Home Depot was co-founded by Bernie Marcus (visionary), Arthur Blank (operations/finance), and Pat Farrah (energy), and financed by Ken Langone. Home Depot is yet another example of how great ideas are born out of frustration not greed.
In 1972, Bernie Marcus would become CEO of Handy Dan Home Improvement stores. Arthur Blank would become CFO of Handy Dan in 1976. Albeit a regional chain, Handy Dan was one of the most reputable home improvement chains in the country.
Handy Dan was acquired by Daylin Incorporated in 1969. Sanford Sigoloff was the CEO of Daylin Corporation and he could be considered an anti-intelligent fanatic. Handy Dan made an initial public offering in 1972 by selling 400,000 shares of common stock to the public. Daylin continued to control 81% of Handy Dan. By the end of 1972 Handy Dan operated 28 home improvement centers that produced $51.5 million in revenue and $1.5 million in earnings.
Under Bernie Marcus’s leadership, Handy Dan would grow to 66 stores, $155 million in sales, and $7.8 million in earnings by 1978.
The following quoted excerpts are taken from the book, Built From Scratch.
In 1976, Handy Dan got on the radar of investment banker Ken Langone. A friend of Langone, Gary Erlbaum, owned a chain of home improvement stores called Panelroma. Langone asked him who the best operators are in the home improvement retail market and Erlbaum answered:
“The best is a company out of California called Handy Dan”.
When Langone researched Handy Dan he found it was trading at $3 per share and the business was likely to earn $1.50 per share. Langone was suspicious of the numbers. He immediately wanted to fly out and meet Bernie, so Erlbaum made the introduction.
“Bernie,” Erlbaum said, “this guy Ken Langone, wants to meet you. He is a very tough guy. Really tough. This is one of the most aggressive people I have ever met. He is a tough businessman. And he can be overbearing. But I swear, this is the most honest, ethical man I have ever met in my entire life. And when he tells you something , you can believe it. I have more trust in Langone than I do anybody in the entire world.”
Bernie agreed to take the meeting, and minutes later Langone called Bernie.
“This doesn’t make any sense. You’re going to make $1.50 a share?”
“Yes,” Bernie replied, “After taxes”
“In that case,” Langone announced, “I am going to buy every share of stock I can in your company, and I would advise you to mortgage your house and buy the stock, because this stock is going to go straight up.”
“Would you mind if I came out to see you sometime?” Langone asked.
“Sure, sure,” Bernie said, “any time you want to come out, fine.”
“Good,” Langone said, “I’ll see you tomorrow for lunch.”
Langone took the first flight out of New York the next morning and was in Bernie’s office by 11:30am.
Langone would go on to buy almost all of the 400,000 share float at prices ranging from $3 to $12.
As I said before, Sanford Sigoloff was the CEO of Daylin Corporation. Daylin owned 81% of Handy Dan, and the company was Daylin’s crown jewel. In fact, Daylin Corporation as a whole would have lost money in 1978 had it not been for Handy Dan. Sanford Sigoloff was what we would call an anti-intelligent fanatic.
When Langone met Sigoloff for the first time he told Bernie, “This is a real bad guy. This is a guy that you can’t trust and that would kill you in a second.”
In fact, Sigoloff referred to himself as “Ming the Merciless”. He was “nice looking, sharp dressed man, very smooth, slick and articulate”. He had a couple successes where he went in and purchased a couple businesses with the backing of Michael Milken. He loved to slash and burn and enjoyed firing people.
Bernie recollected a conversation with Sigoloff, “When people leave, he once told me in a coffee shop, it was very important that he affect them economically, emotionally, and physically, so that people think twice before they ever turn on him. Sigoloff wanted people to be fearful of him. He wanted to see them destroyed. That was his style.”
Sigoloff owned 81% of Handy Dan, and Langone owned 19%.
Langone thought it was odd that other holding companies that owned 80% of public subsidiaries were quickly buying the remaining 20% and taking them private again. Langone’s lawyers looked into it and found an odd fiduciary rule that was actually giving the minority control over the company. Put differently, Langone realized due to a loophole (figuratively) his 19% was basically a control position.
Langone flew to California to meet with Sigoloff to let him know that he was in more control than Sigoloff thought. Sigoloff, a control freak, couldn’t handle it, and tried through strong arm tactics to acquire Langone’s position. Langone, never a person to back down, fought back harder, and antagonized Sigoloff every chance he could.
Once Sigoloff realized Langone was right about the controlling minority stock arrangement Sigoloff offered Langone $12, and then $14 per share for his position. Langone was having too much fun saying no to a man he hated.
At the same time Sigoloff was making Bernie’s life hell.
At dinner one evening, Bernie asked Langone, “Do me a favor. Get Sigoloff off my back. Sell him the stock.”
Langone replied, “Bernie trust me. You don’t really want me to sell him this stock, because if I do, I am signing your death warrant. You are a dead man.”
Bernie didn’t agree. He kept pressing Langone to sell his position. Finally, Langone agreed. He called up Sigoloff’s attorney and told him he’d sell at $25.50 per share. On January 9, 1978, the deal was done.
Handy Dan was successful because Bernie was operating it the opposite of the way Sigoloff ran his other subsidiaries. Sigoloff was jealous and didn’t like Bernie getting the credit.
On April 14, 1978, Bernie Marcus and Arthur Blank went to Daylin’s West Los Angeles offices for a corporate planning meeting. Bernie and Arthur were pulled into separate rooms and told they were fired. To say they were shocked was an understatement.
Arthur called his wife right after and she thought he was joking. It might no sense to fire your best people. But that is exactly what he did.
Furthermore, over the next four years Sigoloff made Bernie and Arthur’s lives miserable. Sigoloff launched labor declassification proceedings against them. He also made accusations to the Justice Department and Securities Exchange Commission. His goal was to bury them in legal bills.
Sigoloff told Bernie, “I am going to fight you with the company’s money, and you are going to have to fight me with your own money, which you don’t have.”
In addition, neither Bernie or Arthur owned any stock in Handy Dan. “All of the hard work and innovation seemed to have enriched everyone from Ken Langone to Sandy Sigoloff, but not us.”
Bernie called Langone and told him that he and Arthur were just fired.
Langone replied, “You have just been kicked in the ass with a golden horseshoe. This is the greatest opportunity. Now we can open up that store you talked about when we were in Houston!”
A year prior, Langone was with Bernie in Houston, and Bernie told Langone about a store he created in his head that would make all of Handy Dan’s stores obsolete.
This would start a chain of events that would lead Bernie, Arthur, Langone, and later on Pat Farrah to partner on Home Depot, the greatest home improvement store chain in the world.
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