PROMOTING CONSOLIDATIONS 1. Economic advantages of consolidation.—Com petitors in any given line of business frequently find it advantageous to consolidate their interests for the purpose of effecting economies of production or distribution, or to control the market. The prin cipal economies of consolidation may be summarized as follows: 1. Price control and the elimination of competition 2. Elimination of cross-freights 3. Elimination of duplicated advertising and sell ing expense 4. Stronger position in dealing with organized labor 5. Saving by large-scale purchase of materials and supplies 6. Saving by concentrating office and executive work 7. Saving in costs by the specialization and inte gration of production 8. Saving due to a general use of patents and special processes 9. The standardization of products.
For a full explanation of these economies of com bination, and of the history and nature of the various types of organization, reference is made to the Mod ern Business Text on "Organization and Control." Discussion of the taxation and regulation of corpora tions by the government and of their effects upon the formation of consolidations is omitted also from this book because of the special treatment given to this subject in the Text on "Business and the Govern ment." The object of this chapter is to present the financial considerations which determine the capital ization of combinations and the methods of promot ing them.
2. Methods of consolidation.—Competition be tween independent companies may be eliminated by: 1. Pooling their products or markets 2. Voting trustees holding controlling interests 3. Merger, thru the purchase of physical assets of one or more companies by another, or thru the purchase by one of the capital stock of others 4. The holding company 5. The fixing of prices or trade customs by gentle men's agreement, usually thru the medium of the trade association.
Pools and trusts, in so far as they restrain trade or tend toward monopoly, have been long since declared illegal. The merger of assets, and the control of one
company by another thru the purchase of outstand ing capital stock, are processes possessing cumber some restrictions. It often becomes necessary to secure an amendment to the charter, or the consent of a large majority of the stockholders, before such physical mergers may be effected. The financing of a merger is frequently difficult, because of the mutual jealousies and distrusts which accompany negotia tions between competitors. Frequently the stock holders of the purchased company will not take the se curities of the purchasing company, which necessitates the sale of stock in the open market under adverse circumstances. Individual producing companies are seldom large enough to swallow competitors whole in this manner, and even when they are, the process is necessarily difficult and gradual. Mergers are, there fore, infrequent as a method of combination.
The holding company, as we shall see, overcomes most of these objections and enables large combina tions to be effected with comparative ease, especially when the competing interests favor consolidation. The decisions of the Federal Court in the suits against the Standard Oil Company and the American To bacco Company, however, struck directly at the holding company as an instrument of combination. When the purpose of the holding company is directly to restrain trade, establish monopoly, or substantially impair competition, as is undoubtedly the case in many instances, there is great doubt as to its legality under present Federal and state laws, altho the laws of 1914 concerning trusts and establishing the Federal Trade Commission are not retroactive. For this rea son, many competing companies avoid the semblance of combination and yet endeavor to obtain some of its benefits thru the formation of trade associations. These have no binding effect beyond the common un derstanding and action of members.