Collateral bonds afford a means of financ ing the purchase of stock in another corpora tion. The purchasing corporation may bor row money on temporary loans to make the purchase, then fund the temporary loan into the permanent one of bonds, with the pur chased stock as collateral security. American railroad finance affords some rather notable examples of extension by this means.
The Atlantic Coast Line Railroad owns $30,000,000 of Louisville & Nashville Rail road stock out of the total issue of $59,917, 220, and has outstanding, secured on this stock, $35,000,000 Atlantic Coast Line Rail road, Louisville & Nashville collateral, 4s, October, 1952.
The Northern Pacific Railway and the Great Northern Railway are both obligors on the $215,227,000 of bonds known as the Chicago, Burlington & Quincy joint 4s, July, 1921, by means of which the two obligor roads own approximately 98 per cent of all the capital stock of the Chicago, Burlington & Quincy Railroad.
The Oregon Short Line Railroad has out standing $45,000,000 ($100,000,000, author ized) refunding 4s, December, 1929, secured on $108,000,000 Southern Pacific Company stock ($374,451,800 outstanding); also on $7,206,400 preferred and $10,255,400 com mon stock of the Baltimore & Ohio and $8,000,000 New York Central & Hudson River Railroad stock, besides $23,443,000 San Pedro, Los Angeles & Salt Lake 4s.
Remembering that the Union Pacific Rail road Company owns $27,350,700 out of $27,460,000 capital stock of the Oregon Short Line Railroad Company, recalling also that the Southern Pacific Company owns the $13,800,000 preferred stock and $67,274,200 of the $67,275,500 common stock of the Cen tral Pacific Railway Company by means of $30,618,500 Southern Company, Cen tral Pacific stock collateral 4s, 1949, we can begin to get an idea of how useful some finan cial organizers have found this stock collat eral bond device in acquiring control of and combining properties.
Rock Island furnishes the standard model of pyramiding in this way to acquire control of large properties with a relatively small amount of capital.
One corporation hardly combines with an other unless the other owns all the stock, ex cept directors' qualifying shares. In a looser sense the acquisition by one corporation of a majority of the stock of another may be con sidered a combination, possibly the ownership of less than a majority, if enough to give con trol on the principles already discussed, may be so called. From that point the ownership by one corporation of stock in another grades off through all the degrees of intercorporate relationship, till it may become so small as just to indicate a sense of friendliness.
Financial plans suggested so far for expan sion have not contemplated the creation of new corporations except as subsidiaries. In corporating a new company, to which two or more existing corporations become the sub sidiaries, will accomplish any of the results of combination already spoken of. It should be borne in mind that if one corporation acquires absolute control of another through owning all the capital stock of the other, the owning or principal corporation can at will turn the combination by stock ownership into a physical merger or consolidation by taking the necessary legal steps.
A new corporation can combine two or more others with itself through any of the de vices already spoken of, as swapping its stock for the stock of the others, or acquiring the stock of the others through the issue of col lateral bonds. The United States Steel Cor poration was, as everyone knows, a new cor poration formed to combine a number of others. Most of the big consolidations of the past two decades were effected in this way.
Long-term leases afford another simple form of combination. Railroad finance espe cially takes frequent advantage of them. They are applicable, however, to combinations of industrial enterprises and are sometimes used for that purpose.
Most commonly the transaction takes the form of the shareholders of one corporation voting to lease its property to another corpor ation in return for the other's agreement to pay a rental equal to a certain percentage on the stock of the lessor company. Ordinarily the lessee company directly guarantees the payment of a stipulated dividend on the stock of the lessor, which thereupon sells in the market as guaranteed stock. If the lease is for a long term, as ninety-nine or nine hun dred and ninety-nine years, the combination on its face does not differ very much in results from a physical merger financed by bonds secured on the new assets. In the case of the lease, if the lessee corporation fails to pay the guaranteed dividend on the lessor's stock, the shareholders of the lessor corporation can take back their property. Likewise in the case of the physical merger, the purchasers of the bonds secured on the assets of the merged corporation can take the property on any failure of the purchasing corporation to pay interest. There is one important difference: A receiver of the lessee corporation, generally speaking, can repudiate the lease, but a re ceiver of a corporation which has issued bonds to pay for new assets cannot repudiate the bonds.