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CONTENTS

PART II

THE ASSOCIATES 103

"Make Mistakes, Learn from Them, and Move On"

THE CUSTOMERS 132

"Let's Take a Walk and We'll Find It Together"

BUILDING THE BRAND 145

"Low Prices Are Just the Beginning"

THE COMPETITION 162

"Market Dominance Is Important"

GROWTH 177

"It Was Like Basic Training; You Learned How to Do a Lot of Things, Then You Went to War and Improvised"

THE MERCHANT, ACT II 206

"Who Is Staring Out the Window, Wondering Where We Will Be in Five Years?"

STRATEGIC PARTNERS 215

"We Had to Be Psychologists, Lovers, Romancers, and Con Artists"

HOW WE MANAGE 237

"You Are Wearing an Invisible Collar"

THE COMMUNITIES WE SERVE 275

"Our Culture Is About Making Sure People Understand That They Are Empowered to Do What Is Right"

CONTENTS

PART III

THE FUTURE 297

■Responding to Change Is One oF the Reasons for the Success of The Home Depot"

LEGACY 313

"We Took a Lot of Chances"

Adcnowledgmencs

We would like to thank the dozens of current and former Home Depot associates, vendors, friends, and family members who spoke openly about their experiences in the founding and development of the company.

We also are indebted to the National Home Center News, a valuable resource in reconstructing parts of this story.

Bernie Marcus Arthur Blank Atlanta, Georgia November 1998

There are several people whose contributions I'd also like to acknowledge, starting with The Home Depot's director of internal communication Rob Hallam, who served as my orange guide and explained everything that was otherwise inexplicable, and Nancy Beliveau, who worked closely with me to coordinate schedules and research materials, and never lacked a kind word of encouragement. There was also a coast-to-coast army of secretaries and assistants at

ACKNOWLEDGMENTS

the company who worked hard and graciously to smooth my path. I'm grateful to all of you.

A few other thank-yous: to my editor, John Mahaney, and his assistant, Luke Mitchell; to my agent, Joel Fishman of the Bedford Book Works; to my overworked and much appreciated tape transcriber, Becky James; and to Marcella Ziesmann, whose good humor and hard work are missed.

I'd like to thank my daughter, Rachel, for not growing up too fast while I was writing this book. My mother, Phyllis, and my mother-in-law, Helga Holsten, deserve kudos for helping out in so many ways. And finally, my wife, Mimi, who showed uncommon grace and patience with my many nights on the road or chained to the keyboard. I love you all.

Bob Andelman St. Petersburg, Florida November 1998

mcroduccion

"We Take Care of the Customer and Each Other"

You want a formula for success? Take two Jews who have just been fired, add an Irishman who just walked away from a bankruptcy and an Italian running a no-name investment banking firm. Add—then subtract—Ross Perot. Lease space from a shrinking discount chain, fill a space the size of a football field full of hardware (and a few hundred empty boxes), and you've got a company. At least that's the way we did it.

^ ^ ^

The creation of The Home Depot began with two words in the spring of 1978: "You're fired!"

Twenty years ago, we were two out-of-work executives. Our situation was not a lot different than millions of others who were shown the door. We had little in the way of capital and faced some daunting personal and legal challenges as we tried to get our careers back on track.

In our early years, we lived on the edge, with no balance sheet and a lack of financing. It took great romancing to establish the vendor base necessary to open and maintain the broad product selection for which we quickly became known. We were always pushing boundaries beyond where our industry's conventional wisdom suggested we could go.

INTRODUCTION

And it paid off: In just twenty years, our company, The Home Depot, has multiplied exponentially from four stores in Atlanta to 775 stores, 160,000 associates, and S30 billion in sales. Almost all of our growth has come from internal expansion and very little through acquisition. How did we and our associates do it?

Building The Home Depot was a tough, uphill battle from the day we started in a Los Angeles coffee shop shortly after we were fired. No one believed we could do it, and very few people trusted our judgment. Or they trusted our judgment, but just didn't think the whole concept of a home improvement warehouse with the lowest prices, best selection, and best service was going to work. They certainly didn't realize that what we were planning would turn out to be a revolution in the retail business.

While we want to tell the story of The Home Depot because it's a great entrepreneurial tale, our larger goal is to convey what we learned along the way about customers, associates, competitors, growing a business, building a brand, and many other topics everyone in business needs to know.

We're two regular guys from similar modest personal backgrounds and religious orientation who were given a strong drive to succeed by our respective parents. The values that form the core of The Home Depot's business philosophy are bigger than one person. They developed from our families as well as from key business experiences in the early days of our careers.

This book is the story of that virtually unparalleled growth and the values and culture that nourished it.

But we're not a company that's just about numbers. The numbers are important as a measure of our success. But we've attained them because of a culture that is agile and flexible enough to change direction as quickly as events demand it. When something isn't working in our stores, we don't keep doing it the wrong way simply because the rules say to do it that way. Instead, we do it the right way and change the rules. We do things because they're the right things to do for our customer.

A set of eight values has been our bedrock for the past twenty years. Although they were not put in writing until 1995, these val-

INTRODUCTION

ues—the basis for the way we run the company—enabled us to explode across the North American landscape and will be the vehicle for reaching our ambitious goals in the international marketplace.

We're only as good as our people—especially the men and women working in our stores every day. If the front line isn't absolutely committed to the cause, we can't win. That's why we believe a sure way of growing this company is to clearly state our values and instill them in our associates. Values are beliefs that do not change over time; they guide our decisions and actions. They are the principles, beliefs, and standards of our company. We call this process of enculturation "breeding orange."

In summary, we care about the customer and we care about each other. As you'll see throughout this book, our values are not platitudes that are dead on arrival on a lobby wall plaque, but are the spine that shapes the way we do business. These are The Home Depot's core values, although they are so universal that they should apply to every company:

■ Excellent customer service. Doing whatever it takes to build customer loyalty.

■ Taking care of our people. The most important reason for The Home Depot's success.

■ Developing entrepreneurial spirit. We think of our organizational structure as an inverted pyramid: Stores and customers are at the top and senior management is on the bottom.

■ Respect for all people. Talent and good people are everywhere, and we can't afford to overlook any source of good people.

■ Building strong relationships with associates, customers, vendors, and communities.

■ Doing the right thing, not just doing things right.

■ Giving back to our communities as an integral part of doing business.

■ Shareholder return. Investors in The Home Depot will benefit from the money they've given us to grow our business.

INTRODUCTION

Our values empower people to be their best. If we can implant a value system that lets them apply their basic goodness and ingenuity to The Home Depot and its customers, that's all we need to succeed. That will allow them to do all the right things without us having to constantly tell them.

Nobody loves a company. A company is just a sign. Nobody loves brick and mortar.

These values are our company. They are our belief system, and we believe in them as much today as we did when the first Home Depot stores opened in June 1979. Without them, we're no different than our competition. Our competitors could copy them just as they've copied our stores, products, and merchandising ideas. But they would have to believe in the ideas underlying these values to make them effective, and that's a tough step to take.

The Home Depot—and other companies, such as Wal-Mart— have helped create a consumer revolution through low prices and wider availability of products that was unimaginable twenty years ago. Many of the products now offered by The Home Depot were either too expensive or available only through contractors. Contractors could only get them from distributors or wholesalers and, after all of the markups, many home improvement projects were beyond the means of many middle-class people. Who would have thought that today an average person could walk into a store and buy a complete designer kitchen for S3,000 and get the knowledge to install it at no extra cost? We helped create a market of male and female "weekend warriors" who confidently glide from project to project—and call on us for assistance whenever they hit a rough spot.

In 1981, before we went public, Bernie made speeches locally in the Atlanta area, where we are based. Standing before 400 members of a local Rotary Club, he asked, "How many people consider themselves real do-it-yourselfers?" He described a DIYer as someone who owned power saws, electric drills, etc., or who could change a light fixture. How many, he asked, could repair a toilet themselves rather than call a plumber? "A do-it-yourselfer is somebody who really can do those things," he said.

Out of 400 people, maybe 20 raised their hands.

INTRODUCTION

In 1997, he made another speech to the same group and asked the same question. This time, only 15 out of 450 people did not raise their hands. We had changed America.

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Our employees, customers, and investors all want to hear the story of The Home Depot. "Tell us how it started," they ask. Every colorful detail, every unforgettable, crazy character. When we do store visits, they ask endless questions about the early days of the company. They want to hear what happened, even the most familiar of business legends, in our own words.

Naturally, we enjoy telling these stories. But what's even more important to us is sharing what is learnable and transferable from our experience. For example, while we are still busy on a day-in, day-out basis as cofounders and senior executives. The Home Depot is not a cult of personality. One of our greatest accomplishments is hiring a cadre of people who are smarter than we are and who will one day run this business without us—even better than we did—and not miss a beat.

That's a vital issue to us. Because somewhere around the opening of the 300th Home Depot store a few years ago, we realized there would now be Home Depot stores that we would never visit in person, associates we would never shake hands with or personally welcome aboard.

For people like us who started the business and personally tagged and shelved merchandise and took care of customers in our first stores, to think that today we are opening up stores that we will never see is a scary thought. It is a sobering thought. That speaks to the grow ing size of the company and the importance of passing on what we know to others.

That raises another issue: It's one thing to have corporate values, but another thing to communicate them. When we had four stores, it was easy. We knew everyone by name and saw them on an almost daily basis. But with 761 stores and 160,000 associates, the challenge is much more complex. We can't control everything that goes on in that many stores. But our values are the magic of The Home Depot.

INTRODUCTION

By consistently and emphatically teaching and enculturating them through the ranks of managers and on to the people working in the stores, we know that each and every one of these 160,000 folks will take care of the customer and each other. The rest takes care of itself.

So as you read, we hope you'll pick up a few ideas for building your own business along the way.

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Finally, there may come a day twenty years from now when we will want to go back and remember the truth about The Home Depot. That's the real reason we wrote this book. So we can sit rocking on a porch swing and say to each other, "My God, is that what happened? What a story that was; is it true?"

It is; every word of it. Cross our hearts and swear to bleed orange.

Bernie Marcus Arthur Blank Atlanta, Georgia November 1998

PART I

„^.„^^__„„„^...J1

Two Regular Guys

"We Can Finish Each Other's Sentences"

Bernie Marcus: My parents were Russian immigrants who came to America with no money. So courageous, these people. I think often about their lives, how in desperation, they picked up and left the only life they and generations before them had ever known. They had nothing. They came with nothing. They arrived in America looking forward to freedom and safety. They didn't speak the language. They were special people for whom courage was second nature.

I grew up in a fourth floor tenement at the corner of Belmont Avenue and Rose Street in Newark, New Jersey. It was freezing in the winter and hot as hell in the summer. I tell the joke that it was so bad that they tore it down to build a slum.

It was the only home I knew, of course, and I loved it. We were surrounded by other kids in this tenement, and I loved my life, me and my friends hanging from the fire escapes, using our imaginations to entertain ourselves. It was so much fun; just ourselves and our minds.

My mother was the matriarch and peacemaker of the family. She was such a positive human being that it was difficult to depress her spirit. She could find the bright side of any situation, even death. Mother was a great optimist. She often used the Jewish word b'sheirt,

BUILT FROM SCRATCH

which means "it is destined to be." And to her, everything that was destined to be was always very positive. In other words, even if somebody died, she would find a good reason—"they didn't suffer" or "the family didn't suffer." She could make anything into a positive.

My mom taught me most of the beliefs I possess today, especially that you have only so much physical and mental energy. Don't spend time replaying the past; it only keeps you from focusing on the future. Don't spend time on things in which you can't make a difference. She also taught me that the way you handle and deal with life's setbacks creates the basis for what you'll accomplish in the future.

I often think of Willy Loman, the central character in Arthur Miller's great play Death of a Salesman. Willy's glory days as a star salesman were clearly behind him. If he wanted to keep his job he needed to change. Instead, he blamed everyone but himself for his failures. My mom was just the opposite, always looking on the bright side.

A very, very bright woman, my mother had enough wisdom to qualify her to teach at our best business schools. She was bedridden in her mid-forties, crippled with rheumatoid arthritis. She couldn't walk. When my sister, Bea, was eight years old. Mother's doctor told her that the only hope she had of ever walking again would be if she had another baby. Believe it or not, I was conceived for medical reasons! Even better, after giving birth to me—on Mother's Day, no less—she was able to walk again. Her hands and feet were still hopelessly gnarled, but she was able to walk.

To her, I was a blessing. She loved me so because I literally saved her life. Although in unrelenting pain, she functioned for some thirty years after my birth and had an immense influence on my life.

My father was a cabinetmaker. He was strong as an ox, a great craftsman but a terrible businessman. He worked day and night, seven days a week, fifteen hours a day, and still couldn't make ends meet for his wife and four children. Without the contributions of my two grown brothers, Irving and Seymour, the family would never have survived.

