SYNDICATES: JOINT ACCOUNTS AND UNDERWRITINGS corporation requires at one time an amount of financing too great for the bank ing house which has undertaken to supply the corporation's need for capital, or to which the corporation is applying, to supply alone, the banking house seeks cooperation. How great the amount must be for the bank ing house to seek aid depends, of course, on the particular house and its "placing power"; that is, its ability to distribute securities and lodge them in the hands of investing financial institutions or individuals. With a particular house the amount may also vary from time to time. It will depend on the other commitments of the house at the time, its opinion of the probable course of the mar ket, and, in general, all the considerations which enter into a determination of the amount of risk it is willing to assume at a given moment.
Such cooperation in the sale of securities takes the form of joint accounts and under writings. Though these two business meth ods — joint account and underwriting trans actions — differ in degree rather than in kind, they differ enough to make the two terms desirable. Joint accounts are more common than underwritings. Though an underwriting may not follow a joint account, ordinarily a joint account precedes an underwriting. Some times an underwriting transaction is entered into without any joint-account transaction preceding it. A description of the two trans actions will make the situation clearer than any amount of preliminary general statement.
Let us assume that a banking house has committed itself to purchase, or learned that it can purchase, an issue of corporation bonds. The transaction is larger than at the moment it cares to undertake to handle entirely on its own account and it seeks the assistance of several other banking houses. Ordinarily the house is in the position of extending an invi tation rather than of asking a favor. It has the business in hand. Though it has done part of the work already, it will not stand in any better position with regard to the profits than the other houses which cooperate.
Each house invited to cooperate either states that it is not in a position to do so, or that for some other reason it does not care to, or else indicates how large a participa tion it wishes to take. The word "partici pation" is the technical term for the share in the transaction that each house takes. Profits are divided and losses shared in pro portion to the size of the participation.
We will assume an issue of $5,000,000, and that the house of Brown & Company regu larly does the financing for the issuing cor poration, or for some other reason is in a position to purchase this particular issue from the corporation. Of the several houses Brown & Company invite to participate in the purchase and sale of the securities, Jones & Company, Smith & Company and Robin son & Company decide to join in the under taking. It is decided that Brown & Com pany shall keep a participation of $2,000,000; Jones & Company to take a participation of $1,500,000; Smith & Company, a parti cipation of $1,000,000; Robinson & Com pany, a participation of $500,000. The num ber and amounts of the participations may vary to almost any extent. Our supposititious case, however, may be taken as fairly repre sentative.
Assume that Brown & Company have agreed to pay the corporation 95.50 for the bonds. We will assume also that the situa tion demands that the corporation receive all the money in one payment. This, of course, would be the case in a refunding operation. If the corporation had been financing on short-term securities in anticipation of a better market and had, say, $4,500,000 of such "notes" about to mature, it would re quire the cash in order to meet the maturity. Let us suppose also that the corporation needs some cash for the extension or im provement of its plant or line. The sale of $5,000,000 bonds at 95.50 will meet the pay ment of the $4,500,000 of notes that are fall ing due and will provide in addition the esti mated requirement of $225,000 of cash.