The problem was that Heidinger earnestly wanted a profit shown so he could qualify for a bonus. Without a formal profit showing, Heidinger’s 10 per cent bonus would never materialize. Before the merger, Heidinger was accustomed to receiving a monthly bonus of RM 10,000. Under the new arrangement, IBM reaped huge earnings as royalties or other “fees,” but his income suddenly disappeared. Until the profits could again be declared, Heidinger demanded a monthly “loan” of RM 5,000 just to make living expenses.61
Only Watson could authorize it. He did agree, but kept Heidinger on a short leash. The loans would extend only until August 1935, at which time “the whole position will be reviewed again.”62
Upon learning of his temporary morsel, Heidinger, on March 3, 1935, shot off a saccharine thank you to IBM NY Vice President Otto Braitmayer. “It was indeed a great pleasure for me to receive… your kind letter of February 21 by which you allow me to receive from the Dehomag during the first eight months of this year a monthly advance of RM 5,000—instead of dividends which will be declared later on…. thank you very much for your kind thinking of me on occasion of my 60th birthday… which brings me nearly into your class of age.”63
But then an additional Reich regulation hit, this one completely undercutting windfall profits. New rules prohibited distributed profits in the form of dividends above 8 percent of a company’s original investment. Since Dehomag’s soaring profits were now vastly in excess of IBM’s original capitalization, the dividend cap applied. As it became increasingly difficult for IBM NY to extract monies from Germany, profits still remained undeclared. It seemed that no matter what was done, Dehomag’s growing business made money but profit was never declared.64
An IBM comptroller’s analysis conceded that by fiddling with losses, “It is obvious that Mr. Heidinger would draw about 40 percent of the total dividends which could be declared.” At the same time, the analysis added, IBM would only be able to receive 60 percent of what it was expecting.65
Finally, Heidinger caught on that IBM losses were just as valuable as profits. If he couldn’t get a bonus on profit—he demanded it on the losses. Ironically, IBM managers were unable to deny the logic. “Mr. Heidinger is justified to a certain extent,” conceded one internal memorandum, “in asking that the losses in the other divisions be taken into consideration… because… the surplus is reduced.”66
IBM agreed to give Heidinger a bonus on losses, but struggled to phrase the arrangement since German taxing authorities would never believe genuine losses could create a bonus. Finally, to assuage Heidinger, the company agreed to declare a phantom dividend first, pay Heidinger a 10 percent bonus on that amount, and then recast those same numbers as losses to avoid tax.67
But what should be done with the blocked funds? In July 1935, during a Dehomag board meeting Watson attended in Berlin, he directed that “the money should rather remain invested in the firm and be credited to the license account [royalties], as direct remittances are not possible.” Heidinger was offered extra incentives, such as insurance and a generous pension.68 The feisty German agreed, but that only postponed the next round of financial fisticuffs.
Meanwhile, to realize blocked profits, Watson channeled money into tangible assets. He expanded Dehomag’s Lichterfelde factory, retrofitted an old underutilized pre-merger facility in Sindelfingen outside Stuttgart, and installed additional card printing presses. The race was on to build those presses and expand factories, because shortly, the Reich would decree that German companies could no longer pay for any imports from America. The new rules prohibited such imports, by either cash or credit. Hence intra-company accounts could no longer be manipulated to create losses. Dehomag could no longer mask as a legitimate expense its own machinery shipped from one IBM company address to another. The German subsidiary would have to become completely self-sufficient.69
Rottke bragged to the Dehomag board chairman in New York that he had beat the new regulations because “I have still imported as much merchandise as ever possible” from IBM NY before the new regulations took effect.70 Stockpiling IBM supplies, machines, spare parts, fabricating equipment, and punch cards meant that Dehomag received a decisive manufacturing impetus without the need to remit any money to New York. That only strengthened Dehomag’s balance sheet, and made it a more powerful component of IBM.
But now surplus cash escalated in Germany beyond even Dehomag’s needs. Watson needed to invest in German assets that would retain their value. They could be sold later. Eventually, IBM commissioned its outside auditors—Price Waterhouse—to join IBM managers in making investment recommendations. An extensive written report was submitted. Stocks of other German companies were considered too volatile. Timberlands were debated, but deemed unlikely to be approved by the Reich as a precious natural resource. Buying an independent paper factory was rejected since paper was now highly regulated by the Reich.71
“Rental property might be acquired, preferably in Berlin,” an IBM European manager suggested to Watson in a letter. The decision was Watson’s. He chose apartment buildings. These could be turned over to local rental agents for leasing, thereby generating income as well.72 Berlin was filled with some very discounted real estate at the time.
IBM began buying apartment buildings. The properties purchased were not prime locations, but reliable sources of rental income. One building was at Schutzenstrasse 15/17. A second was at Markgrafenstrasse 25. Attorney Konrad Matzdorf, whose office was near one of the addresses, managed the sites, and according to one IBM assessment, “accumulated a substantial amount of money for the rentals.”73
As IBM plowed its Reichsmarks into hard assets, it already anticipated a wider European presence. In 1935, Watson shifted the company’s European headquarters from Paris to a city with a better banking environment, Geneva, Switzerland. A Price Waterhouse report later confirmed that while dividends and profits destined for the United States were indeed blocked in Germany, “the regulations quoted above do not apply to transfers to Denmark, Belgium, Holland, Switzerland and Italy, since these countries have made special arrangements with Germany in connection with the transfer of interest and dividend payments.”74 As it happened, IBM maintained operations in Denmark, Belgium, Holland, Italy, and now Switzerland.
Although the arrangement to pay Heidinger bonuses on losses originated in 1935, the small print of any agreement with the Dehomag founder consumed months of wrangling. During that time, IBM was astonished to learn that Heidinger had never quite filed all the many merger papers from 1934, thus preserving some or all of his original corporate compensation rights. More than that, the language in some of the merger documents Heidinger drew up was so convoluted, no IBM translator could understand it. At the end of 1935, an IBM manager confessed to New York, “the translation is still very confusing and actually it is hard to tell exactly what it means. Also you will be interested to know that both Mr. Rottke and Mr. Zimmerman of the German company are unable to determine the exact meaning of the German original.”75
Pure and simple, Heidinger would not finalize the merger papers until his bonus was rectified. The matter had been dragging on since late 1933. IBM was operating companies that arguably did not quite legally exist for lack of the proper paperwork.
Once and for all, IBM wanted to straighten out its contractual messes with Heidinger. Both sides, in spring 1936, agreed to new bonus language. Heidinger visited New York in early 1936 to attend the Hundred Percent Club, the international IBM celebration of those executives meeting or exceeding their annual sales quota. Dehomag was always the number one foreign revenue producer. While Heidinger was in New York, there was plenty of face-to-face time for him and Watson to work out the smallest details of the final agreement governing the merger and bonus. A special letter was crafted by a Berlin attorney confirming that the contract was just a private undertaking between two stockholders with Dehomag, not with Watson in his capacity as chairman of IBM. This continued the fiction that Dehomag was not under foreign influence.76