As poor as we were, my mother used to take ice cream money away from my brothers and sister and me—often against our will—

TWO REGULAR GUYS

and give it to charities. Her sincere belief was that "the more you give, the more you get." How right she was.

m m m •

We lived in a predominantly black neighborhood, which made me a target if for no other reason than I stood out in any crowd. Black gang kids used to challenge me to fights every day after school and whip me badly, but, somewhat fearless, somewhat stupid, I always came back for more. Finally, the leader of one gang was so impressed with my ability to take what he was dishing out that he wanted me as part of the gang. At 11 years old, I not only ran with this gang of thirty black kids but I became its second in command.

Then when I was about llVi, we moved away from that neighborhood, which was getting too rough for our family.

m m m

My family was always in tough shape financially, so I started working from the age of 13. My first job was as a soda jerk after school. During summer vacations in high school, I earned money for college as a busboy in the Catskill Mountains. You could accumulate a significant (in those days) amount of money if you were frugal, because the jobs included room and board and the tips were all yours.

From an early age I had a propensity for medicine—especially psychiatry. I was particularly interested in studying the mind. I spent hours reading the works of Freud and Jung and became determined at the age of 17 that I would become a psychiatrist.

During this time, I learned the art of hypnosis. When I was a waiter at Kutsher's Country Club, I became proficient enough that I was able to perform on stage. I would put somebody into a hypnotic state, take them back in years, but I never made a fool out of anybody. I helped people with memory problems find something they lost. In fact, I did one of the original stop-smoking routines. It was a very exciting period in my life; I hypnotized as many as ten people at a time. It was here, as I got into people's minds, that I began to understand how some folks become obstacles for others.

I recognized then that my calling was in medicine, and specifically

BUILT FROM SCRATCH

psychiatry. I registered for premed studies at Rutgers College in Newark, which allowed me to save money by living at home.

After my second year, I sought a med school scholarship. One day the dean, with whom I had become friendly, called me. He had arranged a scholarship for me to attend Harvard Medical School. I was very excited.

Then he said to me, "I will give you the address where you have to send a SI0,000 check," and I just looked at him in disbelief. He explained that there was a quota on how many Jews Harvard would willingly accept into medical school. The SI0,000 was some kind of kickback.

I never personally spoke to anyone from Harvard, but I was told there was an unwritten quota system regarding how many Jewish students could be accepted into various graduate schools—medical included. But if my family could come up with a SI 0,000 contribution, I could probably circumvent the quota. Well, my entire family—parents, aunts, uncles, and cousins—had never seen that kind of money, let alone possessed it, so my dream was quashed like a tenpenny nail being hit by a sledgehammer.

In total frustration, I quit school the next day, packed my suitcases, and hitchhiked down to Florida, where I stayed for a year. I was so despondent because I couldn't be a doctor.

After I'd had a year of real-life learning experiences and total independence, my mother prevailed on me to finish my education. All good Jewish mothers feel their children need a college degree, so I went home. I went back to Rutgers and enrolled in pharmacy school, which was far from my heart's first choice.

m m m

I was very young during World War II, but it—and the news of the Holocaust in particular—had a sobering effect on me. It dawned on me that folks like myself were massacred for no other reason than being born Jewish. If not for the courage of my parents giving up everything they knew to come to this wonderful land, I might have perished in Hitler's death camps. So at an early age, survival of the Jewish race and religion became very important to me.

We were brought up in an Orthodox religious home. Going to

TWO REGULAR GUYS

synagogue—and living our lives according to the scriptures—were very important and had a special meaning to my parents and, through their eyes, to me. They had a strong belief in God, and they instilled that in me.

I was very religious myself, although I had a problem: I didn't understand Hebrew. It was difficult for me to pray to God in a language that I didn't understand. I did the chants, and I did the words. But I didn't understand it, and, as an adult, I kind of backed off on Orthodoxy. But I never backed off on being a Jew.

I understand the frustration that blacks faced in America years ago. Jews suffered the same obstacles. Large corporations, banks, and industries were devoid of Jews in positions of authority. We couldn't belong to exclusive clubs or high society. So we had to work harder and smarter to succeed. There is great jealousy of the accomplishments of Jews in America, but we fought for our share.

I believe that the value of our religion is critical. I think it has taught me values. And what I have always understood is that the human being is his own temple, that if you feel good about yourself and share your good fortune with others who are not so fortunate that you are doing the work of God. Beginning with my mother's encouragement, I have tried to conduct myself in this manner.

p p p

When I finished pharmacy school in 1954,1 interned for a year. Before the year was up, the father of a friend of mine, Larry Wortzel, died, and Larry offered me a 50 percent sweat equity share of his father's Millburn, New Jersey, pharmacy business. Central Discount Drug. I accepted, but it was a mistake.

This was not a great partnership and was full of stress for both of us. A frustrated would-be doctor does not make for a good pharmacist. Lots of heated arguments ensued.

One Saturday night—we were open until nine P.M.—after I had yet another conflict with Larry that day, I was alone in the store and eating dinner at the back counter between customers. That's when fate—a little guy with a big cigar in his mouth—walked into the store and changed my life.

"Hey, kid, come here, get me a cigar," he said.

BUILT FROM SCRATCH

This fellow may have been two years older than I was, maybe three years at the most.

"What did you say?" I asked. "I said, kid, get me a cigar."

So I walked up to him, and said, "Pick a window."

This big cigar dangling in his mouth, he looked at me, confused. "What do you mean, pick a window?"

"Pick a window, because you are going through one of them. I want you to have a choice in which one." And believe me, he knew I wasn't kidding.

He put up his hands in a defensive way, as if to suggest he meant no offense. But I was in a foul, foul mood, and I was prepared. Calling me "kid" was the last straw.

"Wait a second," he said. "You must have had an argument with your partner."

"How did you guess?" I asked, disarmed by his intuition. "Hey, I've been in here before," he said. "I've seen you around your partner."

He introduced himself as Danny Kessler and said he was the chairman of a company called United Shirt Shops.

"What are you doing in this crummy store?" he asked me. "Why don't you get the hell out of here? Go into a business that is more suited to your talents."

"And what business would that be?"

"Discount stores. Concession departments. I have the men's clothing concession in a whole bunch of stores and we are making a ton of money. There are lots of great stores doing this."

"Where are they?"

"There is one not far from here in Paramus," he said, "Why don't you come visit me there tomorrow?" So the next day, I did.

I had never been in a discount store in my life, and it was mind-boggling. I had never seen that many people in my whole life go through a store, and every department, while part of the same store in the customer's eyes, was run by a different concessionaire. Kessler took me over and introduced me to Henry Flink, who leased and ran

TWO REGULAR GUYS

the cosmetics department. Health and beauty aids were just flying off his shelves.

"How does a person get in this business?" I asked Kessler.

"You want to get in, I will get you in," he said.

I had no money to buy into a new venture; I was broke. Larry had no money, either; he had the store, that's all. But Kessler was true to his word and found a place for me to start. Spears Fifth Avenue, near the Empire State Building.

We hocked the drugstore to get into this new business. Wortzel didn't want to do it; I did. Another argument. But our resources were so slim, we had to do it together. I finally suggested a compromise. I said, "You stay with the drugstore, I'll run this business, and we'll be successful at it." Reluctantly, he went along.

To get me up and running, Flink agreed to sell me merchandise on credit, basically setting me up to be his own competitor. It was the beginning of a personal relationship that continues to this day.

Unfortunately, Spears was on its way to bankruptcy and nearly dragged us under with it. Plus I had other troubles. Wortzel and I owed Flink and others a ton of money.

Meanwhile, another friend of mine. Bob Silverman, told me about Two Guys. "They need you desperately," he said. "They are the best, but they are running the worst cosmetics business in the world. Maybe you can get a concession in their stores."

So I went to the Two Guys store in Totowa, New Jersey, and walked it maybe ten times over a two-week period. I was astounded. Great Eastern Mills, another well-known East Coast discount chain of that era, was good. But Two Guys was better. I asked one of the employees, "Who runs this place?"

"That guy right there," he said, pointing. "Herb Hubschman." By a twist of fate, Hubschman was in the same store that I was visiting.

"Mr. Hubschman?" I said, interrupting him.

"Yeah?"

"This is the greatest store I've ever seen," I said, exaggerating to keep his interest. "This is unbelievable."

Flattered, he personally walked me from department to department, telling me, "I buy this" and "I do this" and "I bought this for

BUILT FROM SCRATCH

this" and "I bought this whole company out." When he finished, he turned back to me and said, "Well, what do you have to say about that?"

And I said, "For the smartest guy in the world, you are the biggest schmuck I ever met in my life."

He looked at me, stunned, a hurt expression in his eyes. "What are you talking about?"

"Look at how brilliant and innovative you are," I said. "You have food in the store, you have appliances, you have this and you have that. But your cosmetics department is the worst I have ever seen. It's disgraceful! How can you let this happen?"

"Well," he said sheepishly, "my brother runs it."

"Now I know what's wrong. Your brother runs it.

"Herb," I continued, "from now on, I will run this part of your business. What your brother is doing in sales now I will pay as rent and I'll make a profit over that."

"You can't possibly make that deal," he said.

What he said he believed and what he wanted to believe were two different things. I wanted that cosmetics department and he wanted me—enough for him to buy the concession departments I had at Spears and another store, Webster's, for all of the debt that I owed, including paying off Henry Flink and Larry Wortzel. I separated myself from Larry—we weren't talking at all at that point, anyway. I left him with the drugstore, and I went with Two Guys.

The owners of Two Guys, which was one of the foremost discounters in those days, bought our inventory and paid our debts. I took over the cosmetics department and in a short time did what I said I would do. They also gave me the sporting goods department, followed by major appliances. By the time I was 28,1 was overseeing approximately $ 1 billion worth of business, all of the hard goods of the Two Guys companies.

I ascended the ladder of success at Two Guys by learning how important the folks are with whom you surround yourself I loved teaching people the business. Why have I been successful my whole life? Because I've always surrounded myself with people who are better than I am. That's one of the lessons that guided Arthur Blank and me

TWO REGULAR GUYS

when we started The Home Depot and one every businessperson in America needs to learn.

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I later became friendly with Wal-Mart's founder, Sam Walton, and remain close today with the company's current chairman of the board, David Glass. We have a lot of common experiences and interests.

One day. Glass and I were walking through one of his superstores in Georgia. I said, "You think this superstore of yours is a great invention, right?"

"Oh, yes," he said proudly, having played a part in Wal-Mart's birth.

"Well, we did this at Two Guys back in the early fifties," I said. "We had a supermarket. We had linen and major appliances. We had a little restaurant. We had all of the things that you have here now. We didn't have the systems that you have. We didn't have the help that you have. Today, we have computers to help run these businesses. Back in those days, it was run by grunts, who did a lot of real grunting. It was a tough business. Everything in your stores is a carbon copy, it's as though the world came around."

David then remembered! He had been in Two Guys stores.

"Some of it worked," I said, "some of it didn't work."

Seton Hall University in New Jersey did a study in the late 1960s and discovered that 70 percent of the appliances that were bought on the East Coast were bought in Two Guys stores. Something like 60 percent of lawn furniture was bought at Two Guys.

But in the end, they blew it.

Herb Hubschman, the founder of Two Guys, died. And when his brother subsequently exited the business, it was taken over by outsiders who destroyed it by overexpanding.

One of their last smart decisions was acquiring Vornado, which was probably the largest fan company in the world at the time. Two Guys was the major buyer of their fans. When they ran into bad times, our private company,Two Guys, bought their public company, Vornado, and created a new public company under the Vornado name. I subsequently went out selling their product to other people.

BUILT FROM SCRATCH

Another acquisition, Food Giant, a supermarket company in California that built emporiums and discount stores, was the arrogant move that destroyed Two Guys. We overexpanded and paid a heavy penalty for it. Guys like me were drowning in the mess of it all. The rising waves of red ink made me sick.

As a conglomerate. Two Guys was a disaster. People in the company focused on their own careers, not the customers. As a result, the customers disappeared and careers sank. The history of retailing is filled with once-great companies that disappeared off the face of the earth,Two Guys included. I carried the lesson I learned about the importance of customers throughout the rest of my career.

I left Two Guys in 1968 because I couldn't deal with it anymore.

I'd had it with cold weather, anyway. One freezing, miserable day, there was ice on the ground, snow and sleet were falling, it was disgusting. My car window iced up while I was driving. I pulled over, got out of the car, and as I scraped the ice, some of it went down my sleeve. Just then, a car whizzed by and sent a wave of ice over my head and down my back. "That's it," I shouted to everybody and nobody. "I am out of here! Next chance I get, I am gone."

A week later I got a call to go to California.

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In June of 1968 I joined a manufacturing company called Odell, Inc., as president and chief operating officer. Odell was a S50-million-a-year manufacturer of consumer products such as Esquire shoe polish, Tintex, and Tidy Bowl.

I stayed at Odell for two years, enduring a hostile-takeover battle with Papercraft. In June 1970,1 read the handwriting on the wall and left Odell for Daylin Corporation as a vice president in its North Bergen, New Jersey, offices. My initial responsibilities included supervising the 34-store Millers/Gulf Mart Discount Stores operation, working with Dave Finkle, chairman of the executive committee, to coordinate the corporate-wide merchandising of our hard-goods lines, and supervising drug and toiletries merchandising in the chain of Great Eastern Discount Stores—a direct competitor of Two Guys.

