We will assume that the original syndicate bought the bonds for 95.50 as before, and we will also assume that it sells them to this second syndicate at an advance of one point, or at 96.50. Again warning should be given that any figures stated in the discussion must not be taken as typical. In practice the fig ures vary widely and in the discussion specific figures are stated merely for the sake of clear ness. In organizing the second syndicate the members of the original group, in becoming members of the second, must clearly state that they are making this profit. Since the relationship of parties to a joint adventure is of a fiduciary nature, they must exercise the utmost good faith toward each other. One may not make a secret profit. So the state ment of the profit of the original account regularly appears in the underwriting syn dicate agreement. Members of the original account could not well avoid, if they would, making substantial subscriptions to the un derwriting. They must do this to show their belief in their own undertaking. Though they might have the fullest confidence that the undertaking by the second syndicate would result in all the anticipated profits, they might, for perfectly good and proper reasons, prefer to stay out of the underwriting. They might be able to employ their capital in some matter that promised better returns than those to be anticipated from the most suc cessful result of the underwriting. Naturally, however, the people who are invited to sub scribe would be suspicious of the proposal if the people who are extending the invitation failed to be among those subscribing.
Although joint-account agreements are ordinarily informal, — just an exchange of letters, as already indicated, — underwriting agreements, on the other hand, are ordinarily formal. The number of subscribers makes the full formal statement more important for the avoidance of misunderstandings. Generally the houses organizing the underwriting syndi cate hand, or mail, to those whom they are inviting in, a copy of the subscription agree ment, and each subscriber signs a separate copy. It will not do, in discussing syndicates, or indeed almost any other topic in the sub ject of "Corporation Finance," to speak in general terms without some express reserva tion. Sometimes underwritings of very large amounts, involving a considerable number of subscribers, are the most informal. When it becomes known that a syndicate is about to purchase a large issue of securities, repre sentatives of other houses, which enjoy busi ness relations with one or more of the pur chasing houses, are likely to telephone and ask that they be put down for a certain amount. This subscription will generally be acknowledged by mail, but the letter will not state any of the terms of the agreement other than naming the subscription price.
If the subscriptions received total more than the amount of the whole issue, some or all of the subscribers will be scaled down in the "allotment." By " allotment " is meant the formal acceptance of the subscription. The subscription blanks which have been sent out contain a stipulation reserving the right to reject all or any part of the subscription. In legal terms sending out the application blanks is a mere bid for an offer; signing and sending them in constitutes the offer. Since the offer is for all or any part of the amount applied for, the allotment of less than the full amount constitutes an acceptance in accordance with the terms of the offer and completes the con tract.
In forming the underwriting syndicate the members of the original syndicate become managers of the second syndicate. Or it may be that only one of the members of the joint account, or first syndicate, becomes manager of the underwriting syndicate. The manager of the underwriting syndicate has much more power than the manager of the joint account. For one reason this is necessary because of the larger numbers of the second group. An expression of opinion cannot be had so read ily from so many people. The second syndi cate may have up to say two hundred sub scribers. Since the size of the issue makes the whole situation more difficult to handle, some central authority must have the power to act quickly. The group that formed the joint account presumably comprises houses with more capital and wider reach. They are more powerful houses and are in a position to im pose terms.
The power of the manager or managers of an underwriting syndicate often extends to making or changing the selling price, and in a general way the manager or managing group directs the policy of the business as well as takes care of the details. As one of the cares of the position the manager will have the duty of protecting the market. Until the syndi cate has disposed of the entire issue, it is of course essential that no bonds should be offered for sale at less than the price at which the syndicate offers them. If sales in the general market are reported at a lower price the syndicate naturally cannot command the price it has set.
Since the syndicate sold in the first place at its price all the bonds that have been sold, one might well inquire who has any bonds of the issue to sell at a price. People often purchase bonds on a new offering in the belief that the particular bond at the price, with the particular issuing houses back of it, under the existing general conditions of the market, will be in such demand that the issue will all be purchased at once and the price in the general market will go up. When such people have purchased and have seen that the securities were not all sold at once on issuance, they know that their speculative hopes will not be realized promptly. Since they bought as a speculation and cannot make the immediate profit, they prefer to sell at once at such loss as may be necessary rather than keep their capital tied up and run the risk of further loss. So they promptly turn around and offer their bonds on the market. Such a throwing of securities back on the market makes one of the dangers of the syndicate transaction. Avoiding such a situation so far as possible, and taking care, of it when it does arise, comprises a large part of the strategy of any undertaking to market an issue of securities. When securities are offered at less than the syndicate price, the only thing the managers can do to protect the market is to buy in such securities. The man agers will usually try to trace the source of the selling and generally will succeed in the endeavor. They will make a mental note of who the seller is and when he wishes to pur chase securities of some future issue which is oversubscribed the managers will not favor him in allotting the bonds.