Heidinger knew his stock had become worthless only by virtue of the losses engineered by Watson to avoid taxes.
Heidinger fought back. He went directly to the Reich tax authorities, briefed them on IBM’s entire complex merger plans, and asked for a formal ruling on the company’s tax avoidance strategy. If Heidinger couldn’t get his $500, it would be costly for the parent company. Quickly, IBM learned it was very expensive to fight the feisty Heidinger.106
Tax officials proposed an assessment as high as a half million dollars. Protracted negotiations ensued with the tax boards. Streams of letters and cables crisscrossed the Atlantic. Numbers, from the ferocious to the moderate, bandied between IBM offices. Heidinger had positioned himself to “save the day” by negotiating the taxes down to a quarter of their proposed assessment. New York began to comprehend the process. IBM auditor Connolly at one point understated the predicament: “I should not be surprised if he [Heidinger] set up scares [with government officials] and talked them off for the sound of it.”107
Financial battling between Berlin and New York seemed endless. Heidinger continuously tried to extract bits of compensation and sometimes trivial sums of expense money. IBM would block him through its controllers, managers, and attorneys. Heidinger would then retaliate by aggressively “consulting” Reich bureaucrats, which invariably led to added costs. Connolly openly asked in one letter if Dehomag could just pursue its corporate business without Heidinger “running to the German government every time for approval.”108
One conflict came to a head at the June 10, 1934, Dehomag board meeting. Heidinger wanted IBM NY to pay his dividend taxes resulting from the merger. He also resented the highly detailed financial reports required each month by IBM auditors. Watson refused to pay Heidinger’s dividend taxes and his auditors would not relent on their micromanaging oversight. At the board meeting, Heidinger angrily threatened that if his view did not prevail, than Dehomag was no longer an independent German company, but a foreign-dominated firm. As such, he would notify authorities in Berlin. Dehomag would then be assessed an extra quarter-million in special taxes and “prohibited from using… the wordDeutsche “ in its name, since that term was reserved for Aryan businesses. Without the word Deutsche in Dehomag, he warned, government and commercial contracts would be lost. Minutes of the June 10 exchange were omitted from the meeting’s written record. Details, however, were summarized in a separate letter to New York.109
Ironically, when it came time to making capital investments, Heidinger took a completely opposite approach. In a memo asking IBM NY to undertake an expensive expansion of facilities, Heidinger asserted, “The management can merely submit proposals; the decision as to whether something should be done about it, is the responsibility of the owners.”110
Ultimately, IBM and Heidinger forged one battle-scarred compromise after another, howsoever transient. But no matter how insolent or disruptive Heidinger became, Watson refused to disengage from Dehomag’s lucrative partnership with Nazi Germany. In fact, Watson was determined to deploy as many lawyers, accountants, and managers as necessary—and personally visit Berlin as often as required—to make sure IBM received all the profit—frozen or not. The fight with Dehomag would continue—not to reign in its technologic alliance with the Third Reich, but rather to ensure that the profits continued and remained unshared.
WATSON KNEW he needed to stay close to developments in Germany. In 1934, he visited twice. The first was a brief stay in late June to oversee the final merger of four IBM subsidiaries into the new larger Dehomag, a transaction long delayed by negotiations with the tax authorities. In addition, a new management and stock participation contract was needed for Heidinger. Watson wanted to be on hand if any last-minute disputes arose with Heidinger.111
When Watson visited Berlin that June, the Reich’s forced sterilization program was just ramping up. Everywhere, Jewish misery was evident. Nazi Brown Shirts noisily blocked the doorways of Jewish-owned shops. Unemployed Jews were moving out of their homes. Signs declaring Jews “not wanted” were prominently posted outside stores and cafes. But Watson did not focus on the Nazi war against the Jews and other non-Aryans. He was concerned with IBM’s market victories in Germany and his war against any potential competition. IBM’s only possible rival was Powers.
Dehomag didn’t own the entire German market for punch cards—only 95 percent of it. Since the first days of Herman Hollerith’s census contracts at the start of the twentieth century, IBM and its predecessor companies had been dog-fighting the Powers Accounting Machine Company in the United States and indeed anywhere in the world Powers tried to do business.
James Powers was a Russian immigrant to America who had helped the U.S. Census Bureau break free of Hollerith’s monopoly in 1905 by developing a similar card sorter. As such, Powers and the Hollerith companies constantly jousted and litigated on patent rights. In 1914, while Watson’s criminal conviction for anti-trust was in appeal, a financially battered Powers, anxious to avoid further confrontations, simply asked Watson’s CTR to license its punch card technology. Without that license, Powers declared it would go out of business. Under the specter of federal charges, Watson ostentatiously agreed to license his competitor, Powers, but at an exorbitant 25 percent royalty. This would ensure that Powers would survive as a miniscule player in the punch card field, thus obviating federal charges of total monopoly. But the 25 percent royalty also meant that Powers’ machines were more expensive for customers and therefore profoundly less competitive. Besides, IBM would receive a good share of all of Powers’ revenues.112
After the government dropped its anti-trust case against Watson, he was less inclined to let Powers survive. Recalling a tactic from his NCR days, Watson litigated against Powers extensively for various forms of patent infringement, raided its key managers in America and abroad, and systematically pressured clients to switch to Hollerith systems.113
In Germany, Powers did enjoy some minor installations dating back to the 1920s primarily because it sold rather than leased its machines and had developed some highly specialized models. What’s more, some machines, even though old, were simply still functioning. Some was too many for Watson. Dehomag continued the IBM legacy of litigation by suing Powers in Germany. But this time, it was not for patent infringement. It was for not being sufficiently Aryan.
In the highly charged Nazi business environment, where certain words possessed special meaning, Powers was one of many firms that rushed to declare themselves “under German management.” But in reality, charged Heidinger in the court complaint, two Americans were managing the Powers firm. Even after the Powers board of directors ousted its two American managers, Heidinger claimed that the foreigners were nonetheless secretly controlling the company. All this, he argued, was designed by Powers “to facilitate marketing for its products” within the Third Reich, thereby competing unfairly with Dehomag through false advertising. Dehomag, on the other hand, was pure German and free from foreign influence, the complaint attested.114