I never had any real money to speak of in those days, despite hold-

TWO REGULAR GUYS

ing lofty titles in some of America's best retail companies. And by 1972,1 had an ex-wife, Ruth, two kids in college, Fred and Suzanne, and a new wife, Billi, and another child, Michael Morris. No matter what I was paid, it w^asn't enough. Real money is in equit>^, and that I didn't have.

But when I was handed the reigns to another Daylin chain. Handy Dan Home Improvement Centers^, it forever changed the course of my life.

Arthur Blank: I grew up in the borough of Queens in New York QaVs. We lived in Sunnyside until I was 11, then the family moved to Flushing.

People assume that because we cofounded the world's largest home improvement chain, we must be real whizzes around the house. But I never had the opportunit>' to be handy because I was raised in an apartment. I was always out in the street, playing ball and running around with my friends. There was nothing made of wood around our house—everything was cement, bricks, and block. I didn't live in a single-family home until I was 31 years old.

My dad was a very kind person. You couldn't help but notice how everybody liked being with Max Blank. He was just an easy person to be around. And while he worked hard, he was always available to play ball or do whatever I asked.

One of the things I have always remembered about Father was his natural affmit\' for speaking Spanish. When I took Spanish in high school, he would help me with my homework after dinner. He would sit on the corner of my bed, shake his head, and say, "How come you don't get this?" It came so easily to him and so hard to me. I was a good student when it came to science and math, but I couldn't get Spanish. "Why is this hard for you?" he would ask. "What is the matter here?" (In 1998, when we opened our first store in Chile, I was reminded again of how useful it would have been to learn Spanish.)

I have such fond memories of my father. As a pharmacist, he was always helping people. Back then, a pharmacist was kind of a sec-

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ondary doctor. Medical doctors weren't as accessible or as abundant as they are now, so my father spent a lot of time talking to people about their health, giving them advice. It's somewhat ironic that my partner, Bernie, has a grounding and experience as a pharmacist.

When my father worked for his brother, it was only a couple of blocks from where we lived. Mother would make his lunch or dinner and I would take it to him at the drugstore. I would sit there and watch while he mixed prescriptions—the way pharmacists really used to do it—and he talked to me between customers and sneaking a bite of food.

I remember how hard he worked when he started his own business. Sherry Pharmaceutical, a mail-order pharmaceutical company selling direct to hospitals, doctors, and nursing homes across the country. At night he would come home and be on the phone for hours doing deals.

One of the great losses in my life happened when my father died in 1957 of a heart attack. He was just 44 and I was 15. My uncle also died of a heart attack sometime later. My brother, Michael, who is two and a half years older than I am, was always convinced that he would never live past 44. Really. He just "knew" that he was going to die because Dad died so young. Today, Michael is 60 and still in good health.

I never had that fear. I have always pushed myself hard, but it was never because I thought I wouldn't live a long life. I do, however, think one of the reasons I have had an extreme emphasis on health and exercise in my life is my father's death. In the mid-1970s, a doctor at the Scripps Clinic in San Diego warned me against smoking. "You have one big strike against you," he said. "Your father's heart condition."

That had a big effect on me. On the plane ride home, I read Kenneth Cooper's first book. Aerobics, all about running and staying in shape. When I got home, I ran a mile. Cooper had a test in which your physical fitness starting point was running as far as you could in twelve minutes. I was able to run a mile in twelve minutes, which today is ridiculously slow. Then, it was a major accomplishment. The next day, I did it again. Pretty soon I was running a mile or two every morning. People would see me out running—this was before it be-

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came a national obsession—and they would say, "What were you doing? What is that about?" It was such a strange thing to do then.

So I think my father's death affected me in a lot of ways. Maybe at some level, deep down inside, I have always had a sense of urgency about getting things done and accomplishing things and moving on with things, and maybe some of that has come from him. But I never consciously had a fear of dying at an unusually young age. In fact, I am probably in better condition and fitter than most men half my age.

One of the great losses that I feel I have is that I never really knew my father as an adult. There have been times when I had been under stress and I took great comfort in recalling childhood conversations with my father and imagining how we would discuss the current issues in my life.

When you see a person through your eyes at age 15, and that is the end of the relationship, you don't really know him as an adult would know him. And as I have gone through the growth in life, my first marriage to Diana, our three children, Kenny, Dena, and Danielle, all the business situations, building The Home Depot in the last twenty years, my second marriage to Stephanie, and our son, Joshua, I wish my father could have been there through it all.

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My mother, Molly, was 37, a young woman, when my father died. How much his death affected her, nobody will ever really know for sure, but I think it was probably greater than any of us ever suspected. Not only because she had to go into his business and run it with no experience, but because it was really a small business then that she built from the ground up. If she had tried to sell it right after my father died, it wouldn't have been worth very much.

She was concerned because she had to put two sons through college, both in expensive private schools. The issue of being able to support us was paramount for her.

My father did not have a lot of life insurance. The life insurance that he had was in dispute because he had taken it out only a year or so prior to his heart attack. There were questions of whether or not he had made a full disclosure about his health.

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So Mother became the breadwinner, trying to, as she put it, "be a mother and a father to two sons." Of course there is no way that a mother can be a father to boys, anyway.

The pressure our situation exerted upon her was enormous, and it took a lot out of her over the years. My father's death affected her, not only because she lost her husband, but because it put much more stress on her and made her life a lot more difficult in many, many ways. It changed my relationship with my mother, who is a very remarkable woman. She is a very bright lady, a principled person, a perfectionist, with strong social-liberal leanings.

My mother, who really had no business experience, went into the business and ran it as best she could. And she did a very good job.

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I have always been athletically inclined. Today I run marathons; back in high school I was a baseball and football player, as well as running track.

Being competitive has always been at the core of my nature, although it didn't kick in with regard to academics until I got to college.

In high school, sports were my consuming passion. I did okay in school in terms of academics, but mention sports and my attention was truly riveted. In baseball, I started off as a centerfielder, but I eventually threw my arm out and couldn't make any long throws. So I became a catcher, a position that suited me because I was in the middle of almost every play.

I apparently got my athleticism from my father. He went to Columbia University, where he set then-New York City records for both the mile and the 100-yard dash, an unlikely feat today because athletes tend to specialize in distance or sprint races.

When I started at Babson College, a small business school just outside of Boston, I took school seriously for the first time. And there's nothing like applying yourself: I was elected vice-president of my junior class, president of the senior class—I did everything in school that you could possibly do, plus, I was a straight-A student and made the dean's list.

One of the ways I paid for my college education was running my

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own landscaping business. Freed from t±ie confines of cit\' life, I discovered a love of being outside. I ran m\' own laundry business as well, picking up laundry on campus several nights a week.

My brother, Michael,, earned a degree in pharmacy from the University' of Michigan. On paper, our skills sounded like the perfect combination for taking over the family business and finally relieving our mother of the pressure caused by Dad's premature death. Aiichael would be more on the technical side, I would handle the business side.

But after graduating with a bachelor of science degree in accounting in 1963, I postponed joining the family business a while longer and took a job with the Big Eight accounting firm of Arthur Young & Company. I was the youngest staff person they ever recruited in New York Cit\' and I stayed for almost five years.

Some of the work I did at Arthur Young was in management consulting. I was 20 years old when I started, so I was never the senior person on major assignments, but I did do some consulting, as well as staff accounting. I enjoyed that, and I was very good at what I did. It was important for me to get some outside experience in the business world so I could eventually bring a greater expertise to our own company.

I was on the verge of becoming an audit manager in 1968, when I chose to join the family business instead. The company had been growing and doing well, and my mother and brother were anxious to have me finally take my place beside them. One of my father's brothers was involved with it, as was a cousin. It truly was a family business.

It was very different than what I had expected after all those years. I was prepared to roll up my sleeves and do what it took for the business to be successful, and I understood the responsibilities that I would have then would be very different than what I had at Arthur Young, and they certainly were. The environment, certainly, was very different. But that was okay with me. And I enjoyed my work when I was there. I worked very hard, very long hours. But it was not a growth situation from a professional standpoint.

It was hard for me to work with my brother and my mother. I loved them both very much, but it was impossible. I spent a couple of

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years working tiiere, and then my mother sold the business to the Daylin Corporation on June 1, 1968. When my father died in 1957, it was a very small business. By the time she sold it, my mother had built the company up to several million dollars in volume. Daylin was a conglomerate centered in the retail business, with an emphasis in pharmacy and health goods.

If you have a family where family members can work together, that is wonderful. But it doesn't often happen, and it didn't happen in our situation. I love my mother, I love my brother, but we were not meant to work together every day. And I think Mother finally saw that, too.

I think selling the company was the right decision for her. As a widow and mother, her primary interest was not building a huge business but conserving its equity and resources. She was too concerned about her own future at that time to think in terms of risk and expansion.

When Daylin took over, we all stayed with the business for a while longer, but I really didn't feel that staying in that business was what I wanted to do long-term. It was still hard for me to work with my mother.

Fortunately, Daylin was a company of infinite opportunity.

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In 1970, Daylin named me chief financial officer of Elliott's Drug Stores/Stripe Discount Stores. Two years later, I became president of Elliott's/Stripe and relocated the company and my wife and our three children to Griffin, Georgia. They actually call it "The First City South of Atlanta."

Between 1972 and 1974, my responsibilities at Elliott's/Stripe included being named assistant treasurer of the parent company. Max Candiotty, the president of Daylin, and Leon Beck, the corporation's senior vice president and lead financial officer, adopted and men-tored me. They saw potential in me and were very supportive during my career there.

When I became president of the division, it was kind of a shock to the rest of the Daylin organization because I was a very young man in

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my late twenties. I hadn't run a business of that magnitude. I had only been involved in business at Arthur Young from the work I had done there, and, of course, my family business. So it was a major move, but it turned out well. I did a good job for them, and I grew the business and gave them the kind of earnings they were looking for.

I remember having many good personal relationships at Daylin in those days. It was a less structured, less hierarchical corporate environment, a family culture where people supported each other and cared for each other.

Becoming president of that division at an early age fed my entrepreneurial spirit. It encouraged my capacity for starting and running a business, for wanting to make decisions, for wanting to be a part of everything.

In July 1974, Daylin was going through some very difficult times. That's when it decided to sell off some divisions, one of which was mine, the freestanding drug stores. I said, that's fine. I'm 32 years old—I'll do something else.

That's when Bernie called me from Handy Dan. We had met a few years earlier at Daylin corporate events and established a solid rapport. He named me corporate controller of Handy Dan; later, my title changed to vice president of finance.

In baseball, the pitcher is often the center of attention. That was Bernie. But the catcher is in the middle of the action, helping set the pace of the game. During our time at Handy Dan and subsequently at The Home Depot, Bernie and I have been effective as team players in roles in which we both feel comfortable.

Origins

"You've Just Been Kicked in the Ass by a Golden Horseshoe"

Bernie: He called himself "Ming the Merciless."

It wasn't a nickname used behind the boss's back. The sign on the CEO's office door at the Daylin Corporation impressed upon all who entered how proud Sanford C. "Sandy" Sigoloff was to be known as "Ming." Ming, of course, was the villain in the old Flash Gordon movie serials of the 1930s.

Sigoloff, a former nuclear engineer who once worked for the Atomic Energy Commission, is today best remembered for his later stint atop Wickes Cos.—which he bought in bankruptcy with the help of junk bonds wizard Michael Milken. Wickes had a reported $400 million in losses and 250,000 creditors when Sigoloff took it over in 1982, but within three years, the company emerged from bankruptcy. He also ran L.J. Hooker Corp., whose divisions included the already-bankrupt B. Altman & Company and Bonwit Teller retail chains.

He was a nice looking, sharp-dressed man, very smooth, slick, and articulate, a chief executive who couldn't just fire an underling and get on with business. When people leave Sigoloff, he once told me in a coffee shop, it was very important that he affect them economically.

ORIGINS

emotionally, and physically, so that people think twice before they ever turn on him.

I was shocked at such tactics. "When you treat people like that, it comes back to haunt you," I said. "People are fearful of you."

But Sigoloff wanted people to be fearful of him. He didn't want to let a person out with dignity. He wanted to see them destroyed. That was his style. He didn't call himself Ming the Merciless for nothing.

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Gary Erlbaum once ran a small chain of Philadelphia-based home improvement stores called Panelrama. In 1976, Erlbaum and his Park Avenue investment banker. Ken Langone, president of Invemed Associates, talked about the future of Erlbaum's industry.

"Let's start with a benchmark of who is the best in this business," Langone said. "Who do you think are the best operators?"

"The best is a company out of California called Handy Dan," Erlbaum said.

That worried Langone.

"Gee, Gary," he said, "if my memory serves me right, those guys are in bankruptcy." If that was the fate of the best, little old Panelrama didn't have a prayer.

