In the following article, it is proposed to deal with the prospectuses and formation of companies generally and the points to be noted in considering new investments.
'A company is formed for the purpose either of starting a new undertaking, or of acquiring and working one already in existence, and the prospectuses will of course differ very materially in the two cases.
Suppose the undertaking be a new one then the chief considerations are first, when ther there is a genuine want for such a and, secondly, whether the company, considering the directorate, capital and materials at its disposal, ix likely successfully to fill that want.' Where tectinical processes are involved in the new enter-Prise, it is extremely difficult for those who xre not experts to form any reliable opinion. Take " company formed to manufacture paper iv Shanghai. There is no question that any amount of cheap paper can be absorbed; the want is indefinite, it merely a question of prise. But the rice at which paper can be successfully made in Shanghai is a question for experts. Ie depends on the cost of the raw material, whether wood-pulp or fibre, the chemicals used in theprocessand theexpensesof mana-facture. The recently issued prospectus of the Shanghai Pulp and Paper Company, Limited, is praiseworthy in setting out in the greatest detail the figures on which the anticipations of the directors are based. The statements in the prospectus are to the point, and the whole essence of the thing, viz., the capital outlay of starting the manufactory and the annual income and expenditure, are Inid before the public in order that possible investors may form their own opinion as to whether the business is likely to be a success. The only fault that could be found is that the estimates aint at almost too great an exactness.
Tu the case of all new undertakings, the intending subscriber has to rely almost entirely on the individual and collective capacity of the Board of Directors. It must be assumed that they have gone far more thoroughly into the pros and cons than any ordinary subscriber can go, more especially if some of them have special knowledge in the business of the intended company. The statements they make in a prospectus must (so the luw says) be based not only on good faith, but also on proper enquiries. Considering how important a factor the directorate is to the public who are asked to subscribe, it is a pity the directors' share qualification is rarely mentioned in a prospectus. The public ought to know how far the Directors are hound to go into the concern with their own money, as in the cxso of new undertakings there is little but the Directors' anticipat tions to guide them, and it would he valuable to know how far those anticipate are hacked up by x monetary stake, The prospectuses of companies which are formed to take over an_ existing business involve different and far more complex considerations. For here we have to deal with the two great evils of joint stock companies—the promoter and over-capitalization. The profits to be made by company promotion, é.e., selling an existing concera to © company, Are so large that the majority of companies which have appeared of late years have had no other reason for their existence than the enrichment of vendors and promoters, The first point to notice in the prospectus will be the capital of the company, and the second the price to he paid for the concern, These two figures are usually obtained by a simple meticd. The price at which the ness is to be sold is determined by fixing the minimum amount of prospective dividend which will induce the public to subscribe, and capitalising on that. basis, For instance, say a prospective 7% will attract the public; then if the business has been earning Tls. 70,000 per annum, the capital would be put at tis. 1,000 000, and the public would be told that the average earnings of the undertaking have Been sufficient to extn at least 7% and that with an increase of capital much larger profits may be expected, etc. A small part of the capital has to be set aside xs working capital, the whole of the rest goes to the vendors.
This, it will be observed, is a different method from that pursued where " firm sells its business to another firm, and the parties are dealing at arm's length. In such a case the assets are purchased at a valuation, and good-will is either disregarded or taken at one or two yours! pure chase of the annual nvt income. © Lo arrive at how the price works out on a true business method in the case of company flotation, it is necessary to deduct the value of the assets us given in the prospects from the purchase price, and what remains over (astaily largo sum) must of course represent good-will. It is then coxy to form a very fair iden whether the price paid for good-will is or is not excess sive, The thing to remember is that in company flotation, there is no real bargaining between the vendors and the company. In common language the concern is "turned into" a company. The Directors are as a rule nominees of the vendors and promoters, and they put the purchase price and the capital of the company ut whatever figure the vendors think Bt to select.
With regard to the Directors and other officers of this company, it is of course of the utmost importance tat they should be reliable men, but in judging the prospectus there is much more to go on than their mere names and anticipations as in the caxe of m new concern, where these two considerations are paramount. In considering the business to be taken over, the assets and then the profits should be noticed. As to the assets, it is desirable
Text read from the printed page and cleaned; old type leaves the occasional error.