Looking at the matter from another stand point, a lessee corporation conceivably might take advantage of a lease to make the leased property relatively unimportant, but the shareholders of the lessor corporation, in event of a receivership of the lessee, would have no recourse except to their own property. On the other hand, holders of bonds issued to pay for the property of the merged corpora tion very likely would occupy.such a position with regard to the risk as to be the first to move for a receiver of the consolidated cor poration, and would have recourse to the earn ing power of all the assets to recover their interest.
Provided the shareholders of the corpora tion which it is desired to merge can and will authorize the lease, the financing problem, of course, becomes very simple. In fact there is none. The lessee does not have to provide any funds to put the transaction through. It assumes a larger obligation in expectation of a still larger income. Presumably the leased property is more valuable to the lessee, for one reason or another, than to the share holders of the lessor corporation. Whatever reasons would apply for a merger or consoli dation of any kind might apply for a com bination by lease. We have not undertaken to go into these reasons, but simply to indi cate how, when found desirable, the managers of the corporations concerned might carry it out.
We may examine several examples of guar anteed stock which sufficiently indicate the purpose and scope of this form of financ ing. The American Telegraph and Cable Company has $14,000,000 guaranteed stock outstanding. The property of the company is leased to the Western Union Telegraph Company for fifty years from May 12, 1882, at a rental of 5 per cent on .the stock. The lessee is to maintain and renew the cables and equipment. The line of the Boston & Albany Railroad extends from Boston, Mas sachusetts, to Albany, NewYork, and makes, with branches, a total of 304 miles. The cor poration has capital stock outstanding to the amount of $25,000,000, and has leased its property to the New York Central & Hudson River Railroad for ninety-nine years at a rental of guaranteed dividends of 8 per cent on the stock, organization expenses, interest on bonds, taxes, expenses of maintenance, etc. The Boston & Albany Railroad Com pany received $5,500,000 New York Central 31 per cent 100-year debentures to pay for certain property not included in the lease, the income from which yields about .77 per
cent additional per annum on the stock. Divi dends are paid quarterly at the following rates : 2 per cent in March, 21 per cent in June, 2 per cent in September, and 2 per cent in December.
The line of the Boston & Providence Rail road extends from Boston, Massachusetts, to Providence, Rhode Island, with branches, making a total of sixty-three miles. The property is leased to the Old Colony Railroad for ninety-nine years from April 1, 1888, at a rental of interest on bonds, dividends of 10 per cent per annum on the $4,000,000 stock, and $3000 per annum for organization ex penses. The Old Colony Railroad is leased to the New York, New Haven & Hartford Rail road for ninety-nine years from March 1, 1893, and the lessee assumes all liabilities. The Pittsburg, Fort Wayne & Chicago Rail.
way extends from Pittsburg, Pennsylvania, to Chicago, with a branch, a distance of 470 miles. The capital consists of $38,875,300 special improvement and $19,714,286 com mon stock. The special stock is subject to the common, and was issued to the Pennsyl vania Railroad for improvements. The pro perty is leased to the Pennsylvania Railroad in perpetuity from July 1, 1869, at a rental of interest and sinking-fund on bonds and 7 per cent per annum on both classes of stock. The lease was assigned to the Pennsylvania Com pany on the lessee's assuming all obligations of the lessor.
The rate of dividends guaranteed indicates the, valuation placed on the leased property. Though ordinarily it runs from 4 per cent to 8 per cent, it may, however, be almost any thing. For example the Maine Central Rail road guarantees 2 per cent on the $300,000 capital stock of the Rumford Falls & Range ley Lakes Railroad. The Maine Central Rail road also guarantees 2 per cent on the $4,392,538 capital stock of the Portland & Ogdensburg Railway, running from Portland, Maine, to Lunenburg, Vermont. These repre sent low points. Of course the lessee always guarantees interest on any bonds of the lessor. The Philadelphia & Reading Railway pays 12 per cent on the capital stock of the Philadelphia, Germantown & Norristown Railroad. The Delaware & Hudson Com pany pays a dividend of 64 per cent on the $345,360 Rome & Clinton Railroad stock. The old Metropolitan Street Railway Com pany of New York City guaranteed 16 per cent on the $1,000,000 capital stock of the Eighth Avenue Railroad.