"I think that while the majority of Handy Dan is owned by a company named Daylin Corporation, 19 percent is owned by the public," Erlbaum said. "Daylin went into bankruptcy; Handy Dan didn't."

Later that same day, back in New York, Langone got out his Moody's Investors Service and Standard & Poor's manuals, books packed with data on publicly held companies. Not only was Handy Dan not bankrupt, it was a solid company doing very well—despite the woes of its parent company.

Handy Dan Home Improvement Centers, headquartered near Los Angeles in the City of Commerce, began in 1955 as a small hardware store in El Monte, California. Two decades later, it was under our management and had become one of the nation's most respected and successful home improvement chains. Handy Dan stores were 30,000 to 35,000 square feet and generated the highest volumes in

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the industry. Our best store did S5 million a year in sales, unheard of in those days in the home improvement business. The average store was closer to S3 million.

Langone was further intrigued that it was selling for S3 a share and it appeared likely to earn SI.50 a share. Even in 1976 terms, that was awfully cheap.

Erlbaum had mentioned that he and I were good friends, a relationship begun when I had considered acquiring Panelrama. And while I ultimately passed up the deal, a close personal relationship blossomed between us. Langone asked Erlbaum to call me and make an 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."

Coming out of Erlbaum, that was a pretty strong statement.

Intrigued, I said Fd certainly take Langone's call. Half an hour later, the phone rang and I heard the following statement: "I think you have the greatest company I have ever seen in my whole life! You run the greatest business I have ever seen!"

That said, Langone was still suspicious of Handy Dan's numbers. "This doesn't make sense," he told me. "You're going to make SI.50 a share?"

"Yes," I said, "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."

Langone, who later joined us as a cofounder of The Home Depot, was a man who formed instant, irrevocable opinions about people, and I, he decided, was the kind of man with whom he could do business. Not knowing Langone from the next potential shareholder, I was politely reserved and noncommittal.

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"Would you mind if I came out to see you sometime?" Langone asked.

"Sure, sure," I said, "any time you want to come out, fine."

"Good," Langone said. "I'll see you tomorrow for lunch."

Langone seemed very excited. He took the first flight out of New York the next morning and landed in Los Angeles by 11:30 a.m., in time for lunch.

Still overwhelmed by the speed with which Langone operated, I took a more cautious approach. I immediately called my lawyer, Erwin Diller, a very conservative, straight-laced attorney, and invited him to lunch.

"Erwin, I am meeting a guy for lunch tomorrow, and I am not meeting him by myself," I said. "I want you there."

I was nervous about what I could and couldn't say and what I should and shouldn't say. Langone was like a fire hydrant let loose, boasting his intention of buying every single share of stock in the company. I didn't want to do anything that would land me in hot water with the Securities and Exchange Commission. And I answered to a higher authority, anyway: Ming the Merciless. I was trying to make sure I did the right thing.

Langone was the single brightest, most energetic person that I had ever met. He is intuitive, smart, and a real street fighter. Over lunch, Langone described his background and how he represented a group of investors who had every intention of buying up Handy Dan stock. He asked pertinent questions. The more he learned about the business, the more he realized how undervalued our company was— in part due to the Daylin bankruptcy—and his enthusiasm only grew.

Diller also took kindly to Langone's visit. After he had gone, Diller told me that he felt as if I could trust Langone. Certainly Langone went away happy: As soon as he returned to New York, he and his investors started buying every share of Handy Dan stock that came on the market, more than 400,000 shares in all, at prices ranging from S3 to S12 per share.

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Diller was right. I could trust Langone. But I knew that for myself. The minute we met, the chemistry was right. We took an instant liking to each other and trusted each other implicitly. Of the 2.5 million outstanding shares of Handy Dan stock, about 475,000 were in the hands of the public. Langone effectively got all the stock with the exception of one block of 50,000 shares. It was owned by the Brooklyn-based Congregation of the Most Holy Redeemer, or as they're commonly called, the Redemptorists. Never shy, Langone called the priests and spoke with their financial officer. Father Ray McCarthy.

"Would you like to sell?" Langone asked.

McCarthy paused a moment. "Langone," he said. "Is that an Italian name?"

"Yes," Langone said, encouraged. "Yes, it is." "And are you a Catholic?" "Yes, I am."

"Then in the name of hell," McCarthy said, "tell me what I should do."

"On those terms," Langone said, laughing, "keep it. Don't sell."

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Langone started buying Handy Dan stock at S3 a share. By the time he controlled most of the public issues, it was around S9 with nowhere to go because so little changed hands anymore. Still, it was a valuable stock to hold because Handy Dan was making money and had a very exciting future.

Now that he possessed so much Handy Dan stock, Langone personally visited every one of the company's stores (some of which were known as Angel's Do-It-Yourself Centers), from Southern California to Denver and Kansas City. We became fast friends, our relationship growing far beyond a common desire to see Handy Dan grow. We genuinely enjoyed each other's company and socialized whenever possible.

Sigoloff, of course, was more than a littie curious about who was buying up all the Handy Dan stock, so I arranged a meeting. It was all handshakes and politeness on the surface, but that was as good as it ever got between Langone and Sigoloff. Neither liked the other and

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they never would. Sigoloff viewed Langone with suspicion; Langone didn't care for Sigoloff's attitude toward me.

"This is a real bad guy," Langone said after his first encounter with Sigoloff. "This is a guy that you can't trust and that would kill you in a second."

Arthur was Handy Dan's chief financial officer and my closest friend and confidant at the company. He had come to the home improvement chain in 1974 after two years as president of another Daylin division, Elliott's Drug Stores, which was based in Savannah, Georgia.

The tw^o of us had met several years earlier at corporate meetings and discovered an instant camaraderie: I loved to tell jokes and stories, and Arthur, who enjoys laughing, is a great listener, a terrific audience. He joined me at Handy Dan as CFO after his predecessor had a stroke. With Arthur in the role, the position became much broader, with responsibilities that exceeded the realm of financial matters.

Arthur and I ate lunch together almost every day. It was very much a symbiotic relationship, despite my being nearly twelve years Arthur's senior. In the best of marriages, you marry somebody, hopefully, who has your value system but who is still different from you in lots of ways, and that is how^ you grow. We were two different people who fit together symbiotically.

Handy Dan wasn't the only U.S. corporation in the 1970s that was held by an 81 percent private, 19 percent public parmership. A number of holding companies like Daylin sold 19 percent of their whoUy owned subsidiaries (such as Handy Dan) to the public. The holding companies kept 81 percent on the belief that the public would unlock values in the asset, creating a higher value so that the 81 percent would be worth much more than if it were completely private. (For tax purposes, the companies had to own more than 80 percent.)

But a fascinating thing happened at at least three of these companies. Brunswdck Corporation owned 81 percent of Sherwood Med-

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ical and abruptly bought back the 19 percent of outstanding public shares and took it private again. TransUnion did the same with Eco-dyne; National Distillers of America followed suit, buying back all the stock in Almaden Wines.

At the time, Langone was on the board of Sealy Corporation. By luck, another board member was a lawyer for two of the three companies that had repurchased their shares.

"Is there any common theme in why this is being done?" Langone asked. "Why is this stock being reacquired?"

The economics didn't work, the lawyer said, and the holding companies didn't realize as much value as they anticipated. In many cases, instead of asset values rising, the exact opposite occurred: the publicly held shares plummeted in value. Handy Dan, for example, went public at SI2 and dropped as low as S3 at one point.

"Well, that and one other thing," the lawyer said.

"What is that?"

"This structure is a time bomb," the lawyer said. "We believe, theoretically at least, that if somebody were to get control of the 19 percent minority, the only way the person who held the 81 percent could really exercise their fiduciary responsibility to the minority would be to vote it in direct proportion to the way the minority votes on any issue."

Langone was thunderstruck. Not speechless, of course, just thunderstruck.

"You mean," Langone asked, "that if 60 percent or 90 percent of the 19 percent said they wanted to do something, the only way that the 81 percent owner could sanitize their vote would be to vote directly proportionate to the minority? Does this mean that the motion would carry, which means that the minority controls the company?"

"Yes," the lawyer said. "It seems convoluted, but considering fiduciary duties, that is the only way the majority owner can say, 'Hey, I didn't shout, I didn't force my will on anybody.' I think that was a stretch, okay? But it will probably work."

Langone, who controlled virtually all of the 19 percent of Handy Dan public shares, wasted little time in calling Sigoloff and asking for

ORIGINS

a meeting. Daylin was out of bankruptcy protection by then and back to business as usual

A few days later in California, the two men shook hands and Sigoloff, completely in the dark, asked, "What's up?"

"Well, Sandy," Langone said, "I just wanted to see how you and I are going to run this company going forward."

The gauntiet was thrown down, the line drawn in the sand. Insert your own adversarial cliche; any will do.

"What do you mean, we>'' Sigoloff erupted.

"Sandy, there is a body of thought. . ." and Langone filled Sigoloff in on what the attorney told him. "This is why these other companies are all buying their shares back, because there is a potential time bomb here. I don't want to have any trouble with you. I think what you and I ought to do is to stay in constant contact and communicate with one another the things we want to do with the company, to the best interest of everybody."

A major control freak who had no intention of ceding a whit of influence to Langone, me, or anyone else, Sigoloff was furious.

"I don't believe that, it's crazy! This is stupid," Sigoloff said. "I never heard of anything so dumb in my whole life."

"Okay," Langone said, using his most conciliatory tone and keeping as straight a face as possible. "I just hope it doesn't get to the point where one day we have to test it."

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That day came sooner rather than later. A month after their first "partners" meeting, Langone received a call from Sigoloff. One of Sigoloff's lieutenants, Daylin senior vice president Jeffrey Chanin, was going to be in New York and wanted to say hello.

Langone alerted me because he expected the attorney's visit would be anything but innocent. He also put a call in to notorious corporate takeover attorney Joseph Flom, a partner at the New York firm of Skadden, Arps, Slate, Meagher & Flom, L.L.P., and a personal friend of Langone's. Flom's office was a five-minute walk from Langone's.

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"Joe, I don't know if I need a lawyer," Langone said, describing the situation, "but if I do, I want you to have the meanest, toughest S.O.B. you have standing by."

"I have just the guy—Bob Pirie," Flom said.

So on the appointed day, Jeff Chanin arrived at Langone's office, took off his jacket, and sat down. He lost no time with idle pleasantries, saying that Sigoloff was taking Handy Dan private again and that Langone and his investors must sell out. If necessary, Chanin swore, Daylin would squeeze Langone out in what's called a "cram-down" merger. But that required that Sigoloff control 90 percent, something that wouldn't happen unless nearly half of Langone's investors defected.

"Jeff, cut the crap," Langone said calmly. "I control enough stock that you can't do any such thing. If that is why you are here, to threaten me, you have the wrong guy. Excuse me."

Just then, Langone picked up the phone and called Bob Pirie. "Bob," he said, "I need you."

Pirie arrived in minutes.

"Who is this guy?" Chanin demanded.

"This is my lawyer," Langone said. "Now, what do you want to talk about?"

"Look, we really don't want any trouble," Chanin said, backpedal-ing. "The stock is selling for about $S a share. We know you are boxed; you can't sell any stock. You have no liquidity. How about if we pay you SIO a share?"

"No way," Langone said. "The price is SI2."

Chanin was shocked. "Forget it!"

Wanting to leave Chanin swimming alone with his personal barracuda, Langone left for the men's room. Barely two minutes later, Chanin followed him in.

"Okay," he said, "SI2."

"Jeff, you don't understand," Langone told him. "You offered to buy it for SI0.1 said no. I offered to sell it to you for S12 SLndyou said no. Now you are back, wanting to buy it at SI2. That offer is off the table. That's gone. We had an offer and a denial. No deal."

"What?!"

ORIGINS

"I suggested a price of S12 in my office, right?" Chanin nodded, acknowledging Langone. "And you declined. Well, that's it. I don't want to sell it now."

"You must have some price," Chanin said.

"Okay," Langone said, "SI4."

Chanin left in such a blind rage he almost banged his head on the door.

About a week later, Sigoloff called Langone. "Let's not mess around," he said. "We will pay you SI4." "Sandy, you guys don't get it," Langone said. "I offered it to you for SI4. Chanin said no. That offer is off the table." "I don't understand," Sigoloff said.

"It is this simple. You had a chance. You turned it down. I have reconsidered my position. I don't want to sell." Sigoloff hung up the phone, madder than hell.

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Sigoloff wanted to change the Handy Dan board so that he controlled it, but I wouldn't allow that.

Sigoloff didn't like me, and the feeling was mutual; I rejected everything about Sigoloff, the way he dealt with people, how he talked down to people.

The difference between us was that I didn't need Sigoloff; Sigoloff needed me. He couldn't get rid of me even though he wanted it more than anything, because every time he moved against me, he got a call from Ken Langone. Langone would call him and threaten to sic Joe Flom on him with a shareholder lawsuit. And in that way, Langone kept Sigoloff in line.

