William Durant

In the early days of any industry, growth requires lots of external capital. Reinvested profits, if there are any profits at all, are usually woefully insufficient to meet the growth expected by visionary founders or eager customers alike. This means the founders and executives of firms in new industries have to be capable financiers, or at least have ready access to such people, to succeed in their ventures. William Durant, the man who more than any other built General Motors, seemed a more natural financial intriguer than an industrialist, but that hardly made him the wrong man to lead General Motors in its early days, whatever the problems he encountered with his business strategy.

Billy Durant

William C. Durant was born in Boston, Massachusetts in December 1861 but his hometown was Flint, Michigan. It was there where his grandfather arrived after leaving his native Massachusetts; this grandfather would be elected governor of Michigan soon after William’s birth. William “Billy” Durant left school at seventeen to work in the Michigan lumber yard run by his family. He later became a drug clerk and a salesman of real estate, bicycles, insurance, and cigars. As we will see, he was wired for sales work.

In Flint, Durant bought a small horse cart company in 1886. He paid for the company with $2,000 in borrowed money, an approach that Durant would make frequent use of in his career. The firm was renamed the Durant-Dort Carriage Company though neither Durant nor his business partner there knew anything about manufacturing generally, let alone building carriages specifically. They began principally as salesmen; the pair had another firm make the carts which they sold at a markup of over 50%. They did eventually take over the final assembly of the carts themselves and within 15 years, the business was worth $2 million.

Creating General Motors

In search of a new project, Durant took over management of Buick Motor Company in 1904. Production exceeded 8,000 cars by 1908; compare this to just before Durant took over the company, when Buick had sold just three cars in 1903 and sixteen in 1904. Buick was now the largest manufacturer of automobiles in the United States. Most firms in the nascent industry were still tiny and poorly financed, relying on buying from suppliers on credit while demanding cash from their customers. This meant even a single bad year, where inventory went unsold even just a little bit longer, could ruin a company.

Durant sought to consolidate the industry under the name General Motors. He bought Cadillac, Oldsmobile, and many other brands in just the first sixteen months of General Motors’ existence. With the exception of Cadillac, these acquisitions were made on credit typically offered by the seller, with little cash included in the purchase price. For example, Oldsmobile was bought for $3 million of which only $17,000 was in cash. Henry Ford’s demand for cash payment meant that Durant had to turn down a chance to buy Ford Motor Company for $8 million in 1909 after he failed to obtain financing from a bank which passed on the chance to provide a loan.

This rapid amalgamation of General Motors occurred during an era when the automobile industry was small but booming. Durant envisioned a future where 500,000 cars would be sold in America in a single year, a sum which seemed staggering in those early days. In 1910, 200,000 cars were sold in the United States across all companies. Half a million did not seem so far away any more. By 1916, sales had risen to over 1 million.

Debt

In the process of growing by acquisition, Billy Durant’s General Motors had accumulated massive debts and the mergers were not always well thought out. Durant would buy entire companies only to protect General Motors from a ‘possible’ but by no means ‘expected’ change in technology or consumer preferences. For this reason as well, the company was growing faster than its management could handle.

General Motors was in financial trouble. The company resorted to selling junk bonds in 1910. Thanks to its large size, this was a spectacular test of the limits of leveraged finance in that era. General Motors borrowed $15 million at 6% through a syndicate of investment banks led by Lee, Higginson and Company.

The banks received a commission of $2.5 million and $6 million in General Motors stock for arranging the loan, though 6% interest was hardly enough and the banks had to give up the stock as an inducement to investors to get the loan sold. The bankers also had limited confidence in Durant so a trust was established to transfer control of the company to the banks who promptly appointed Durant’s replacements.

Billy Durant’s story didn’t end here though. Now outside General Motors, he partnered with racecar driver Louis Chevrolet to create another automobile company. His new creation, Chevrolet, quickly achieved a sales pace of 15,000 cars a year and profits of over $1 million. Durant also began work to retake control of General Motors by buying the company’s shares.

The bankers in charge of the company had been busy paying down the debt, resolving the financial issues Durant had created. Their conservative management came at the expense of shareholders’ dividends and since no dividends were being paid to shareholders, there were many willing sellers among them. In retaking control of the company, Durant was backed by New York’s Chatham & Phenix Bank and the wealth of the Du Pont family. In 1915, Durant had managed to obtain control of General Motors by offering sellers five Chevrolet shares for each of their General Motors shares.

Durant Corporation

In charge of General Motors once more, Durant again focused on expanding by acquisition, this time into farm tractors, and encountered limited success. Disagreements within management were rising. Walter Chrysler, who led the Buick division, its most successful unit, disagreed with Durant’s forays and was of the view that Durant failed to adequately consult him before important decisions or ignored his advice when it was offered, to negative effect. The economy turned in 1920 and the market for automobiles contracted.

Durant lost control of the company yet again after 1920. He was being sent margin calls when his efforts to buy more stock, as usual with borrowed money, amidst a sagging stock price had failed. At the time, Durant had accounts with something like seventy brokerage firms across the country.

In any case, Billy Durant and General Motors were now in a bind. If Durant’s personal financial troubles triggered the liquidation of his shares, which secured his borrowing, that could cause the price of General Motors stock to drop sharply, something his backers, most notably the Du Pont family, were keen to avoid.

To work his way out of this hole, Durant established the Durant Corporation to offer GM shares at $18 apiece to small shareholders, subject to fifty-share limits, and even offering a payment plan to customers buying shares. The goal was to sell the shares and raise money for Durant’s financial rehabilitation without causing a flood of shares to enter the open market. The small investors paying for their shares in installments would be an investor-base unlikely to sell in the short-run. The plan didn’t work and, in the end, a syndicate including Du Pont and J.P. Morgan & Co. bought Durant’s 2.5 million shares for $23 million.

Afterwards

Now sixty years old, Durant was out of a job again. Still, he started yet another car manufacturer, as he had during his earlier departure from General Motors. This time, the creation was Durant Motors, which he had hoped to grow into another amalgamated rival to General Motors to be called Consolidated Motors.

Durant also returned to speculation in General Motors shares from the outside. John Jacob Raskob, the chairman of the Democratic Party and an executive at General Motors and Du Pont was hired by Durant to promote the company’s shares. In the end, plans for Consolidated Motors went nowhere as few were willing to give Durant another shot. Durant Motors failed early in the Great Depression and Billy Durant himself filed for bankruptcy. Durant died in 1947.

Lesson

William Durant was not made for slow and steady growth. He built General Motors through a rapid amalgamation of companies, where the justification of any one acquisition was not subjected to any particularly high bar. Merely eliminating a potential competitor, no matter how much smaller or unlikely to triumph, was enough to spur Durant to make a deal. Whether the most effective approach to building his company or not, the strategy worked in that General Motors became a behemoth in an industry known for many failures in its early history.

Still, in a nascent automobile industry, Durant could not have implemented his plan without external financing. Whether thanks to his aptitude as a salesman or otherwise, he raised the needed funds from his bankers, a critical undertaking. He succeeded not only in building General Motors but in retaking control of the company twice, throughout the way funneling lots of borrowed money towards his expensive business strategy.

More from the Tontine Coffee-House

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