The fall of the Kreuger empire

From autumn 1930, when Ivar Kreuger ensured that people from his match company became chairman and president of Ericsson, the company finally became a part of the international financier's empire, just as it began to falter. The company became a pawn in Kreuger's increasingly desperate maneuvers to save his own boldly constructed financial kingdom.

In May 1930, a further issue of Series B shares in Ericsson was made, each share carrying one-thousandth of a voting right. The intention was for the then total of 800,000 Series B shares to be placed in the international market, in order to give Ericsson a much-needed capital boost. In the situation in which the world found itself after the Wall Street crash of 1929, such opportunities no longer existed.

Despite its tight position, Kreuger & Toll was instead forced to acquire funds to pay for Series B shares to a value of SEK 28 M. Kreuger solved the problem by borrowing money from Ericsson against guarantees in German bonds. It was a shameless but skilful maneuver to basically let Ericsson pay for its own shares. In his tight corner, Kreuger sought a definitive way of activating the assets represented by Ericsson.

There were liquid funds in Ericsson which Kreuger quickly transferred to Kreuger & Toll. In its annual report for 1930, dated April 1931, Kreuger & Toll declared quite openly that it now owned 410,000 Series A shares in Ericsson and thus had a voting majority, but also declared that "it is intended to retain these shares as a permanent holding". Shortly afterwards, Kreuger began to discuss the sale of Ericsson with its US competitor. In spring 1931 he was involved in negotiations with Sosthenes Behn, the president of International Telegraph & Telephone (ITT) in New York and, on June 18, reached the famous agreement that would shake Ericsson to its foundations.

The core of this extremely complicated agreement was that ITT acquired 200,000 Series B shares and 410,000 Series A shares that is, the voting majority in Ericsson. In return Kreuger & Toll received USD 11 M, the money that Kreuger had to have at his disposal in order to pay the dividends due on Kreuger & Toll's participating debentures.

Since Swedish law only permitted foreigners to own shares in Ericsson corresponding to 20 percent, Kreuger & Toll would vote for these shares for the time being, while in the long term another form of cover would be arranged. In a parallel agreement, Behn and Kreuger committed themselves to the later sale of the series B shares in one another's companies. No secret was made of this section of the series of agreements.

The public thus found out that ITT and Ericsson had exchanged Series B shares, that representatives from both companies would be part of one another's Boards of Directors, and that the companies would now cooperate in the global telephone market. The entire business was presented as another success for Kreuger, who was now to become a member of the world's largest telephone trust. He would not only be "king of matches" but also "king of telephones".

Kreuger had sold Ericsson to ITT and had in practice transformed the Swedish company into an American subsidiary. However, this fact was withheld from the public and Ericsson's president Johan Grönberg was also kept in the dark for a long time.

At the beginning of 1932, when the Americans took a closer look at Ericsson's year-end report prior to finalization of the agreement, they found that the company's position was financially undermined and that the report ITT had received the previous summer regarding the company was inaccurate. In particular, the year-end report heading included "cash at banks and in hand" in an amount of SEK 30 M, which was a deposit of SEK 28 M that Ericsson had been forced to make in Kreuger & Toll's Dutch subsidiary and which Kreuger had used for other purposes.

Ericsson's liquidity had been presented as positive, but was in fact in a disastrous state. Thus ITT simply terminated the agreement and demanded its USD 11 M be returned. It was impossible for Kreuger to produce any money at this point, but he managed to negotiate a six-month postponement of payment for Kreuger & Toll and the shares in question would be held by ITT as security until then.

By now Kreuger had used up his privileges in most places, the Group's liquidity was exhausted and a collapse was imminent. Kreuger committed suicide on March 12, 1932. In his farewell note he wrote: "I have made such a mess of things that I believe this to be the best solution for everybody concerned." A closer look at his business showed that Ericsson's position really was extremely complicated. In ownership terms, the majority shareholding was held by ITT, Ericsson's largest competitor in the market. At the same time, Swedish law did not permit ITT to exercise its voting rights.

Ericsson's ownership situation was thus extremely unclear. Financially, the company found itself in an acute crisis, particularly because it had claims of about SEK 65 M against the bankrupt Kreuger Group.

Author: Ulf Olsson

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