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Once Sigoloff realized that Langone was correct about the explosive nature of Handy Dan's stock arrangement, he wanted Langone out of his business. He made several more miserly attempts to buy back the publicly held stock, all rebuffed by Langone. And the more Langone resisted, the more pressure Sigoloff placed on me.

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Billi and I invited the Langones to visit our home in Encino for dinner. After dinner, I turned to Langone.

"Do me a favor," I said. "Get Sigoloff off my back. Sell him the stock."

"Bernie, trust me," Langone said. "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."

"You don't know what you are talking about," I responded. "Sigoloff doesn't know this business, / know this business. He needs me to run it."

"Bernie, look, the only thing of any value in that mess Sigoloff has on his hands is Handy Dan. As long as you are there, he is never going to be able to take credit for its success, or for the recovery of Daylin."

"Oh, you don't know what you are talking about."

"Bernie, I have never been more certain of my position than I am right now. I am telling you, I can read this guy like a book. He can't stand to see you succeed. The more you succeed, the more pain he feels."

Not convinced, I sloughed off Langone's concern. I felt very cocky about myself, that I ran the company as well as it could be run and that Handy Dan made so much money that Sigoloff would be stupid to get rid of me.

"Don't worry about me," I said. "I am a big boy. I can take care of myself."

"It's your funeral."

"So, will you sell?"

"Yeah, sure," Langone said, "I'll sell. But I am not going to mess around on price."

On the spot, I called Ed Kaufman, a Daylin lawyer, at home. I told him that Langone was ready to make a deal. Then I handed Langone the phone.

"I want to make you an offer," Langone said. "You don't want it, that is the end of it, and let's leave it alone. If you want it, that is the price."

"Well, what's the price?" Kaufman asked.

ORIGINS

"It's »25.50 a share." "Why the odd number?"

"Because," Langone explained, "it has to look like we had some real hard bargaining here."

Kaufman said he would call Langone right back. Five minutes later, the phone rang.

"Be in my office tomorrow morning at ten to sign the papers," Kaufman said.

The next morning I picked up Langone at the Century Plaza Hotel. As we drove down the street, Langone tried again to dissuade me, offering to cancel the deal. But I could not be dissuaded. I honestly believed my position at Handy Dan would be more secure once Langone was out of the picture.

Daylin announced on January 9, 1978, that it had acquired all of the publicly held shares of its Handy Dan subsidiary for S25.50 per share. It effected a short-form merger of one of its subsidiaries with Handy Dan, making the home improvement company once more a wholly owned subsidiary of Daylin.

m m m

Arthur and I view bankers as people who put their careers on the line for us, and we protect them. Luther "Rip" Fleming, our banker at Security Pacific National Bank, knew everything that happened at Handy Dan before anybody else did, including the board of directors.

There are basically two kinds of banking relationships: transaction banking and relationship banking. Rip believed that relationship banking was the only way to go, just as we believed that we could succeed in retail only by building personal relationships with our customers. He sought banking relationships that would continue for years, encouraging close relationships between the officers of the company and the bank. In that way, the bankers expected to be first to learn the good as well as the bad news.

Sigoloff vehemently objected to the nature of our relationship with Rip. He thought we were too open with Rip, with whom we shared everything—good, bad, and ugly.

I even shared otherwise confidential information about Handy

BUILT FROM SCRATCH

Dan with Rip. He was a great supporter of ours. He would meet with anybody on our behalf, sometimes putting his own reputation on the line to protect the Handy Dan company.

Sigoloff couldn't believe the way we treated Rip. Our relationship with Rip drove him crazy. He hated it, especially when we would be discussing a sensitive issue and I would say, "Well, I spoke to Rip about it and . .

Sigoloff would interrupt and say, "What do you mean, you spoke to Rip? What are you talking about?"

And I would say, "Well, Rip already knows about this."

"Why do you do that?" Sigoloff would say, frustrated again.

Sigoloff told me how he had manipulated bankers all of his life. He said, "They don't know what the hell they are doing."

As contemptuous as he was of bankers, Sigoloff still needed their money to run his businesses. His oft-stated philosophy was "keep banks in the dark and feed them crap, like mushrooms." His MO was burying them in paper. And it wasn't just banks, it was anybody. In fact, he put people on his payroll whose primary job seemed to be generating those kinds of documents.

Sigoloff's approach was to hit the banks with so many facts, so many charts, that no human being could ever go through it all. And before that, confuse them. Then when you confuse them, he'd say, you'll end up with somebody who you can do anything you want with.

This is how Sigoloff wanted us to treat Handy Dan's bankers, but we refused. In fact, it was the beginning of our practice of doing everything the opposite of the way Sigoloff operated.

Sigoloff wanted to become the chairman of the board of Handy Dan, but Rip, based on covenants in loan agreements guaranteeing separation between Daylin and Handy Dan, told Sigoloff that it wasn't going to happen.

"Sandy, you are entitled to board representation on Handy Dan," Rip told him, "but you will not be its chairman."

m m m

Control of Handy Dan wasn't the issue for Sigoloff. What he really wanted was credit for turning Daylin around, saving it from the

ORIGINS

creditors, saving it for the shareholders, saving it from bankruptcy. But the only Daylin division that had a great cash flow was Handy Dan—my division.

As Langone had forecast, when public ownership disappeared, so too went the ability to shield ourselves from Sigoloff's dark shadow.

The day I knew I was finished with Sandy Sigoloff was the day the Daylin board of directors discussed succession. One Sigoloff-appointed board member said, "I don't know why there is any question about succession here, since you have your obvious successor right in this room, Bernie Marcus." By that time I had been promoted to chairman of the board and CEO of Handy Dan, in addition to carrying the title of president.

A quick glance at Sigoloff's ashen face told me that that was never going to happen. And the very notion that some on the board supported the idea made me a genuine threat to Sigoloff. The situation between us just went from really bad to dire.

The clock was ticking.

m m m

April 14, 1978, is a day that Arthur and I will never forget. We were scheduled to attend a Friday, one p.m. corporate planning meeting at Daylin's West Los Angeles offices. The plan was to spend a couple of hours reviewing our budget and plans for the coming year.

That's what it was supposed to be.

I still believed that if you did something well, if you made a lot of money, that people, even if they didn't like you, would tolerate you. How wrong I was.

By this point. Handy Dan had 66 stores (the stores in Arizona and California were known as Angel's) and almost SI55 million in sales. We won the Home Center Retailer-of-the-Year Award in 1976-77, which was given by the Brand Names Foundation. Best of all, the National Home Center News reported, "During fiscal year 1976, Handy Dan earned S7.8 million before taxes, while the comparable figure for Daylin, as a whole, was S7 million."

We arrived half an hour early and spoke casually with Bill Mal-lory, Daylin's chief financial officer and someone I shielded from

:i3

BUILT FROM SCRATCH

being fired by Sigoloff. Mallory took me aside, separating me from Arthur, making innocuous conversation. He seemed nervous.

At one P.M. sharp, Mallory walked me into a room. Sigoloff was there waiting, accompanied by an assortment of lawyers, accountants, and stenographers. It was an odd group for a planning meeting. Even odder was that Arthur was nowhere in sight.

I was in one room, Arthur in another. It was a planned effort to divide and conquer us. There were several attorneys in both rooms, and it became clear this wasn't a planning meeting.

Sigoloff finally had us where he wanted us, and today was Ming's version of corporate show-and-tell. To make a long story short, I was fired and in rapid succession so were Arthur and Ron Brill.

Brill, whose family had owned neighborhood hardware stores in New York and New Jersey, had been an accountant with Arthur Andersen & Co. in Los Angeles when we first met him. His specialty was retail, and he was the audit manager for the Daylin Corp. during its bankruptcy. The end of the bankruptcy coincided with Ron's decision to leave Arthur Andersen in 1976, and we hired him as Handy Dan's director of internal audit.

Ron, like Arthur and me, never knew what hit him.

Sigoloff was well organized. He released a statement to the press by deadline on Friday afternoon, so that all the Los Angeles papers carried the story of our firing on Saturday morning.

But it was far worse than just the loss of a couple of well-paying, high-profile jobs, or a few embarrassing newspaper stories.

Sigoloff was primarily after me; for Arthur and Ron, it was more a matter of guilt by association.

We all had painful experiences telling our family and friends what happened. Walking out of the Daylin offices, Arthur went to a pay phone and called his wife.

"Diana," he said, "Bernie, Ron, and I were just fired."

She started laughing. At that moment, he may not have had a job, but Arthur felt good about his marriage. Diana knew Arthur's work ethic and manner so well, she figured he was making a little joke. The firing came so out of the blue that she thought he was kidding. After

ORIGINS

all, you don't usually fire someone for running your company well and making you piles of money.

"No," Arthur told her, "it really happened " _

m m m

We have never discussed the actual charges Sigoloff made against us, but for the record, here is what happened:

We had been involved in a decertification battle with a Handy Dan labor union in San Jose, California—the only unionized stores in the chain, incidentally. A group of employees had come to us and said they wanted to decertify out of the union.

We hired an attorney who told us what we could and could not do during the decertification proceedings. I directed our personnel department to do whatever fell within the legal guidelines.

What we eventually learned was that actions were taken that apparently violated some National Labor Relations Board rules.

None of us knew about these supposed NLRB violations until some time after Sigoloff fired us.

Anybody who knew the facts behind it—including Ron Brill— also had to go. As director of internal audit, Ron knew the cost of the decertification proceedings. But he didn't think that what we were doing was illegal and, ultimately, neither did anybody else. But for nearly four years, Sigoloff made our lives miserable and cost us a fortune in legal defense fees.

Incredibly, neither tlie Justice Department nor the SEC instigated investigations; Sigoloff—through his attorneys—did. He made accusations to the Justice Department. He went to the Securities and Exchange Commission. His attorneys informed the Justice Department of their accusations and explained that that was why we were fired.

The labor decertification proceedings were used as a tool to eliminate me and those closest to me. These efforts did cause us emotional and financial harm, but the issue remained strictly personal. The material and "information" about the circumstances regarding the decertification that were turned over to the Justice Department and the Securities and Exchange Commission were carefully re-

BUILT FROM SCRATCH

viewed and considered. Despite all of the pressure brought to bear on Justice and the SEC to act against us, not one charge was ever made against Arthur, Ron, or me by any government agency. Ironically, the only official proceeding that came out of the entire decertification labor case was that a formal complaint charging unfair labor practices was issued by the NLRB against the union.

It cost us each a small fortune to hire lawyers to defend ourselves. And we were hardly well paid. Ron, for example, was only paid in the mid-S30,000 range. None of us owned stock in Handy Dan; all of our hard work and innovation seemed to have enriched everyone from Ken Langone to Sandy Sigoloff, but not us.

I had options in the company, but they were wiped out. Sigoloff also voided my contract, daring me to sue. "The only problem for you," Sigoloff taunted me, "is that 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."

And he was right.

Traumatic as our experiences at Handy Dan were, they played an important part in developing Home Depot's values. For example, Sandy Sigoloff rewarded people who were his loyal followers with an inordinate amount of money. There are people who are for rent, and he bought their souls. We learned that love and compassion do a hell of a lot more than just buying people.

m m m

It was late Saturday when Ken Langone returned home and called me.

"Kenny, a terrible thing has happened," I said, describing Friday's events. "You told me what would happen to me. You told me that I would get fired, and it happened. And now he is trying to destroy my life."

But Langone wasn't at all sympathetic. Not one bit. And he wasn't interested in wasting time on "I told you so," either. What he actually said was more upsetting.

"Oh, man, that's great, that's unbelievable," Langone said.

"What the hell are you smoking?" I asked.

ORIGINS

"This is the greatest news I have heard," Langone continued. "This is ... I am so happy. I cannot tell you."

"What is the matter with you, Kenny? Did you hear what I said?"

"No, no, you don't understand!" Langone insisted. "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!"

Langone actually thought being fired by Sandy Sigoloff was a blessing.

I thought he was crazy.

"Kenny," I said, "I was just fired. There's nothing golden about that."

"Are you kidding?" he said. "That is the greatest news I have ever heard!"

I thought he was a raving lunatic—which he is. "What the hell is the matter with you?" I said. "I just got fired.'' Langone just breezed right over that.

"Now we can open up the store you talked about back in Houston!" he said again, his excitement growing. "You guys have been really hamstrung and haven't been able to do a lot of the things you wanted to do, and it is pretty clear to me, as an investment banker and financier, that you have a lot more capacity than what you can do here. Don't view this as a negative.

"Bernie," he continued, "you never know where life is going to take you. This is a great opportunity for you to do your own thing— let's go into business together."

Frankly, I was surprised he remembered. We had been opening another Handy Dan store in Houston. Langone flew in from New York for the occasion. As we were w^alking the store, Langone stopped short and asked, "Why are you opening so many stores in Houston? It appears that you already have a store on every major street corner in the city."

"Because some day," I said, "somebody is going to open a store that is going to make all of our stores obsolete."

"What do you mean?"

"There is a store that I have created in my imagination that is going to make Handy Dan obsolete."

BUILT FROM SCRATCH

"What will it look like?"

