Acquisitions lured car buyers -- but when sales fell, bankers swarmed
Durant rode the boom-to-bust cycle twice.
By 1910 he had acquired either full or majority control of almost two dozen automakers and parts suppliers. It was an approach that contained both the catalyst for GM's success and the seeds of Durant's undoing.
His rationale was simple: He hedged his bets by making acquisitions across the industry. As he explained later, "I was for getting every kind of car in sight, playing it safe all along the line."
Hits and misses
Sometimes Durant struck gold, as with Cadillac and AC Spark Plug. More often, though, he struck out. For every winner he added, there were more money-losing propositions that burned through cash as fast as the few profitable companies could earn it.
One company, Heany Lamp, cost $7 million in cash and securities — almost $150 million if purchased today — but proved worthless when it was discovered that its patent for an automotive electric lamp had been filed falsely.
The Heany Lamp fiasco ultimately proved more costly than the eventual write-down of its investment. It reinforced the opinion of Wall Street and East Coast bankers that Durant was out of control and had to be stopped.
Durant was safe as long as increasing sales kept generating the cash he needed to stay afloat. When the car market slumped in the spring of 1910, it gave the bankers leverage to put an end to Durant's exuberance.
GM began hemorrhaging money. It needed $200,000 every two weeks just to make its payroll; Buick alone owed almost $8 million. Durant needed money — a lot — and soon. After being rejected by every Midwest bank he approached, Durant had to seek out the East Coast bankers he had hoped to avoid.
The terms extracted were harsh. The bankers lent $15 million, secured by GM property and assets, for five years at 6 percent interest. From that, GM received $12.8 million in cash, while the bankers issued themselves a "bonus" of $6 million in GM stock.
Durant estimated that the bankers' commission totaled $9.35 million in cash and securities. Last, but most important to the bankers, management would be conducted by a five-man directorate. Durant would be a member, but no longer in charge.
Determined to regain control of GM, Durant did what he knew best: He started another car company. Teaming up with former Buick racing driver Louis Chevrolet, Durant established Chevrolet Motor Car Co. in 1911. By 1915, sales had reached 20,000 cars, and annual earnings exceeded $1.3 million. The groundwork for Durant's return was established.
Ironically, his next step — surreptitiously accumulating GM stock — was made easier with the bankers in charge. The new board, which was more interested in cutting costs than building value, had refused to pay a dividend since it took over. The resulting sluggish stock price made it easy for Durant and his associates to add shares cheaply.
Showdown in NY
On Sept. 16, 1915, directors met in New York. William Pelfrey, author of Billy, Alfred, and General Motors, described what happened as "a boardroom coup like none before or since."
Durant had accumulated about 40 percent of GM's common stock, and he informed the board: "Gentlemen, I now control this company." He was challenged to prove his majority. A compromise board, which included Pierre DuPont and John Raskob, was nominated and declared a 50 percent stock dividend. Durant returned to Flint undaunted, determined to prove his majority holding.
With $100 million of Chevrolet stock, he offered to exchange five shares for every one of GM. By May 1916, Durant reported at GM's board meeting that he controlled 54.5 percent of its outstanding shares.
"It was as if Jonah had swallowed the whale," an observer noted.
On June 1, 1916, Durant became president of General Motors. He continued where he left off in 1910 with his growth-by-acquisition strategy. Perhaps only Durant was surprised when it led to the same result in 1920.