8. Basis of consolidation.—If the promoter pur chases the various plants upon option, there is no ba sis, except the arbitrary price agreed upon in each case. If, however, the owners submit to a valuation of their properties, as they usually do, it becomes necessary to adopt a definite basis for evaluating each class of asset and paying for it.
The promoter, in securing his option or obtaining mutual consent to a basis of consolidation, has used every means in his power to convince the competing companies of the desirability and necessity of com bining. To the stronger concerns, he pictures the great economies to be had in production, market con trol and the elimination of ruthless and often sense less competition. Each large stockholder is flattered by hints that the combine will need a big man of his caliber for president, treasurer, manager or purchas ing agent. The writer remembers one case in which there were six different men who expected to be president of the new combine, each, of course, keep ing it a secret from the others. As many more ex pected to be purchasing agent, a position which is frequently the best paying job in the combine. It was naturally much easier for the promoter to explain afterwards to the disappointed ones why his plans had miscarried than to lose their support beforehand.
To the weaker concerns, the promoter explains the tremendous strength of the new combine and the im possibility of any small concerns competing with it. Once it became apparent that terms had been made with Mr. Carnegie to sell his interests to the United States Steel Company, there was little difficulty in in ducing his competitors to enter. It is frequently necessary, as in this case, for the promoter to offer exceptionally strong inducements to the more power ful competitors and to make up the loss by penalizing the weaker ones. Those who are afraid, and yet feel the necessity of joining the combine, are naturally negotiating at a disadvantage.
It is customary, in arriving at a basis of payment, to take an actual appraisement, upon a uniform basis, of the physical assets, all differences of opinion being referred to a committee for adjustment. This com mittee is often dominated by the promoter. Tangible assets are usually settled for in cash, bonds or pre ferred stock of the holding company. Intangible assets, such as good-will, are usually paid for in com mon stock. The value of good-will is generally de termined by capitalizing over a period of years the average earning power of the company. Mr. Car negie, for instance, has said that any company is worth the replacement value of its physical assets, plus the profits, or minus the losses, of the three years' business just preceding.
It is customary for those who are selling to guar antee such items as accounts receivable, and for the holding company to withhold a portion of the pur chase price, in the form of securities, until all such guarantees and other contingent matters have been adjusted.
Usually the active managers of the various units are retained in the employ of the corporation. It is customary for the holding company, when the actual basis of combination has been determined, to buy in all the outstanding capital stock of the subsidiary corporations in exchange for the securities of the hold ing company.
9. Promoters' profits.—The promoters derive their profits in various ways. In a few cases, as in one of the earlier steel combines, the promoter is en.. gaged outright at a stipulated compensation, guar anteed by the various interests who desire to consoli date. This, however, is very rare, and the promoter usually gets his profits out of the preferred and com mon stock that remains after the owners of the in dividual companies have been paid at the agreed rate.