"If I tell you, then you will know," I said. "Right now, only I know"

In 1976,1 already envisioned the prototype of The Home Depot, a massive store unlike anything in the United States at that time.

"If Handy Dan has fifteen stores in Houston," I told Langone, "three of my new stores would make these obsolete."

Langone couldn't imagine it.

"Well, I am not going to tell you about it," I said. "And I am just praying that no one else thinks of it. I won't share it with anybody else. Not yet."

That was the daydream behind The Home Depot. But still in shock after being fired without warning, I was not in a mood for daydreaming.

"Bernie," Langone said, "you have repeatedly told me how Handy Dan and this whole industry is vulnerable. Too many small chains, no national companies, and prices are too high. Do you still believe that?"

"Yes."

"Good. Then let's you and I meet as soon as we can." "I have no money," I protested. "Well, how much would you need?" I threw out a number. "Twenty-five million." At that, Langone let the subject drop without further comment and said good-bye.

m m m

With very little cash on hand, my reputation at issue, and, at the age of 49, my future prospects shaky at best, I hired a lawyer to pursue approximately $ 1 million in salary, stock options, and other benefits that I believed Sandy Sigoloff had stolen from me.

This was a lawyer apart from the one who would defend my name and reputation as Sigoloff dragged me through the courts via the Justice Department and SEC.

My attorney said, "You have a great case. We can win." But every time I talked to him, it cost S200 an hour.

That's when I ran into an old acquaintance, Sol Price, founder of

ORIGINS

the Price Club discount membership warehouse chain. About the same time that Sigoloff fired me. Price was conducting his own legal maneuvers against a German company that had bought one of his companies. The Germans violated their ccfntract with Price, and he sued them.

Over dinner, I told Price how Sigoloff turned me out. There was a lot of self-pity on my part: Why did this happen to me? I was drowning in my own sorrow, going several nights at a time without sleeping. For the first time in my adult life, instead of building, I was more concerned with surviving.

Price invited me to spend more time with him in San Diego. When I arrived a few days later. Price immediately walked me into a room that was piled from floor to eye level with documents.

"What is tiiis?" I asked.

"These are depositions," Price explained. "This is what I have spent the last three years of my life going through."

I shook my head in awe—and fear. I saw my own future looming before my eyes.

Price said the lawsuit consumed every day of his life. Wherever he was, whatever he was doing, all he thought about was the lawsuit. "The attorneys are sucking me dry," he said. "In the final analysis, even if I win, I lose." Which ultimately is what happened. Price won, but he lost. All the energy and time he had to put into it wasn't worth it. He drained his body, his energy, his thoughts, and his money.

"Do you have money to pursue this?" Price asked.

"No, I really don't."

"Are your attorneys at least representing you on a contingency basis?" "No."

"Bernie," Price said, sympathetically putting his hand on my shoulder, "when I sold my company, I went right out and started the Price Club. I had the money, so we were able to do that and sue these bastards. You don't have money to waste."

He paused while I considered that.

"Bernie, do you tiiink you are talented?" Price asked.

"Yes, I tiiink I am."

BUILT FROM SCRATCH

"Do you think you have the ability to build something, to create something, do you feel good about yourself?"

"Yeah, I do," I said quickly. "I feel all those things. I think I can be very successful."

"Then why don't you just tell Sigoloff to go himself? And get

on with your life. Pay your lawyers what you owe them and walk away from it."

I drove back to Los Angeles that night, rolling over and over in my mind the things I saw and heard. By the time I got home, I realized that Price was 100 percent right.

It was time to get on with my life.

m m m

Arthur was not happy being out of work, but he did enjoy the time it gave him to spend with his wife and young children while he considered his future. He also became more dedicated to his fitness, using the time to train for and run his first marathon.

His friend Leon Beck—himself late of Daylin—suggested they open a CPA practice together, but that wasn't the direction Arthur saw himself going. He also declined opportunities to run the Wickes and Handy City chains of home improvement stores, which was later somewhat ironic when Sigoloff was hired to turn that parent corporation around, too.

And there was the growing talk of a new challenge, the home improvement store of the future. I had Langone's interest in raising money and had made it clear I couldn't even think of going forward without Arthur. Arthur quickly realized that, win or lose, his destiny was deeply entwined with mine.

We met several times a week, first at the old Hyatt coffee shop in the City of Commerce, a point halfway between our homes— Arthur's in Fullerton, mine in Encino—and later in space lent to us by our attorneys, Buchalter, Nemer, Fields, Chrystie & Younger. (Stuart Buchalter later became chairman of Standard Brands, somewhat of a competitor.) Starting with a clean yellow pad of paper, we put a business plan together. I dreamed aloud of wide open ware-

ORIGINS

house stores as Arthur tried to make sense of the numbers. It was an interesting exercise, because the numbers didn't work.

Our vision was of an immense warehouse store, anywhere from 55,000 to 75,000 square feet and with high ceilings. The biggest Handy Dan store was just 35,000 square feet. Handy Dan carried a small assortment of selective merchandise, the best-sellers in every category.

Unlike Handy Dan, we would insist on buying directly from the manufacturers. Manufacturers would send merchandise directly to our stores, cutting out middlemen and warehouses, so we could give their profit back to the customer in price reductions.

Per store volumes would be S7 million to S9 million in annual sales. That was insane at a time when the best Handy Dan store averaged S3 million.

We imagined gross profit margins of 29 to 31 percent. That, too, was unheard of. Prevalent in the industry at that time were margins of 42 to 47 percent. To make payroll, traditional stores needed higher margins. But we believed that high-volume stores would do much more business than Handy Dan or any other stores in existence in those days, because of the low prices at which we would sell the merchandise. We would have immense amounts of merchandise and great assortments, stacked to the ceiling, so consumers would be overwhelmed when they walked in, and they would virtually smell a bargain.

Finally, and most important, this superstore would star highly trained people on the selling floor who could not only move product but help even the least mechanically inclined customer through most any home repair or improvement.

That was the theory behind The Home Depot.

In my mind, the concept was simple. But it was Arthur's job to make the business plan work on paper. And it didn't. It just didn't.

"The numbers don't work," Arthur said.

"Why don't they work?" I asked.

"The margins and the volume don't support the profit." "What do we need?"

BUILT FROM SCRATCH

"More sales "

"Okay," I said, "that's easy. Let's write in more sales."

"Just put them in?" That went against Arthur's straightlaced financial training. "I can't do that."

"Arthur, just do it," I said. "Just raise the sales. Look, this whole thing is not a fact; it's a product of my imagination. A business plan is just a creation. Just raise the sales. What do you need, a million, two million dollars? Put it in. Because if you don't do it, I will."

Arthur didn't give in easily, but he did give in, stretching the numbers only as far as he could go without feeling guilty.

We both felt good about the concept, even if we weren't exactly sure how the numbers would unfold in the marketplace. We even formed an operating company, MB Associates, short for Marcus/ Blank.

It was something to do while we waited for fate to find us.

The Financier

"My People Don't Drive Cadillacs"

Bernie: Nothing happened for a couple of weeks as we assessed all of our opportunities. One day, my phone rang. The caller was Ken Langone.

"I got S2 million," he said.

"From who?" I asked, astonished.

"Ross Perot," he said.

m m m

Ken Langone is a man of truly unusual qualities, about as far from the cold, bottom-line-oriented investment banker as you will ever find. And for all his bombast, he's also a man who likes being in the background but making a difference. He can effect more positive change in a day of phone calls than most people accomplish in a year.

Ken's investment banking career with the firm of R. W. Press-prich, headquartered in New York City, had been on the upswing for ten years when he met Jack Hight at a social event, a man who became a lifelong friend and golf partner. At the end of the evening, Hight mentioned that the company he worked for was ready to go public. He even offered to arrange a face-to-face meeting with the chairman of the board.

BUILT FROM SCRATCH

"Call me on Monday," Hight said, "and I will get you an appointment."

By the time Ken called on Monday morning, it was all arranged. "You have an appointment at 11:30 Wednesday morning in Dallas," Hight said. "Be here exactly at 11:30. You have thirty minutes. You will be out of there at 12:00, and whatever you do, don't swearP'

The company was Electronic Data Systems, EDS for short, and its founder and chairman was H. Ross Perot.

It was a scary thing, even for a well-traveled man like Ken. He arrived early, took a seat, and was looking at the second hand of his watch when, precisely at 11:30, he and two young associates were escorted into Perot's office. This guy means business. Ken realized.

Now, mind you, despite his decade-long experience. Ken had never conducted an initial public offering.

"Let me tell you who I have been talking to and what they are telling me," Perot said, not wasting any time on introductions. Among the thirteen firms already bidding on his IPO were Goldman Sachs, Merrill Lynch & Co., Salomon Brothers, Allen & Co., and G. H. Walker. Perot then summed up what each had told him. Ken's thirty minutes were quickly spinning by.

After twenty-nine minutes, Perot said, "Okay, what do you think about what I have been saying?"

"I think I will say good-bye, Mr. Perot," Ken said.

"What are you talking about?"

"Well, Jack Hight told me I had thirty minutes. I have about fifteen seconds left, so I think I will say good-bye, and maybe some other time you can see me, and I can tell you about us."

"Whoa!" Perot said. "Let's talk a little bit more. Tell me what you think about what I just said."

Taking a deep breath. Ken figured he had already blown the thirty-minute rule; he might as well blow the other rule as well.

"Mr. Perot," he said, exhaling quickly, "that is the biggest pile of horseshit I ever heard in my life."

"What do you mean?"

"Well, Mr. Perot, it is very simple. I am going to try to get you to sell stock, and I will find somebody to buy that stock. It's that simple.

THE FINANCIER

All the stuff in the middle is bureaucracy. You want to sell, I gotta find a buyer. They want to buy, I gotta find a seller. That's it."

Perot didn't care for profanity, but he valued straight talk even more. He kept Ken talking till one a.m., during which time the two discovered they were married at the same hour on the same day of the same year. Scary, isn't it?

Ken went to Dallas that day with the intention of going home that night, but thirteen hours later, he and his associates were in Perot's car, searching for a motel with a vacancy.

Meanwhile, at Ken's urging, Perot postponed making a final decision. Over the next several months. Ken made repeated trips to Dallas, learning Perot's business and expanding their personal rapport. Two more different men you could not find, but that seemed a common denominator in most of Ken's business deals.

Early in their discussions, Perot said, "Next time you come down, bring all the prospectuses of all the deals you have done."

"Uh, sure."

At the end of their next meeting, Perot asked, "Did you bring the prospectuses with you?" "No," Ken said.

Perot was surprised. Ken was not forgetful. "Did you forget them?" "No."

"Why didn't you bring them?"

Ken finally fessed up. "Because there are none. You are it." "What?''

"Yours is the first deal I am going to do."

Perot just stood there, slack-jawed. He couldn't believe what he was hearing.

"Bear in mind one thing, Ross," Ken continued. "You have such a great company, nobody can screw it up. An idiot can do your deal. If I blow it, I am out of business. But if I do a great job for you, my reputation is set. I have every incentive, and I promise you, I will personally handle this deal myself."

After time, Perot narrowed the field to two, Allen & Co. and R. W. Pressprich. By then, Perot had figured out a couple of things about

BUILT FROM SCRATCH

going public. Number one, it didn't matter who brought a company public. What mattered was the person who actually led the deal to the public, because if that person exerted a lot of effort and influence, the company would enjoy a successful underwriting. If that person didn't do his job, the biggest name in the world couldn't help.

Perot asked Milledge A. "Mitch" Hart, who was then executive vice president of EDS, for his opinion. (Mitch was later an original investor in The Home Depot and a member of our board of directors.)

"The safe bet is Charlie Allen [of Allen & Co.]," Hart said, "because he has been there and done that so many times and has such a great reputation. But Langone is the guy that I would pick."

"Why?"

"For one thing, he is so excited about this he can hardly stand it. He desperately wants to make a name for himself and he sees us as his best shot."

In June 1968, Perot made his decision. He called Ken and said, "The deal is yours." But there was a catch: Ken had to agree to bring EDS out at a multiple of 100 times earnings, which was an absolutely, outrageously stretched number.

On September 11, 1968, the night before EDS went public. Ken and Elaine Langone and Ross and Margot Perot were in the back of a limousine, driving through the Holland Tunnel from New York to New Jersey. The time was midnight. In those days, you would actually sign all the papers for a stock offering in Jersey, then turn around and come right back so you didn't have to pay the New York State transfer taxes.

The Perots were in the backseat looking forward, the Langones opposite them, looking backward.

"Ross, I have something to tell you about tomorrow," Ken said. "We won't be bringing EDS out at 100 times earnings after all."

"I knew it!" Perot said, pointing his fmger. "Everybody on Wall Street told me that you will say you will do the stock offering at 100 times earnings and, at the last minute, say, 'Sorry, we can't do it.'You are just like everybody else. This is exactly what they warned me was going to happen."

THE FINANCIER

"Ross, wait a minute; hold it," Ken said calmly. "I don't want you upset. If that's what you want, we will do it at 100 times earnings."

