Throughout spring 1938, more letters, conferences, and debates streamed between IBM offices on both sides of the ocean. Watson personally called for written recommendations and proposed agreements from special advisors, accountants, and attorneys both in and out of Germany. In some cases, one translation wasn’t enough for Watson. The whole dispute was all coming at a difficult time in view of Dehomag’s expansion plans. Austria had just been annexed, and Germany was openly planning the takeover of Czecho slovakia. Even as Watson was battling Heidinger’s demand for bonuses, he was cautiously negotiating the nature and bonuses of Dehomag’s expansion into “new territories,” such as Austria and Czechoslovakia.106
Watson compromised—in a way. With his consent, Dehomag adopted a shareholder resolution for “an eventual dividend to be declared for the years 1935, 1936 and 1937.” When it was, Heidinger would be paid his long awaited bonus, less all his advances, of course. In the meantime, Watson’s many outside advisors would provide the written opinions about how much profit was legally permissible to declare under existing German law without incurring confiscatory taxes and mandatory loans to the Reich. To assuage a nervous Heidinger, Watson agreed to provide yet more advances, RM 7,000 monthly for the remainder of 1938.107
But Heidinger was impatient. While he had appealed the tax decision, he did not expect to prevail. Soon, Heidinger would have to pay a huge assessment. Dehomag’s books reflected one multi-million mark record after another—1938 alone would yield RM 2.39 million in conceded profits even after IBM applied various intra-company devices.108 Yet Watson still delayed any decision on declaring a profit.
Finally, in late November 1938, just days after Kristallnacht, a furious exchange of correspondence between New York and Berlin escalated into a stubborn standoff over dividing the money.
The squabbling culminated with Heidinger implying that Watson was involved in defrauding the Reich tax authorities. In a long, rambling and sarcastic five-page letter to one of Watson’s Berlin attorneys, Heidinger openly conceded his stock was a sham. Referring to his so-called “preferred shares in Dehomag,” Heidinger declared, “My company shares are no real preferred shares, if for instance the Tabulating Division would yield no net profit, while the remaining divisions would earn a net profit of say five percent, on my shares, I would not obtain anything and the remaining five percent are therefore not preferred in that case but disadvantaged.”109
Heidinger’s letter repeatedly insisted the bogus share arrangement might be viewed by the authorities as a scheme “flatly to evade paragraph 3 of the law.” He invoked strong words, uncharacteristic of IBM’s usual ambiguity. At one point, he referred to “a tax liability evaded by abnormal measures.” The word “evade” was used repeatedly, as in “tax evasion.” Heidinger even added an unsubtle hint of criminality, writing, “But by no means must we expose the Dehomag to the risk of a penal prosecution.” As was his style, he flamboyantly concluded his pejorative missive “with renewed hearty thanks.”110
Watson sought help from Price Waterhouse. But the prestigious accountancy firm could only conclude Dehomag’s finances were in supremely profitable condition and that Heidinger deserved his bonus. In its lengthy thirteen-page single-spaced analysis, dated December 30, 1938, Price Waterhouse declared: the only question is when and how much to pay Heidinger. Moreover, warned Price Waterhouse, if Heidinger insisted on selling his shares, the value of that stock—real or not—was far greater than when the original merger took place in 1934. Using rigid principles of valuation, Price Waterhouse examined the pluses and minuses of the German political and tax environment, and the problem of blocked bank accounts. The firm concluded that each share of Dehomag was actually “worth more to a purchaser in Germany, than to a resident abroad.” The report underlined the words “in Germany.”111 For Watson, this meant that his shares were now actually less valuable than Heidinger’s.
Indeed, Price Waterhouse asserted, Dehomag by any measure had only become more valuable. The net worth of the company had essentially doubled from its RM 7.7 million total investment in 1934 to more than RM 14 million. Annual earnings were about RM 2.3 million, a 16 percent return on net assets.112
At the same time, more bad news came. Dehomag was supplying machinery and spare parts to IBM for resale throughout Europe. IBM in turn merely credited Dehomag’s loan balance account. Frustrated and defiant, Dehomag managers in mid-December 1938 unilaterally began terming those shipments “exports.” This triggered the Reich’s rule requiring actual foreign currency payment, which Dehomag obtained by debiting IBM’s precious few dollar accounts in Germany.113
On January 3, 1939, IBM’s Geneva Controller J. C. Milner mailed Watson a long, detailed letter explicating the adverse Price Waterhouse report, searching for silver linings, parsing Heidinger’s contract language, and ultimately trying to construct loopholes around the inevitability of either paying Heidinger dividends or buying part of his stock. Milner conceded that buying just one of Heidinger’s shares would expose the subsidiary as American-controlled.114
Milner explored all the possibilities. “If he [Heidinger] died and the stock was offered to IBM, in accordance with his contract, the higher book value combined with the earnings of the company would probably force a high valuation of the stock,” asserted Milner. Maybe the company could pay the elderly Heidinger in ten annual installments? Could Dehomag purchase Heidinger’s stock with blocked marks as an internal obligation? Milner offered a range of options, none of them promising.115
It seemed to be a no-win dilemma for IBM. Purchase of Heidinger’s stock was out of the question, asserted Milner, because no one could predict what the Reich economic and taxing authorities would do. On the other hand, once dividends on the 1935-1937 period were formally paid to Heidinger, he would next ask for dividends for 1938. It would continue annually even as the company’s value escalated.116
Clearly, money was a pressure tactic IBM could use. Heidinger was receiving a monthly allowance of RM 7,000 for all of 1938. Milner had some weeks earlier reminded IBM attorneys in New York, “the last payment on this account will fall due in December. It will then be necessary for a decision to be made regarding the year 1939.”117
Heidinger was being squeezed. Not only was he liable for a RM 90,000 tax, but because of the protracted reporting delay, German tax authorities had added a mandatory loan to the government, made retroactive for the three years 1934-1937, and that loan totaled RM 151,000. He could never afford that without help from the company. Watson understood that, and cut off Heidinger’s RM 7,000 monthly advance.118
In a March 13 letter, Rottke implored Milner to advance Heidinger the money needed for the mandatory loan.119 Heidinger was clearly desperate. Tax monies would be due within a matter of weeks. He had accommodated Watson all these years. Now he needed help.
Watson was unmoved. On March 15, the day the Nazis smashed into the remainder of Czechoslovakia, Milner calmly answered Rottke, expressing regret for a “very awkward condition.” But in fact, insisted Milner, it was Heidinger who had insisted that dividends be paid. If now the taxing authority had imposed mandatory loans, that was Heidinger’s problem. Indeed, IBM attorneys in Berlin had carefully studied current regulations and determined that IBM had actually advanced monies above the legal limit. “Therefore,” asserted Milner, “it is Mr. Heidinger who has received too much money, and it is he who should make arrangements to invest the surplus with the Loan Stock Bank.”120