For the same reason he didn’t want to borrow money. We were building factories and churning out rental machines that paid us back only after several years. So the business required an awful lot of financing. Dad liked the idea of growth, but he hated debt. Having lived through several depressions, he felt you should always have enough liquid assets to pay any debt that was called. In 1950 we owed eighty-five million dollars—not a lot considering we only had to pay 2.5 percent interest and we could offset it with the steady income from our rental business. But Dad harped on that debt in meetings. “I cannot get that eighty-five-million-dollar debt out of my mind,” he said. “It is there all the time. It’s something which cannot be laughed off. Every one of us must think about it all the time.”
Dad’s idea for financing IBM’s growth was to plow profits back into the business. That was not easy to do, because he also believed in paying substantial dividends to IBM’s shareholders. For years Dad relied on smart accounting to get around this dilemma. Instead of paying dividends in actual money, he paid in stock, so that if you held one hundred shares, you might get another five shares at the end of the year. Meanwhile Dad would have his accountants put the newly minted stock on IBM’s balance sheet not at its market value, which was something like $200 a share, but at a nominal value of only five dollars. That way it only took a small fraction of the profits to balance it out.
This was a neat maneuver, and our earnings were growing so fast that the stockholder was at no risk, but it made authorities at the New York Stock Exchange nervous. There was nothing to stop a badly managed company unlike IBM from using new shares to disguise the fact that it lacked the profits to pay a dividend. So Emil Schram, the head of the stock exchange, started a crackdown. He made a rule that stock issued as a dividend had to be accounted for at its full market value.
Dad never accepted that. Every spring, when the time came to declare the annual dividend, he’d hitch up his belt and say, “Well, I’ve got to go down to Wall Street and straighten out Emil Schram on this silly accounting business.” Around 1949 he took me with him. “If you’d like to come along, all right,” he said, “but keep your mouth shut.”
When we got down there he said, “Now, Emil, I want to show you the record of the business for the last year.” Schram was a big hefty guy and he’d try to stand up to Dad, but for some reason Dad could always snow him. Schram would say, “I don’t see how I can keep letting you do this. I’ll have to let other companies do it.”
“My company is not like other companies! Just look at our record!”
Finally Schram would let him have his way for another year. In 1951, Schram retired and the stock exchange got a new chief named Keith Funston, the former president of Trinity College in Hartford, Connecticut. Funston knew me slightly from a business luncheon the year before, and he called me up and said, “My people have told me about your father and his stock dividend. I’ve really gone into this, spent several hours on it, and we cannot let your father do it anymore. So please prevent him from coming down here. I’d hate to start out in New York by having a fight with one of the most respected businessmen in town.”
I told Dad, who said, “That’s preposterous! Preposterous!” For once I played it fairly cleverly by not saying anything. I went back to him a second time on it, and a third. Finally he said, “All right, you go down and make the best deal you can.” After that he was always poor-mouthing Keith Funston. He’d say, “You know that fellow Funston. He’s not quite right. He doesn’t understand finance.” But I liked Funston for his grit, and after Dad died I asked him to join the IBM board.
We needed to borrow because even if Dad had succeeded in putting every penny of profit back into the business, it wouldn’t have been enough. Everybody at IBM knew it. If T.J. had been more tolerant of debt, things would have gone very smoothly. But instead I had Williams and LaMotte and everybody else coming to me and saying, “Look here, your father doesn’t want to borrow any more and we need the money.”
Nobody wanted to tackle him, so I had to. I’d go to him and Dad would say, “The only reason we need to borrow is that you men are spending in a very careless way.” I had a devil of a time until finally I hit upon the perfect argument. I’d say, “All right, Dad, we don’t have to borrow. But we’ll have to stop hiring salesmen because we’ve got all the orders we can fill right now.”
That would just kill him, because he’d been a salesman himself, and because he believed salesmen meant growth. He’d say, “Let me see those numbers again.” Then he’d order his secretary to make an appointment for us to go see the Prudential and borrow more.
The toughest issue Father and I ever faced was antitrust. The Truman administration was pretty hard on big business, with the Justice Department winning antimonopoly cases left and right. It broke Alcoa’s hold on the aluminum market in 1945, and then a few years later forced the United Shoe Machinery Corporation to diversify and to tolerate competition from foreign manufacturers. We knew that sooner or later the government would come after us. Our equipment was in the accounting department of virtually every major American company, and the government knew all about us because we were in every federal agency too. We charged premium rents for a premium service, and our growth and profits were astounding—year after year we were making about twenty-seven cents, pre-tax, on every dollar of revenue. Yet, as lucrative as the business was, we’d attracted very little competition, and we still held about 90 percent of the market for punch-card machines. To the Justice Department, all of this was proof that IBM was a monopoly. Right after the war they began investigating us and snooping around. Sometimes the investigation seemed to die down, but then we’d report another record year, or the Antitrust Division would win some other big case, and they’d be after us again.
