To make the discussion complete, we need to consider a type of holding company some what different from the ordinary holding company formed for the purpose of com bination. Usually the companies taken with an industrial consolidation are competitors. That is so from the very nature of the case. Any two or more concerns making the same kind of goods must to some extent be in com petition. Companies taken into a railroad consolidation ordinarily are roads that lead into each other's lines in such a way as to form an extended system. In fact, so far as interstate lines are concerned the federal law prohibits a complete consolidation of any other kind. There is a class of companies, however, which unite concerns that are not physically connected in any way, and cannot from the nature of their business be com petitors; at least, they cannot be in selling, though perhaps they might be in buying. One or two examples will explain the situa tion better than any amount of further gen eral statement.
The American Light and Traction Com pany has outstanding $11,146,700 common and $14,236,200 6 per cent cumulative pre ferred stock. This company owns at least 97 per cent of the stock of the following con cerns: Milwaukee Gas Light Company; De troit City Gas Company; Grand Rapids Gas Light Company; Madison Wisconsin Gas and Electric Company; St. Joseph Gas Company; St. Paul Gas Light Company; Binghampton Gas Works; Consolidated Gas Company, Long Branch, New Jersey; Muskegon Trac, tion and Lighting Company; St. Croix Power Company of Somerset, Wisconsin; Southern Light and Traction Company.
The North American Company, with $29,793,300 capital stock outstanding, con trols the Milwaukee Electric Railway and Light Company; Milwaukee Light, Heat and Traction Company; Milwaukee Central Heating Company; Racine Gas Light Com pany; Kenosha Gas and Electric Company; Watertown, Wisconsin, Gas and Electric Company; Detroit Edison Company; Union Light and Power Company, St. Louis; St. Louis County Gas Company; Suburban Electric Light and Power Company, St. Louis; United Railways Company of St.
Louis; Mississippi River Power Distributing Company; West Kentucky Coal Company.
Such concerns as the Electric Bond and Share Company present a type still further away from the holding company for the ordin ary form of consolidation. They are really financing concerns, and perhaps look to do ing more thoroughly from the beginning, with subsidiary companies in the construction stage, what companies like the American Light and Traction and the North American have done with companies already estab lished. The Electric Bond and Share Com pany and similar organizations put out gen eral issues of collateral bonds secured on the first mortgage bonds of new traction, elec tric lighting, or other public utility concerns.
The issuing companies reserve the right to substitute collateral, so that, whenever the affairs of a subsidiary company warrant, they can take out from under the trust deed the securities of that particular corporation and put them on the market. When they do that they have to return other collateral of a re quired standard.
Though this principle has been applied so far only to public service corporations, no thing in the idea prevents it from being ap plied to industrial undertakings. Only the financing, generally speaking, of industrials is not as well organized as the financing of pub lic utilities. As we have seen all along, the railroads present the most developed and most complex forms of financing. Likewise the organization for financing railroads has developed further than the organization for financing the public utilities, and that in turn further than the organization for financing industrials.
Though somewhat aside from corporation finance in any strict sense, the practice of financing real estate by means of collateral security-issues presents a matter of interest. Such issues follow two general forms. In one a real estate development company issues its own general obligation secured on the equity of redemption of specific real estate. That is, the company finances its developments, so far as it can, on regular real estate mortgages; then finances the equity by the issue of its ob ligations secured on the equities of a number of properties against each of which a specific first mortgage is outstanding. Such develop ment companies may vary this general plan in many ways.
Mortgage guarantee companies and simi lar institutions issue the other type of real estate collateral securities. They simply place a number of real estate first mortgages as lateral under an issue of their bonds. Since the collateral mortgages do not all fall due at the same time, the issuing company must reserve the right of substitution. This is not a matter of corporation finance at all, but simply a device for splitting-up real estate mortgage securities into uniform and rela tively small amounts to fit the pocket-book of the small investor who likes that kind of se curity. The issuing company makes its profit out of the difference between the rate of inter est the mortgages pay and the interest the collateral bonds bear. In return it adds its own obligation to the obligations of the mort gagors, and further lessens risk by the distribu tion of security.