(b) The basis of consolidation is fixed by the promoter, after conference with the leading interests to be combined, this basis laying down a general plan for determining the value of the various kinds of as sets, and of paying for same in cash or securities of the holding company.
The first plan is used only where the feeling be tween the competing interests is extremely bitter and competition is relentless and unfair. In such cases, it is difficult to lay down any mutually satis factory basis of valuation, or even to get together a committee that will work in harmony to determine such a basis. Furthermore, the promoters realize that under such conditions profits have been unduly depressed by relentless competition, many are anxious to sell, and controlling interests may be purchased thru individual negotiations at low prices. This af fords 'the promoters opportunity for a greater profit than is possible when the owners of the various plants know how the holding company's securities are being distributed.
The second plan is more often used, and is perhaps more fair than the first. It requires a certain amount of cooperation or friendly negotiation between repre sentatives of competing companies and a great deal of confidence in those who are handling the promo tion. Sometimes a promotion is begun upon the first plan and finished upon the second. The second plan illustrates better than the first the true basis of con solidation, in which an attempt is made to apportion fairly the securities of the holding company to the interests being combined upon the basis of actual assets bought.
7. Investigation by the promoter.—The promoter is interested in ascertaining the actual value of the various companies which he is attempting to combine. This value is expressed mainly in the earning power. The earnings depend upon two factors, the physical properties of the companies and the efficiency of their management. Good-will is nothing but the capital ized value of past successful management.
The promoter first approaches those who control each company for a statement of the assets and liabili ties of the concern, and the income statements for a number of years back. It is particularly important that the growth in actual cash dividends be compared with the growth in gross sales, plant assets and capi talization. If the capitalization and outstanding ob ligations of the company have increased as rapidly as its business, it is probable that very little has been reinvested in the business out of profits. If cash dividends have grown faster than gross sales, with business increasing, a reduced cost of production and increasing efficiency of operation are indicated. If,
in connection with this latter condition, the increased plant capacity has been made out of earnings, in ad dition to cash dividends, it is apparent that the com pany is highly successful in competition and will make a valuable member of the combine. This merely in dicates the nature of the preliminary considerations to be investigated.
Unless a basis of payment for the various classes of assets has been agreed upon by those in control of the competing companies, it becomes necessary for the promoter to obtain an option upon the controlling capital stock in each, in order that no one or more of the companies may withdraw when the final basis of consolidation becomes known. When the various companies are dealt with independently, these options are almost always sought by the promoter. The price named in the option is the result of a bargain arrived at between the promoter and those who control the company, and is usually based upon some such pre liminary statement and analysis as that above indi cated. Not until the basis of consolidation has be come known, and the option definitely accepted by the promoters, will the plant owners permit outside appraisers or certified accountants to examine their affairs. This explains why many promotions are undertaken upon the first basis and are finished upon the second. The promoter, with his options, becomes all powerful and possesses absolute control of the situation, provided he has the necessary financial backing to take up the options.
With these options in hand, the promoter's next step is to draw the parties together in conference, and, by showing them that they will fare better under the second plan, to get them to agree upon a mutual basis of consolidation by which they take securities instead of cash for their properties. If the promoter avails himself of the right to purchase the various plants upon option, he will require a great deal of cash. By converting the combination from the option basis to the mutual valuation basis, to be settled in stocks and bonds of the holding company, less cash will be re quired, and those who have been previously associated with the business will be actively retained in it. If a basis of consolidation has been agreed upon which calls for a valuation of assets, the appraisers and ex pert accountants are next called in to make detailed reports and to complete the investigation which is necessary to determine the price to be paid for each plant.