgage. When the purchasing com pany has an existing blanket mortgage, which is, say, a first mortgage, it will become a second mortgage on the new assets.
If legal difficulties prevent a physical merger, or other considerations make it un desirable, one corporation may combine with another through stock ownership. The finan dal problem then is: How shall one corpora tion acquire the stock of the other? Perhaps the stockholders of one corporation will take the shares of the other in payment for their own. They swap stock. Then the stock of the "combined" corporation goes into the treasury of the "combining" corporation, and the amount of "outstanding" stock of the "combining" corporation becomes so much larger. When this procedure is imprac ticable, the purchasing corporation may sell its own stock to raise funds for the purchase of the stock of the other corporation. Or it may acquire part by swapping and the rest by purchase.