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1933 Studebaker Bankruptcy

March 18th 1933, Studebaker was forced into bankruptcy as Edwards Iron Works petitioned the U.S. District Court in South Bend for appointment of receivers to operate the business.   Studebaker owed Edwards Iron Works $6,229.20, thirty days past due.

Judge Thomas W. Slick named Paul G. Hoffman, Harold S. Vance of Studebaker and Anton G. Bean of White Motors as receivers.  Liabilities totaled about $21 million, quick assets amounted to about $6 million, and there was practically no free cash.

The following notice was sent to Studebaker stockholders dated March 21, 1933. It read………….

In view of certain legal difficulties and restrictions which have prevented the company from securing its ordinary banking accommodations for financing the operation of its business during the spring and summer, the Directors of the Corporation, at a special meeting in New York, March 18th, 1933, concluded that the best interest of all classes of creditors and stockholders would be served by consenting to a receivership.  H.S. Vance, Vice President of the Studebaker Corporation, Paul. G. Hoffman, Vice President of the Studebaker Corporation, and A. G. Bean, President of White Motor Company, have been appointed receivers of the corporation by the Federal Court of the Northern District of Indiana, with power to operate the business.

The letter was signed by then Studebaker President, A. R. Erskine, his last official act for Studebaker.

How could this happen!

Several things contributed to the bankruptcy as follows:

First, as the great depression deepened, Studebaker management misjudged it’s length and depth, thinking only in terms of a mild recession.   As profits dropped, Studebaker continues to pay dividends from cash reserves.  For examples; in 1930 on profits of one and one-half million, dividends of eight million were paid.   In 1931 on profits of less then one million, three million in dividends were paid out, and in 1932 Studebaker lost nearly nine million dollars and still paid nearly one million in dividends to it’s stockholders.  These number were taken from “Studebaker The Complete Story,” other reference material reports numbers which differ from these, but all the accounts continue to report that the payment of large dividends in an ever increasing bad economy was a very bad decision.

Secondly, Studebaker had acquired “Pierce-Arrow” between 1928 to 1930 by purchasing their outstanding Class B, Class A, and Preferred Stock.   The total cost varies from source to source, being extremely had to pin down, but estimates range from 5.7 million to over 9 million.  In addition, Studebaker had to make an initial cash infusion of about 2 Million, just to get new “Pierce-Arrow” designs into production for 1929.   While Pierce-Arrow initially made profits on it’s best ever sales in 1929 (8000 units and 2 million in profit), thing had been going down hill since and Pierce-Arrow was bleeding red by 1932, losing 3 million on sales of only 2100 units.   At the same time Studebaker’s 1930 decision to design, tool, and release the “Rockne” with manufacture to be done in Detroit added an unknown amount of expense.  It is widely reported that then President of Studebaker, Albert Erskine, rolled the dice in 1930 using most of the cash reserve to bring out the “Rockne”.

Lastly, in late 1932 Studebaker, found itself in dire need of a cash infusion and unable to borrow money, it sought to solve it’s problems with a merger with White Motor Company.   White had a substantial amount of cash and good liquidity.  In fact in the Studebaker consolidated balance sheet prepared for the end of 1932, the cash was reported at 9.6 million, 7 million of which came from White.   An agreement to exchange Studebaker stock for White Motor Company stock, plus five dollars per share was offered and accepted by White’s board on September 13th, 1932.   The stock exchange began in October and by December, Studebaker had about 95% of the stock.   All they needed to complete the merger was approval of the minority stockholders.   That’s when the trouble began, using a little know Ohio law, “which prohibits an out-of-state companys from merging with an Ohio company and then taking their working capital out of the State“; a group of minority stockholders blocked the merger.   The final blow, was the “National banking moratorium of March 6th, 1933”, which effectively shut Studebaker off from any chance to get cash from a commercial bank.

The Road Back!

Considering that not one automobile company had ever come out of receivership under the same management, thing did not look to bright for Studebaker.   However, Hoffman undeterred, set out to save Studebaker with a proposal to spend $100,000 on an advertising campaign announcing to all:

Studebaker carries on

Immediately, sales campaigns and contests were organized with the dealers and discounts were authorized for each car sold.   By the end of March, orders for 2,200 cars were taken.  The receivers were so optimistic, they asked and were granted permission to spend $700,000 to retool the 1934 models.  Pierce-Arrow was sold for one million, creating much needed cash.   The net operating profit for the first nine months of receivership was $55,000.

By November of 1934, Vance and Hoffman had worked out a deal with Lehman Brothers, and Field and Gore to underwrite 6.8 million in new securities on the condition the receivers could raise an equal amount from other sources.   Under the plan submitted to the Federal Court for reorganization, creditors would receive White Motor Company stock (still held by Studebaker) and additional Studebaker stock.  Preferred Stockholders received debentures and rights to purchase additional stock.   The new Studebaker Corporation was incorporated under the laws of the state of Delaware to acquire the assets of the former Studebaker Corporation of New Jersey and the Rockne Motors Corporation.   On March 9th, 1935 the money was paid over to the new corporation, and Studebaker was out of receivership (bankruptcy). Thus, Studebaker became the first automobile company to emerge from bankruptcy with the same management until Chrysler did it in the 1980.