OT - How could Henry Ford buy majority stock in Ford Motor Company?

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Model T Ford Forum: Forum 2014: OT - How could Henry Ford buy majority stock in Ford Motor Company?
Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Wednesday, July 09, 2014 - 09:12 pm:

As a small business owner, I know how important, and sometimes difficult, obtaining capital/financing may be. Obviously, lenders do not "give" money out easily, and as all of us know, collateral is always required (in some manner).

In the winter of 1902-1903, Henry Ford became allied with A. Y. (Alexander) Malcmson, forming a partnership to build automobiles. Malcomson invested between five and seven thousand dollars into the enterprise. By the spring/summer of 1903, Ford and Malcomson realized they needed additional funding, and organized Ford Motor Company, issuing stock to investors. The company was formed, investors secured, and as I recall about $28,000 gathered (cash, the company stock was issued with a "value" of $150,000).

We know Henry Ford at this time had no "extra" money, and essentially operated hand to mouth. Ford Motor Company (FMC) took off, beginning to sell cars in the summer of 1903, and issuing dividends to investors by the fall of 1903.

We also know FMC continued to experience success, selling cars and paying investors dividends through the fall of 1905. By the winter of 1905-1906, FMC was ready to make a big move. In addition to the six cylinder Model K, the new, low priced, four cylinder Model N was planned, and the public eagerly anticipated a quality, well powered four cylinder car selling for $500. The only problem was, FMC was not ready to put the car on the market.

During this time, infighting and maneuvering was occurring behind the scenes. In late November 1905 Ford Manufacturing Company was incorporated, with Henry Ford firmly in ownership control of the new company, that would produce the Model N chassis. Only days later, on December 4th 1905, A. Y. Malcomson was reported to be the president and chief investor in a new automobile company, Aerocar.

Needless to say, the FMC board of directors immediately (December 5, 1905) demanded that Malcomson resign from the board of directors. He declined.

By the summer of 1906, the Model K was being sold, with the sale of about 200 cars by July 1906. Some Model F and a few Model B were also sold during this time (January - June 1906). The Model N was still not on the market, with production and design delays keeping the car from production.

What does this all mean? By mid July 1906 (when the first Model N finally start to be distributed), FMC had very few actual sales on the books. No dividends were paid during this time, and I suspect cash flow had to be tight. The major sales period for cars were the spring/early summer months of April - June, so the prime sales period for automakers had come and gone.

As a lender/banker, I wonder how FMC looked financially? And, what did Henry Ford's prospects (as a borrower) look like? There were over 200 automakers selling cars in the U.S., with companies beginning, and going out of business, almost daily.


In this environment, Henry Ford negotiated with A. Y. Malcomson to buy his (Malcomson's) FMC stock for $175,000. To put this in todays terms, Malcomson had invested the equivalent of $125,000 to $175,000 ($5,000 to $7,000 in 1906 dollars).

Henry Ford purchased Malcomson's stock for $175,000. Today, when reading about the buyout of A. Y. Malcomson, the purchase price seems small compared with the stock buyout prices the Dodge's and James Couzens received years later. However, in todays dollars, Malcomson received the equivelant of about 4.38 million dollars! For an investment less than three years earlier of (todays dollars) about $150,000!


How did Henry Ford receive financing to pull this off? Ford somehow secures the equivalent of 4.4 million dollars, to buy majority stock in FMC, with little or no collateral (that I'm aware of) other than "blue sky" stock ownership in FMC.

I can't imagine anyone with a startup company going to a lender and obtaining this kind of money for a business (that while proven, is relatively new, with slow sales for the year) to purchase stock.

As we know, it all worked out OK :-)


Board of Directors minutes referring to Henry Ford purchase of Malcomson stock:


Detroit Free Press article:


Top of pagePrevious messageNext messageBottom of page Link to this message  By Royce in Georgetown TX on Thursday, July 10, 2014 - 07:45 am:

"On being told that there were rumors of a strained relationship with Mr. Ford and himself, Mr. Malcomson stated most positively that such rumors were without foundation"........


Reminds me of several other statements to the press......


Top of pagePrevious messageNext messageBottom of page Link to this message  By Michael Deichmann, Blistrup, Denmark on Thursday, July 10, 2014 - 08:26 am:

Rob, I had have similar speculations, but as Henry Ford also had an active role in the day to day business he may also have obtained a salary - which may have had some bonuses on top, that may have given Henry Ford some funds, which in turn may have enabled him to lend further money either from family, friends or even a friendly bank.
But it could be interesting to figure out exactly what trick Henry used there.


Top of pagePrevious messageNext messageBottom of page Link to this message  By William L Vanderburg on Thursday, July 10, 2014 - 08:36 am:

It's amazing how one individual could buy someone out of their company when that individual's initial cash outlay was nothing.i don't know Henry's personal finances but I speculate his saying he had no money was a lie


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Thursday, July 10, 2014 - 08:38 am:

Michael,

As I recall, Henry Ford's salary may have been $10,000 for FY 1906 (memory???). Probably not enough to justify a 4.37 million loan ($10,000 salary then equals about $250,000 today).