"Well, a deal is a deal.You said 100 times. . . ."

"Fine, fine. We will do it at 100 times earnings."

Just then, Margot spoke up.

"Ken, what were you going to say a minute ago?"

"Just that instead of 100 times earnings, I was going to do it at SI6.50 a share, 118 times earnings," Ken said, watching Perot turn from a slow burn to a big red-faced laugh. "But if he only wants 100 times, then that is okay with me."

m m m -

Because he was the only person Ken Langone knew with $2 million to spare, Ross Perot nearly became the majority owner of The Home Depot. And this is probably one of the great "What if. . ." business stories of all time.

In the world of technology, EDS was to the 1960s and '70s what Microsoft has been to the 1980s and '90s. It brought a whole new dimension to the business of computer services. EDS was eating up the business world, although Perot was not yet the household name and folk hero he is today.

Ken took me to meet Perot in Dallas. My first impression was that of a gregarious and enthusiastic man who was a model of the American free enterprise system. He was a patriot for the entrepreneurial spirit who literally created something out of nothing. A former IBM salesman and look at him now! I thought. America had been good to him, and he frequentiy talked about giving back to his country.

Ken told Perot—who was always cordial but never cracked a smile—about how Arthur and I had built this great business. Handy Dan, and the injustice Sigoloff had committed against us. Ken told the story in a way that we could not, and Perot ate it up.

There were a few structural and compatibility issues that I felt I needed to run by Perot right from the beginning to see if we would be com.patible.

"Ross," I said, "I am not interested in doing anything with you unless I know that I am going to deal directiy with you. I don't want to

BUILT FROM SCRATCH

deal through intermediaries and I will not become part of your existing organization. If I have a problem, I will call you, and you and I will agree on how we proceed. I am not going to a captain or a lieutenant. I am not interested in that nonsense. If we get caught up in corporate crap, I won't be part of it."

It was my way of throwing down a gauntlet, challenging Perot to accept me for who and what I was. I didn't change my personality for Sigoloff; I wasn't going to do it for Perot, either.

"I like straightforward people," Perot said. "No, I wouldn't put anybody in between us, you have my word."

With an understanding of our positions in place, we agreed to explore a relationship. I introduced Arthur to Perot at the next meeting.

Arthur was unsure what he was going to do with his life. While he sorted out his options, Ken arranged for Arthur to do some consulting work in Philadelphia for Gary Erlbaum's Panelrama chain.

During this time, Perot hired a consultant named Brian Smith, who had been a general director of the board of Texas Instruments. Perot gave our presentation materials to Smith for a second opinion.

At our next meeting, the new man was alongside Perot. Perot introduced Smith and I could see a barrier already developing between me and Perot.

Ken raised the issue later, and Perot waved it away. He said that because of his intense travel schedule, we would need someone who could act and make decisions in his absence. Smith was that man. Uneasy, I let it slide for the time being.

But Smith thought our retail concept was a bad idea. At that time, gross margins in the industry were about 44 percent, really big markups, but we were talking about our gross margins being as low as 29 percent. We expected to make up the difference—and more—on volume. But Smith just couldn't get Perot's wallet wrapped around the concept.

"How are you going to do it?" he asked at a subsequent meeting. "If you are selling at these margins, you will lose a pile of money."

"No, that's not right," I insisted. "The idea is that the volume of business we will do in these stores will give us a different kind of benchmark."

THE FINANCIER

Levy's was a chain of four home improvement stores in Louisville, Kentucky, owned by the Levy family. At that time, they produced some of the biggest sales volume in our industry, roughly S4 million per store annually. Our model was based on at least double their volume. The profit percentage would be lower, but the gross margin dollars, the actual dollars that the margins would convert into, would be substantially higher.

Ken turned to Perot.

"I just don't agree with Brian," Ken said. "He doesn't understand the concept."

Perot wasn't one who worried much about stepping on the views of his underlings. He wanted to do what was best for business. Smith, meanwhile, remained resistant to the deal.

For his $2 million, Perot w ould own 70 percent of the c ompany, as yet unnamed. Ken would get 5 percent, and we would own 25 per-cent. Out of our 25 percent, we would bring in a team of people such as Ron Brill and others.

We made one final trip to Dallas intended to iron out a few final details.

There were strong signals of future culture conflicts, howevei:.JWe ^

were more than a little discomfited by the military nature of EDS, including the^grpx)rate-unifDiTOS^everybody had to wear a shirt and tie, and the only accg^able shirt color was white—and the guard who met every car enteringLihe corporation's campus^^I^^ —-

Dunnga (discussion of what perks would go with my salary, I told Perot I had a small problem. While my salary and perks would be similar to those I enjoyed at Handy Dan, there was the matter of a company car.

The leased car I had been driving was still being paid for by Handy Dan, but the company would repossess it unless I planned to take over the lease or buy it for the depreciated value.This was a good deal for a new company.

"We ought to try to save as much money as we can," I said. "I would like to buy it outright at the depreciated value. Would you like me to buy it, and then I will just charge it to our entity, or do you want to give me a check, and I will pay for it?"

BUILT FROM SCRATCH

"That's fine," Perot said. "You can either do that or buy a new car, I don't really care."

But then Perot decided to test me.

"What kind of a car is it?" Perot asked in that peculiar Texas drawl of his.

"It's a Cadillac."

Perot didn't like that answer at all. JlMy people don't drive Cadillacs," he said. "My guys at EDS drive Ch evrolets." '

"That's fine," I said. "I think it's a good policy for you, but this is a new company we're forming, not EDS. Look, this is a four-year-old car and I'm a big guy. It is cheaper to have an old Cadillac than it is to go out and get a new Chevrolet. So how do we pay for it?"

Not that the question meant anything.

"My.:people don'tjrive Cadillacs," Perot said again. And again. "My people don't drive Cadilla cs."

And whe n he said itjhe third time, I realized this was never going to~work. Going from "Ming the Merciless" to Ross Perot was no improvement. Perot was establishing who and what his position was and what mine was, partners or not.

My mind flashed back to the day Sigoloff and I nearly came to blows during a board of directors meeting. When we went into another room to hash out our disagreement privately, Sigoloff told me that he was the boss. He controlled my career, and I needed to understand that. Then he demanded that I literally repeat that back to him.

I said nothing of the sort.

Instead, acknowledging that he was right about one thing—he was

the boss—I nonetheless told him to go himself. Nobody controls

my life but me. He owned shares of stock, the controlling shares of stock in Handy Dan, but he would never control me or my career.

■ Now I was looking across a different table, staring at Ross Perot, my blood pressure rising, my face turning red. And I was hearing Sigoloff's words coming out of Perot's mouth. "I am the boss; I control your life. I will tell you what to do and what not to do."

Regaining my composure, I smiled. "Ross, I have to talk to Kenny for a minute. Would you mind if we step outside?"

THE FINANCIER

Ken was perplexed.

"Look, Kenny," I whispered, "I know Perot is a very important person in your life, but you have to understand something. If thrs~guy" is going to be bothered by what kind of car I am driving, how much aggravation are we going to have when we have to make really big decisions? If we can't be free to run the business the way we know it has to be run, it isn't going to work. I am never going to have this man for a partner. I would rather starve to death. No way."

Now it was Ken's turn to wonder whose brains were scrambled. "You must be out of your mind! Are you crazy? My God, he is going to give you $2 million!"

"Kenny, I wouldn't touch it with a ten-foot pole. I am out of here," I said and headed down the hall.

Ken went back in, looked Perot in the eye, and never said a word about Cadillacs.

"Ross, look, we are all thinking about where we are," Ken said. "Brian obviously doesn't like the deal. This is a no-win situation for me, personally, and maybe we ought to just cool it for a while. Let's just let some time pass and then decide whether we want to get back together."

"Okay," Perot said. "If you want to come back, come on back." Ken said that he would call in a few days. And that is how we walked away from Ross Perot. ^ -

The interesting thing is that if Perot hadn't been so hung up on Cadillacs, his original 70 percent share of The Home Depot stock would be worth approximately $58 billion today. —

^ ^ ^

Later, Ken wondered if he had damaged his long-term relationship with Perot. I thanked God the deal hadn't been concluded. And Arthur felt the heavy weight of Sigoloff enshrouding him once more after briefly seeing daylight.

I was the first to speak. "What do we do now?"

"Now we are going to go raise the $2 million at 50 percent," Ken said defiantly.

"What are you talking about?" Arthur said.

BUILT FROM SCRATCH

"Let's put together a group of investors where you won't have to worry about that. I am going to get my 5 percent," Ken explained, "you guys are going to have 45, and the next investors will get 50 percent."

"That doesn't make sense," Arthur argued. "That means we will have a better deal by walking away from this deal."

"That's right," Ken said. "In the retail business, when you can't sell something, you mark it down. In my business, when we can't sell something, we mark it up."

M M M

The Home Depot got its start when Ken Langone reached out to his own investment group for seed money. We had convinced him that our new retail concept had such a good blend of low price, wide assortment, and customer service that it couldn't miss. It was destined to become the first nationwide home improvement store brand, and once Ken believed, he set out to convince the rest of the world on our behalf.

We had never met most of Ken's group, so he set up a meeting in New York. We felt like beggars, asking these successful people to invest in our company.

Not that that was necessary; they gave us a rousing reception.

Why? These were the people who bought Handy Dan stock between S3 and $9 a share and sold it at $25.50 a share. Of course they loved us!

Of course, while they had made tons of money, we were broke. That irony wasn't lost on Ken.

"You guys made a ton of money on Bernie and Arthur," he told them. "Take a portion and roll it over into their new business. Sure it's a gamble, a real gamble. If you went to Vegas, you would drop a few thousand dollars a day, so what the hell, let's drop it here and see if these guys can roll sevens again."

We wouldn't have wanted anyone but Ken manhandling this crowd. He's the kind of guy who, if you were in a meeting with him and he was quiet for more than a minute and a half, you'd think he

THE FINANCIER

was asleep. In fact, if Ken has any faults, it's that he gives answers faster than you can ask a question.

Ken eventually cajoled forty or so players in his group into buying enough S25,000 units of preferred stock to get us to $2 million in seed capital. That's of course a far cry from the original S25 million I thought was necessary to capitalize The Home Depot. And in fact we were undercapitalized for a number of years. The idea was that they would put the money up, but it would be a preferred stock and they would get their money back. Not that selling those S25,000 units was a snap.

In the end, they gave us S2 million and two years to open up any business that we chose. The money was intended to cover our salaries, expenses, and benefits, equal to what we made at Handy Dan.

There were actually two pieces to the investment. Ken's investment group bought units consisting of preferred and common stock. Common stock is also what we bought, at pennies a share. This gave us the opportunity to be participants in the fruits of our own labors, an important and much valued opportunity we never had at Handy Dan.

This is the way our company started.

The Merchant, Act I

"Never Be Satisfied with How Things Are"

Bernie: Merchandising is the soul of our company. And much of our success through the years has resulted from a love of discovering and inspiring new products, putting a new sales spin on reliable classics, and our passion for seeing all of them move through the cash registers.

One of the original catalysts responsible for inspiring and propelling this passion was Pat Farrah.

m m m

While we were running Handy Dan, another old-line home improvement chain was growing quickly and gaining attention in California: National Lumber & Supply Company. It was a family-owned home center outlet dating back to 1942, when it was founded by Sol Jaffee. As the years went by, his children and grandchildren joined the Fountain Valley company. But the National Lumber employee everyone in our industry talked about was not a Jaffee. It was a young man named Patrick G. "Pat" Farrah.

Pat joined National Lumber in 1962, just out of high school. He started out as a lumber man but quickly demonstrated an acute understanding of both customer service and product. When Pat joined the company, it was doing about S2 million a year in sales.

THE MERCHANT. ACT I

Before long, the Jaffees promoted Pat to service desk manager. When National opened its second store^ Pat was named the store manager.

He was a natural who loved being around freshly milled wood, a husky guy who enjoyed the physicality of the lumber yard, loading and unloading building materials. He was one of the few who could load three bundles of shingles on a truck at a time.

He also loved the instant gratification that came from serving customers and making a sale. On his days off, Pat worked with an old Swedish guy who taught him how to do mill work, building windows from scratch.

The Jaffee family opened its hearts to him, and Pat became the guy they turned to after Mel Jaffee, the oldest of Sol's three sons, took over the company as president in 1965. And as Pat's stock rose, the other two brothers faded. Pat is a natural, charismatic leader. He gets pushed to the forefront because people want to follow him.

Under his direction. National Lumber grew from two to seven stores, becoming a serious regional competitor to Handy Dan. Mel Jaffee invested his time in Pat, teaching him everything he knew about the industry. He tolerated Pat's mistakes and encouraged him to make more—even at Jaffee's expense—as long as there was a lesson to be learned. After opening the fourth National Lumber store, Pat was promoted to vice president and general manager.

One year National Lumber sold Christmas trees, and Pat hung one upside down from the ceiling. "Jtist think of doing something totally different," he'd say. "Never be satisfied with how things are." If sales were poor on a particular product, he would find a way to make that product outsell anything else.