Dad did not approach this problem in a good frame of mind. The terrible trauma of getting sentenced to jail for antitrust violations when he was at the Cash never really passed for Dad. Thirty-five years had gone by, but it was like a raw wound to his self-respect. He swore we would fight “to the bitter end.” Most entrepreneurs would sympathize with his point of view. IBM was a success not because we drove other people out of business, but because we had good products, superior salesmen, a lot of satisfied customers—including the federal government—and because we kept our energy concentrated on punch cards. Dad didn’t see how any of this could be bad. What was the law against building a great business? And if it wasn’t illegal, why was IBM being hounded? The thing Dad could never accept about monopoly law is that you don’t have to do anything wrong to be in the wrong. The Department of Justice was coming after us entirely because they didn’t think there was enough competition in our market.
Dad was sure of his ground. He took out full-page newspaper ads praising the free-enterprise system, and he told the government that we would cooperate fully because we had nothing to hide. He turned over thousands of pages of documents, and spent many hours in meetings with government lawyers, patiently explaining his business philosophy and IBM’s business practices. Once in a while the Justice Department would do something that drove him wild—such as the time they sent in agents posing as anti-espionage experts and went through our foreign-trade records. But Dad fully expected that the government would eventually see the light. Not only did he want them to desist—he wanted a full public exoneration of IBM. He told us executives in a meeting once: “If they are willing to acknowledge that we have not violated the laws, the very best thing they can do would be to make a statement to that effect, including a reference to our fair policy of giving good service to our users, and raises in pay and other benefits to our employees.… A statement of this kind would prove to the public that the Department of Justice, when it knows the facts, stands for justice.”
But the investigation ground on and finally Dad asked for an appointment with Attorney General Tom Clark. Dad thought we might persuade him to call off the attack before the thing went to court. Like many monopoly cases, this one really
came down to how you defined the market, and Dad gave me the job of presenting our definition. For the attorney general’s benefit I put up a big diagram that represented the accounting world as a pyramid.
The point was simple. If you defined the market as the entire world of business calculations, then we had lots of competition, and the huge bulk of the business belonged to the makers of ordinary pencils and paper. By comparison, IBM was very small. I gave a few government statistics to drive home our point: a congressional committee had estimated IBM was doing only about 16 percent of the accounting work in the U.S.; according to Commerce Department figures, we constituted only nine percent of the total man-hours of production workers in the “office and store machines” industry. Our own estimate—straight out of Dad’s head—was that IBM only did about two percent of all the numerical calculations in American business. “We aren’t a monopoly,” I told the attorney general. “In fact, we’ve barely scratched the surface.”
Dad pointed out that he’d turned down any number of chances to buy out the competition in other parts of the office-equipment pyramid. Over the years people had tried to sell him the patents for all sorts of machines. He’d had the chance to acquire Underwood Typewriter, Eckert-Mauchly Computer, and other companies. After John H. Patterson’s death in 1922, National Cash Register’s investment bankers proposed that Dad merge IBM with the Cash and run them both. Dad turned all of this down, and he told the attorney general that proved he was no monopolist.
Of course, to the Justice Department all this was beside the point. But it shows something important about my father’s thinking. As he once told my mother, “I’m no genius. I’m smart in spots—but I stay around those spots.” He was looking at other products and companies all the time, yet he remained convinced that the greatest potential was in punch cards. He liked to quote a saying that summed up his philosophy: “Shoemaker, stick to your last.” Without his devotion to punch cards, IBM would have lost its focus; it might have become a hodgepodge conglomerate like Remington Rand. Sometimes Dad stuck to his last a little too closely—we came close to missing the computer business, for example, and in 1941, Dad turned down the chance to buy the patents for xerography. The inventor Chester Carlson came over from Queens and offered them to Dad before founding the company that eventually became Xerox. That was the biggest opportunity my old man ever missed.
The attorney general was not persuaded by our pyramid, and I couldn’t blame him because I wasn’t convinced myself. Probably the only person in the room who fully believed our argument was Dad. That’s because he was the only one with the vision to see that pyramid as one big, open market. He really thought punch-card accounting had potential that far-reaching. He would have told you that accounting machines would someday take business away from the pencil—just as personal computers do today. But Tom Clark didn’t see it that way. He listened, and then he simply said, “We think punch-card machines are a separate industry.” Of course, we did monopolize there.