Even more interesting (to me), Ford was able to cover the 4.37 million expense (today's dollars) in one year.

Rob


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Thursday, July 10, 2014 - 08:52 am:

William,

I believe most records show Henry Ford had no "cash" on hand at the time Ford Motor Company was incorporated. He did come from a somewhat well to do (for the period) farm family, but I believe his funds were depleted by the time FMC began to sell cars in 1903. Again, from a rather poor memory, I believe he received $900 from "Henry Ford Company" (soon to be Cadillac) when he left in the fall/winter of 1902.

John Gray, well known and thought of banker (and FMC investor and board president) may have helped Ford with the funding, however he passed away unexpectedly on July 6th 1906, so I don't know if he was instrumental or not in helping Ford make the purchase?

Maybe Trent B., Hap T., or others have more detailed information about HF's personal finances?

Rob


Top of pagePrevious messageNext messageBottom of page Link to this message  By Jim Patrick on Thursday, July 10, 2014 - 10:31 am:

Ford was shrewd, masterful and focused. He had a vision and a goal and made it happen through sheer determination and willpower and... I wonder if there was anything else at play here? I know that Ford was not above using dirty tricks to give him the edge in accomplishing his goals. Did he have anything on Malcomson or anyone else to make this happen...


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Thursday, July 10, 2014 - 11:20 am:

This was a great price for Malcomson. A company that hasn't been able to get their latest car to production on time, and A. Y. Malcomson receives over 4 million on the equivalent of a $150,000 investment. I'll post another article when I'm able...


Top of pagePrevious messageNext messageBottom of page Link to this message  By Bill Everett on Thursday, July 10, 2014 - 02:01 pm:

Regardless of how Henry raised the money and/or credit to buy stock, we mustn't forget that the Selden suit was hanging over everyone's head.

The owners of stock that Henry wanted were no doubt influenced by "What If We Lose The Lawsuit?" which would've likely reduced their stock value.


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Thursday, July 10, 2014 - 02:05 pm:

This article appeared in 1906, and mentions the purchase of FMC stock by He ry Ford from A. Y. Malcomson. It seems to me the article implies the price paid for the stock was a good amount. The article also assumes Malcomson paid the full $25,000 for the stock (when he had less than $10,000 cash invested):


Top of pagePrevious messageNext messageBottom of page Link to this message  By Royce in Georgetown TX on Friday, July 11, 2014 - 07:43 am:

Lets get to the truth here. Malcomson was lying through his teeth to the newspaper when he was quoted as saying:
"On being told that there were rumors of a strained relationship with Mr. Ford and himself, Mr. Malcomson stated most positively that such rumors were without foundation"........

Malcomson was forced out by the rest of the board. Henry Ford and the other directors had over a million dollars in the bank, in cash, in their Ford Manufacturing Company accounts. It was no problem for Henry to buy out Malcomson, Bennett, and the others.

Bennett's words :

"Of course he (Malcomson) didn't like it, and that's what started his antipathy towards the Ford Motor Company......."





From CH Bennett's first person account in the Henry Ford oral history collection pages 23 - 30:




Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Friday, July 11, 2014 - 09:17 am:

Charles Bennett provides wonderful insight into the beginning, and original investor actions, through the Ford Reminiscences. Unfortunately, as with many of the "Reminiscences", his timeline and sometimes facts are sometimes off. An example is when he (Bennett) says "if Malcomson was interested in another car, before he sold out, I didn't know it."

The reality is, A. Y. Malcomson and Aerocar announced incorporation and the intention to build cars December 4th, 1905. Malcomson did not sell his stock holdings to Henry Ford until July, 1906, over seven month later.

As for Ford Manufacturing Company having a "million dollars in the bank," two problems arise (if one is suggesting this was the "seed" money Henry Ford used to buy Malcomson's stock).

First, as of July, 1906, no Model N had been sold. Ford Manufacturing Company had a contract to produce 10,000 Model N chassis and deliver them to Ford Motor Company. As of July 1906, no chassis, no money.

Second, even if Ford Manufacturing had "a million dollars in the bank", it would have been Ford Manufacturing Company's money, not Henry Ford's. Ford Manufacturing had seven investors including Henry Ford, and I doubt they would have approved of Henry Ford using Ford Man. Co. funds to buy Ford Motor Company stock for himself.

However, I find a few other things Charles Bennett reported in his "Reminiscences" quite interesting and telling:

From "Oral Histories" THF, all rights apply. Charles (C.H.) Bennett Chronology:



In this excerpt, Mr. Bennett explains "that Mr. Ford first felt that the heavy, big car was best. They made a six-cylinder car, and that didn't come up to his thoughts of what it would do, or could do, or was bound to do."



To the historical contention that A. Y. Malcomson "forced" Henry Ford to build the Model K (and possibly Model B), Mr. Bennett reports that Mr. Malcomson "only went up to the factory on Piquette twice a year", and that he (Malcomson" was deeply involved with his coal business.



