To facilitate expression and speak in the ordinary language of the street, we may use the term "syndicate" to express either the joint account or the underwriting as a form of cooperation in the sale of securities. The syndicate must be prepared on the stipulated day to pay the corporation $4,775,000 and take delivery of the securities. After the negotiations for the purchase of the securi ties and the determination of the price, the requirement of making payment presents the first matter that must be settled in the formation of the joint account. Presumably, the banking houses forming the syndicate are not prepared to pay for the bonds out of their own capital, but must arrange for a loan in order to "take them up." Financing the purchase and holding of the bonds dur ing their sale is one of the most important parts of the whole transaction. It is called the bonds.
Since many details necessarily come up in the course of the transaction, and because it is important that some one have authority to act in these matters of detail, one mem ber of the syndicate must occupy the posi tion of "manager." Because Brown & Com pany were able to purchase the bonds and brought the other members of the syndicate into the transaction, they would naturally become syndicate manager in the particular transaction we are describing. As syndicate manager they might arrange a loan to carry the entire issue of bonds for the syndicate. The bank advancing the funds would take the bonds as collateral security for the loan. It would not, however, advance as a loan the entire amount the syndicate must pay for the bonds. Let us assume that this particu lar security is of such a character, is assured of a sufficiently good market, and has. such qualities as an investment that a bank would feel justified in lending 85 per cent of the purchase price. Then the bank will loan $4,058,750 on the security of the entire issue as collateral. The syndicate must pay $4, 750,000, or $716,250 more than the bank will loan, in order to take delivery of the bonds from the corporation when the time comes. This $716,250 the syndicate must supply from its own capital in order to swing the transaction.
Let us assume that the syndicate manager has undertaken to procure a loan or loans on the entire amount of bonds and that Brown is the particular individual of Brown & Company who is handling the matter. He will call on each of the other members of the syndicate to supply funds in proportion to their participation sufficient to make up the required $716,250.
Recapitulating, the several participations stand as follows: Brown & Company $2,000,000 Jones & Company 1,500,000 Smith & Company 1,000,000 Robinson & Company 500,000 For these $5,000,000 bonds the syndicate must pay the corporation $4,775,000. Brown & Company, the syndicate managers, are arranging a loan at the bank for 85 per cent of the purchase price, or a total of $4,058,750. This leaves $716,250 to be contributed by the syndicate members in proportion to their participations as follows: Brown & Company $286,500 Jones & Company 214,875 Smith & Company 143,250 Robinson & Company '71,625 $716,250 When the day comes for taking delivery of the bonds and paying the corporation for them, each of the members of the syndicate pays into the bank which is making the loan its proportional contribution as just stated.
According to instructions the corporation will deliver the bonds at the bank, accom panied with a draft for the $4,775,000 pur chase price, and the bank will make the pay ment with the loan of $4,058,750 which it is making to the syndicate, and the $716,250 the syndicate manager has deposited as the contribution of Brown & Company and the other members to make up the balance. This detailed description of the banking transac tion is not meant to indicate that the busi ness always follows exactly that form, but simply to state a form that it might follow and make clear the immediate sources of the money paid over to the corporation. By this method it is seen thatAhe bonds are "car ried" through a loan or kans arranged by the syndicate manager on behalf of the entire syndicate. Such a method of financing the payment for the bonds is called "undivided carrying." Following another method it might have been the agreement that each member of the syndicate should finance the payment, and take up the bonds, to the amount of its participation in the account. This method is called "divided carrying." If the account were arranged in this way, then each mem ber would arrange its own loan at its own bank or banks, and the corporation, under instructions, would deliver to it there bonds to the amount of its participation.
We will assume now that the method of carrying the bonds has been settled as either "undivided carrying," the syndicate mana ger arranging the loan to carry the entire issue, or as "divided carrying," by which each member arranges its own loan and carries its own participation. The origin of these terms is obvious enough. We will as sume also, as would probably be the case with an issue of this size, that the joint-ac count syndicate will not seek further coopera tion, by arranging an "underwriting" syn dicate, but will proceed to sell the bonds directly to investing financial institutions and to individual investors. The next thing to settle is the selling price. Of course this was determined essentially before the purchase price was decided on. When Brown & Com pany agreed to take the bonds at the price of 95.50, they had already come to a conclu sion as to the price at which the bonds could probably be sold. From the price at which they believed the bonds could be sold they deducted an amount which they considered would pay the expenses of the business, if the bonds sold as readily as it was thought they would, and leave what, all things con sidered, they would regard as a fair profit. In this way Brown & Company determined the price they were willing to pay for the bonds. If they had done something toward arranging the syndicate, or actually had ar ranged the syndicate before finally agreeing to purchase the bonds, the purchase price was determined in this way on consultation with the other syndicate members.