If Dad had been reasonable on the subject, we could have settled the matter then. The Justice Department thought we needed competition, but they weren’t asking for anything drastic, like breaking IBM up. They thought it would be sufficient if we simply loosened our hold on the market—by granting licenses to other people to manufacture under some of our patents, and by putting up our machines for sale as well as rental. The natural forces of competition would then do the rest. This would mean some complicated changes in our business, but I didn’t think it would hurt us as badly as fighting the case in court might. Since the 1930s the government had won 90 percent of its antitrust cases, and if we fought and lost, the court might well take the company apart. But when I proposed to Dad that we settle the case, he was adamant. To him a settlement was the same as an admission of guilt.
Our lawyers only made matters worse. The partners in IBM’s usual law firm knew we ought to settle—they were the ones who initially convinced me of it—but they were not as aggressive with Dad as I thought they should have been. It was very hard to tell my father he was wrong. He was so exercised by antitrust that he’d latch onto anybody who agreed with his position. He hired an additional lawyer in Washington, named Joseph Keenan, to help negotiate with the Justice Department. Keenan was a retired federal judge, but he was a wormy guy, a fixer. He told Dad, “These things can always be handled, Mr. Watson,” and sent a fantastic bill. But the investigation kept marching ahead. Around 1950, to my great relief, Dad brought in a third lawyer. This was Judge Robert Patterson, who had been Truman’s first secretary of war and was a great man. The minute Patterson came in, he told Father there was no fixing this kind of case, and that Keenan had to go.
Dad put Patterson on our board, and I had high hopes that he would be able to make Dad see the light. While Dad was in Europe in 1950, Patterson went over to spend time with him and I asked him if he’d talk to Dad about settling the case. He spent half the summer with Dad. But I didn’t hear anything, and when Patterson finally came back, I took him to lunch. “Well, did you get Dad to come around?” I said.
“I’ll tell you the honest-to-God truth,” he said. “I didn’t.”
I was indignant. “Are you kidding? You were over there six weeks! What did you do?”
“Tom,” he said, “it’s pretty doggone hard to sway your father when he doesn’t want to be swayed.” I understood that, but I’d been hoping Patterson could wash that particular piece of dirty laundry for me. Maybe Patterson could eventually have gotten him to change his mind, but he never had the chance. The Justice Department filed its suit against IBM on January 21, 1952. The following day, Patterson died in a plane crash.
Dad and I were so addicted to fighting that we even managed to make a struggle out of my promotion to president of IBM. By 1950, Al Williams and I were essentially running the company day-to-day, with Dad tuning in and out to check on us or make a major decision while spending most of his time working out the kinks in World Trade. George Phillips was still in between us and my father, and the arrangement still wasn’t working well. Williams and I would get all set to do something. We’d tell Phillips and he’d say to go ahead. But then he’d talk to Dad, who’d say, “That’s the most ridiculous thing I ever heard!” And old Phillips would reef his sails and turn round and round. I never really blamed Phillips; he was totally loyal to Dad, and everybody needs a few people like that. But by the spring of 1951, as I was pressing to get the Defense Calculator underway, it happened once too often. I don’t remember what the issue was, but I stormed into Dad’s office. “God damn it!” I said. “You’ve got your secretary as the president of this company. He’ll agree to something I want to do, then talk to you, and reverse himself!” My father sent me out to the anteroom where he took his naps. Then he called Phillips in. Some mumbo-jumbo went on in there, and then he called me back in. They both turned toward me and Dad said, “We’ve decided to make you president.” I’d expected to keep fighting, and Dad could see he’d knocked me speechless. “What’s the matter?” he said. “Don’t you want the job?”
I wanted to feel that he considered my succession to the presidency a major victory of his life, along with his winning of my mother and the record he had made at IBM over so many years. Instead he did it as though it were a way to prevent another argument. I felt crushed. Dad seemed alienated too, and left on a business trip without saying another word to me or even writing a note. Instead he had Phillips send a letter confirming our conversation. All the same, Dad went through with the promotion, setting things up so that I would take over as president in January 1952. Meanwhile Phillips got a raise and a promotion to the new job of vice chairman—where Dad continued to use him as a buffer. I had more autonomy than before, but I still had to go through Phillips on important matters of finance and the like, and Dad still used him to second-guess me.
On the day before my official promotion, hoping that becoming president would somehow make my relationship with Dad smoother and happier, I wrote a letter to tha
nk him and to try to set a new tone.
Dear Dad,
I am deeply grateful that you are doing what you are doing tomorrow. I love my work and the company but in addition, I believe that through this move your life can be made far far pleasanter. You are and always will be Mr. IBM to all of us and the advice and counsel you have given me has been responsible for 90 percent of my present qualifications. I would hope that you would be willing to remain as IBM’s chief executive for years to come giving Mr. Phillips and me your ideas on the policies and top decisions of the company and perhaps leaving some of the dirty details to us.
I share your belief that this company can continue to grow rapidly. My incentive is great—salary—stock, etc but without either, I would still love my job as long as I had a living because IBM is your company and I am your son.…
Father, Son & Co. Page 25