The major problem I have with the Oral Histories is that a list of questions were presented to the respondents, and only a few sets of the questions are included with a few of the interviews. One of those set of questions include leading questions about the Model K. For a truly accurate "reminiscence" I think the questions should have been included with the interview transcript, or no questions given, just a true reminiscence by the people who were there (saying whatever "facts" came to mind).

Still, a very useful tool to help understand the events leading up to production of the Model T.

Rob


Top of pagePrevious messageNext messageBottom of page Link to this message  By Ross Benedict - Calgary, Alberta on Friday, July 11, 2014 - 10:23 am:

I hope he didn't listen . . .


Top of pagePrevious messageNext messageBottom of page Link to this message  By Royce in Georgetown TX on Friday, July 11, 2014 - 10:35 am:

Quote" Malcomson was pretty bitter. He didn't want to sell out"

Again, Malcomson was clearly lying to the reporter.


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Friday, July 11, 2014 - 12:11 pm:

How do we know Malcomson "didn't want to sell out?"

He needed capital for Aerocar. Otherwise, he would not have sold out (if he didn't wish to). The FMC board of directors demanded he (Malcomson) step down from the board. They did not, and could not, demand he sell his interest in FMC.

Most business people would consider a 2500% return on investment in just over three years a good return.

Last question, if he was "bitter", were he and Henry Ford enemies from this point on?


Top of pagePrevious messageNext messageBottom of page Link to this message  By Tom Carnegie on Friday, July 11, 2014 - 12:47 pm:

It strikes me as interesting that people tend to make up their mind and then go looking for facts to support their point of view.

For instance:

Malcomson said to a reporter: (Assuming the reporter recorded and reported it correctly) "Rumors (of a strained relationship between Ford and Malcomson) were without foundation.

Bennett says otherwise (assuming he was correctly quoted).

Either one could be true or not.

It seems to make that it makes sense to look at the evidence, and then decide your point of view, not the other way 'round.


Top of pagePrevious messageNext messageBottom of page Link to this message  By Royce in Georgetown TX on Friday, July 11, 2014 - 01:08 pm:

Tom,

Agreed. Malcomson issuing a denial to an unasked question is clear evidence the readership was aware that his departure from Ford was not voluntary, as every source suggests.

Rob is proud to have found the lone person who says Malcomson didn't get booted from the company - Malcomson himself.


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Friday, July 11, 2014 - 02:27 pm:

Tom,

If I were forced to make a decision of which is correct, Charles Bennett or the reporter, I would unequivocally choose Bennett. His information was taken fifty years after the fact, so recollection may have been "foggy" but I would think his perception of events didn't change much (although we know perceptions of fact do change over time). Fortunately, I don't have to "make a decision." I'm able to have opinions, state why I have those opinions, and change my mind as more information comes to light.

Royce,

When someone agrees with your opinion, you reference their quote or information. When they disagree with your opinion, as when Malcomson says he and Henry Ford have a good relationship, you claim they are lying.

That's a very comfortable world to live in. However it is not the real world, where many perceptions and opinions exist, and the truth often is somewhere in the middle. My personal opinion is that both Ford and Malcomson had their own ideas regarding the manufacture of automobiles. Fortunately for Henry Ford (and us) the two were able to collaborate long enough to get Ford Motor Company up and running.

When you say "the lone person who says Malcomson didn't get booted from the company," one should remember, there was no way to force A. Y. Malcomson to sell his stock. If there had been, I think the price he received would have been much less. As it is, Henry Ford had to negotiate a price (and a very good one for Malcomson), and the point of this thread is, somehow come up with the equivalent in todays dollars of over 4.3 million.

As I asked earlier, since you believe they (Ford and Malcomson) detested, disliked, or otherwise did not get along, do you think it was a short term situation, or lasted the rest of their lives? They competed for a short time as automakers (Aerocar was out of business by mid 1908), and were both businessmen in Detroit for the remainder of their lives.

For the record, I believe Henry Ford, James Couzens and Alex Malcomson all had their own ideas of how to operate an auto manufacturing business. I also suspect that relationships were strained as each sent their separate ways, first between Ford and Malcomson, later between Ford and Couzens. However, most business people are able to separate business and their personal lives, and once they go their separate ways, animosity fades away. Again, these are my opinions, in this case based on my experiences,

Rob


Top of pagePrevious messageNext messageBottom of page Link to this message  By Royce in Georgetown TX on Friday, July 11, 2014 - 07:14 pm:

Rob,

When you find something that disagrees with what the majority of printed history states in a newspaper from an unreliable source you scream "Eureka!"

When I post the transcript of an interview conducted by historians in a scientific, controlled environment, you cry foul.

Clearly, Malcomson was booted from Ford at the request of the board. Therefore his comments to the newspaper reek.


Top of pagePrevious messageNext messageBottom of page Link to this message  By Rob Heyen on Friday, July 11, 2014 - 10:49 pm:

Yes, something "reeks."

I re read William Hughson's transcript including this portion, that may refer to Henry Ford discussing obtaining financing to purchase stocks. Mr. Hughson was Ford's first agent (according to his transcript) and had a lifelong relationship with HF. I'm not aware of another time when Ford would have needed to borrow money to purchase minority stock.


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