He tried to take National Lumber to the place where he saw the company going, but he couldn't overcome the family's resistance.

About that time. Handy Dan needed a good lead merchant— someone to oversee the acquisition of goods for all our stores—and I had heard that Pat was a great one. One day I called Pat. We agreed to meet and I intended to pursue a doubleheader, buying out National Lumber, and acquiring Pat to run the merchandise side of the much larger Handy Dan operation.

I had every intention of stealing Pat away even if National Lum-

BUILT FROM SCRATCH

ber was not available—until I met him. Within thirty minutes, however, I concluded that the man was an egomaniac, a raving lunatic, out of control, in orbit.

Did you ever dislike somebody instantly? That was my response to Pat. And Pat wasn't any more impressed with me.

Pat left the office, and I told Arthur, "I wouldn't hire this guy on a bet. He and I would be like fire and oil. It will be a distant day before I'd have him associated with me."

Besides, Pat, feeling rather cocky about his own company's rosy future, indicated he wasn't interested either.

m m m Fast-forward several years.

In 1977, National Lumber was doing very well, and the family was spending less time hands-on, pretty much entrusting its operation to Pat's care. He and Mel Jaffee even started investing together outside the company. But a dispute over one of those investments turned both of their lives upside down.

The situation started innocently enough when Pat met Cliff Branch. Branch owned California Cooperage, which manufactured a popular line of hot tubs. Pat thought they'd be great project starters in National Lumber stores; buy the hot tub and build a deck around it. As usual, he was right. Do-it-yourselfers bought the tubs and then dropped thousands more on deck materials.

It was going so well that Mel and Pat decided to buy the company. They both liked Branch and thought he'd be helpful in refocusing National's lumber business. They negotiated a deal for an 80 percent ownership.

But the day before the deal would close and be announced in San Francisco at the National Swimming Pool Show, Mel Jaffee—the show's keynote speaker—let all of the water out of the tub.

He returned from a trip to Israel and announced he couldn't go through with the deal. "I can't make this investment now," he abruptly told Pat.

Pat didn't have the cash to do the deal by himself, and there was no way to raise the balance of the money, so they had to back out.

THE MERCHANT, ACT I

Pat flew to San Francisco and gave Branch the bad news in person. He felt so bad about it that on the spot, without any planning, he told Branch he was quitting National Lumber.

Five of the seven National Lumber store managers and fifty more employees, demonstrating unbelievable loyalty, walked out with Pat despite his protestations that they not. They cooled their heels while Pat gathered financing for his dream: an enormous home improvement warehouse superstore, bigger than anything the industry had ever seen.

m m m

Jack Hoffman, a tough old merchant, owned a deserted, forgotten discount store in Lakewood, California, near the Long Beach Airport. He and his brother had previously operated Cal Stores on the site, a 130,000-square-foot predecessor to the Price Club membership warehouse concept. They had fifteen years of success before national discounters such as Kmart and Wal-Mart destroyed their business.

It was at Hoffman's door that Pat and his ragtag, underfunded bunch found themselves. Pat had formed a partnership with two of his most trusted managers from National Lumber, DanTsujioka and Dave Alban. With the help of a manufacturers' rep who loaned the trio an office and secretary, they developed a business plan in four days. On the fifth day, Pat made a presentation and raised S75,000 in cash and a S300,000 line of credit from a local bank.

Not long after that, he made his pitch to Hoffman.

Hoffman took an immediate liking to Pat and listened in earnest as Pat described his dream store. A prince of a guy, Hoffman gave Pat the entire building for 19 cents a foot and a handshake.

"There is one catch, though," Hoffman said.

After Cal Stores closed. Jack's brother continued operating a small liquor store in one part of the otherwise-closed, cavernous structure. "You have to keep my brother in business, keep him going." Hoffman said.

Within thirty days, Pat,Tsujioka, Alban, and the rest of their National Lumber refugees staffed up his new concept store—separated

BUILT FROM SCRATCH

from the liquor store on the inside by a floor-to-ceiling chain-link fence—ordered merchandise, bought mostly used fixtures, painted the store, did the layout, and filled the back of the store with lumber.

When Homeco opened its doors in January 1978, there were 1,500 people lined up to get in. What they experienced inside was nothing short of revolutionary. Merchandise in the 130,000-square-foot store was stocked floor to ceiling. Homeco was the first really big building materials store in California to have lumber inside and perhaps the first to use a forklift on the inside.

Employees wore khaki shorts, tennis shoes, and brown T-shirts with HOMECO on the back. Nobody walked; they literally ran to wait on the customers. Ran. Then they walked the customer to wherever he or she needed to go. The employees wowed everybody who walked in the door, immediately establishing tremendous customer loyalty. It was a style and attitude we later adopted with great success at The Home Depot.

Being located next to the airport was a natural for Pat, whose father was an oil surveyor and part-time flight instructor there. Del Farrah was always on 24-hour call, flying to Bakersfield or Taft to check out a potential new well field. So Pat spoke the language of the flyboys and got to know several smoke-writers, the cowboys who wrote messages in the sky. They typically flew over the beaches on weekends, advertising products such as Coppertone or wet T-shirt contests at local bars. For S200 a month, he made a deal so that whenever they got back to the airport and had any smoke left, they would do messages for him. On the Fourth of July, for example, he tied in to the liquor store with which Homeco shared the building and promoted 99-cents-a-six-pack Budweiser. Hardware and beer, how do you beat that? In a day and a half, Pat sold three truckloads of beer. It was unbelievable. The place was packed.

m m m

One morning, Hoyne Greenberg, a vendor and friend who sold to us at Handy Dan, called me. "I want to take you out to see a store," he said. "It is very important that you see this store. It is run by Pat

THE MERCHANT. ACT I

Farrah. He left the company he was working with and set up his own business. You just have to see this store."

''No thanks," I said. "Not interested. I met Pat Farrah, and I wasn't impressed. I couldn't be less interested."

"Bernie, forget about that; you have to see this store."

"Nope, not interested."

"Bernie," Greenberg said, "I am picking you up at seven tomorrow morning, and I am taking you there whether you want to go or not. Be ready."

The next morning, Greenberg picked me up in a Rolls-Royce, and drove me to Lakewood and a place called Homeco. It had been open just six months. As we walked in, I saw my dreams in living color. I w^as flabbergasted.

Homeco was a monstrous store with merchandise piled up to the ceiling. It was astonishing. I felt tears welling up in my eyes. I was partly overwhelmed, partly angry. I couldn't believe that Pat Farrah, this obnoxious guy I couldn't stand, had this idea. JVIy idea! Pat brought it to life first, but it was almost exactly what I had imagined!

Despite it being Pat's creation, Homeco was love at first sight for me. I loved the merchandise assortment, the way it was piled to the ceiling, the awesome commitment to customer satisfaction, and Pat's offbeat ways of promoting it all.

Greenberg brought Pat over, and for the first time I saw the real Pat Farrah. All the artifice was gone. He was the most enthusiastic, ir-repressibly positive guy I'd ever met. At Greenberg's prompting, Pat showed me around the store. He'd point to something benign such as hammers and say, "We sold a thousand of those last week." Cans of paint? "Eight hundred of those." And so on. I figured the numbers were inflated, but it didn't matter. Pat had the right goods, priced the right way. Even the margins were as I envisioned them.

His staff were competent, hard-working folks who knew their products intimately. And they were carved in Pat's image, entrepreneurs all, a wild man and his wild tribe, selling products like they were pieces of gold.

"We ought to get together," Pat told me. "I always liked you and I always thought . . ."

BUILT FROM SCRATCH

"Uh, sure," I said. I didn't understand Pat's attitude. I knew Pat didn't like me any more than I liked him. Why was he being so friendly? He knew I no longer ran Handy Dan. What was going on?

When I got home, I called Arthur and told him to head over to Lake wood, meet Pat, and check out the store.

Arthur didn't carry any of my baggage with regard to Pat. He just saw a peculiar, eccentric guy who ran the remarkable store that I had described. As for Pat, he was delighted to meet Arthur and welcomed him like some long-lost brother. When it was over, Arthur was enchanted with Homeco and Pat.

Arthur and I went back to Homeco together and studied the store more carefully. Satisfied that this was the real thing, I invited Pat to meet me in Los Angeles at my favorite Italian restaurant. Carmine's on Santa Monica Boulevard.

Dinner began just as the first meeting at my office had: ugly. Both of us were posturing, circling the other, full of testosterone and distrust.

Fortunately, the drinks started flowing. I drank tequila; Pat drank rum and Coke. We had one or two drinks more, and soon we didn't look so bad to each other—just the way many relationships begin.

The conversation turned to merchandise. In business, I love two things: number one, dealing with people, and number two, merchandise. On this, Pat and I finally found common ground, and instead of being tuned to different stations, we were at long last on the same wavelength.

Instead of being repulsed by each other, we were attracted to each other. By the end of the evening, we hugged and kissed. It was an amazing evening in which we got past our facades, discovering kindred spirits.

This sonuvahitch has to be part of our team, I said to myself. / need this guy, and he's going to end up as a major player on our team.

m m m

When Ken Langone first laid eyes on Pat Farrah, he thought we were kidding. This man was going to be our partner?

THE MERCHANT, ACT I

Here's what concerned him:

Arthur went to Homeco to pick up Pat, who was an hour late getting to his own store. In those days, Pat was late for everything.

When he finally showed up, the wildman with the huge Afro haircut was wearing a powder blue velvet suit that was one size too small for him. His ass stuck out the back of his pants, his shirt was unbuttoned halfway down his chest, displaying a variety of gold chains and a big, old, gold watch. And that was exactly the way he walked into the Century Plaza Hotel restaurant to meet Ken, the guy who was going to provide us with the capital to establish a new business, a really important person in our lives whom Pat had never met before. And Ken was right out of Wall Street, shirt, tie, never canceled meetings, always dressed appropriately.

Ken shot Arthur a look that said, "Is this your idea of a joke?"

But Pat Farrah is one of the most creative people any of us had ever met. Pat is to retailing what Michelangelo was to art. At least that's what Ken said by dinner's end.

m m m

We were considering buying Homeco, so due diligence was in order; an audit was planned.

The problem, though, was that Pat had no idea whether he was making money. He couldn't spell the word audit. We asked him what he thought his gross margin—the difference between the cost of buying products and the price for which he could sell them—was, and he said, "Well, I think it is 23 percent and we are making all this money."

Shortly thereafter we signed a letter of intent to buy Homeco— subject to our due diligence. We hired Ron Brill to act as the store's comptroller and assigned him the challenge of getting Pat's financial records straightened out.

Pat's bookkeeper showed Ron around the office on his first day. Ron noticed she avoided a particular filing cabinet.

"What's in here?" he asked, pulling it open even as he spoke. It literally exploded at him, packed as it was with unopened invoices from Homeco's vendors and suppliers.

BUILT FROM SCRATCH

That makes a good anecdote, of course, but the reality is that by the time Ron started opening and recording the invoices, what was in them didn't matter. Pat didn't have the cash to pay the bills.

He was doing great sales volume, and that's how he covered his payroll. By not paying for his inventory, he gave the impression of having plenty of cash. Pat and his top guys, for example, were driving Porsches or Cadillacs.

As long as Pat had cash, it never occurred to him that he was insolvent. He had no clue what his liabilities were. Fiscal responsibility was just not his thing.

We commissioned KPMG Peat Marwick to do an in-depth audit. Between them and Ron Brill, what they discovered was that while inventory was flying out the door, Pat wasn't paying the vendors for it. He was spending more on advertising than he could afford. In fact he never paid any bills, had no systems, no controls, and he was slowly but surely sinking into the sunset.

However, in conducting a physical inventory of the store, Ron discovered one of the Great Farrah's many secrets.

Empty paint cans.

If the store had four layers of paint cans, the cans on the bottom layers were empty. They were on the showroom floor for show. They gave the illusion of greater inventory.

And since the empty cans looked just like the full cans, Ron had to bang on each and every one of them to determine what, if anything, was in them.

Late one afternoon Arthur received a call from Ron. "We finished the audit," he said, "but what we are concerned about is not so much Homeco's expenses but what the store's gross margin really is."

It wasn't the industry standard 44 percent.

It wasn't the 23 percent Pat had guessed.

It was a mere 12 percent.

At National Lumber, Pat had a financial structure in place that he rarely dealt with, let alone worried about. His whole expertise was merchandising and cultural, getting people excited, selling them on things, catering to the stuff that they wanted and making it happen.

THE MERCHANT. ACT I

At Homeco, business basics such as paying the bills revealed Pat's blind spot.

Bottom line, Pat was losing his ass.

Arthur was in shock. When Pat called him later that evening, Arthur said he had the results of the audit and suggested they discuss it over dinner and drinks.

"Well," Pat asked, "how did it go?"

Arthur hesitated. "Ah, the first number ..."

"What is it, like twenty-five, twent>^-four?"

"The first number is a one."

"You're kidding. The first number is a one? Oh, no."

"The second number is also a small number."

Arthur had grown fond of Pat in the short time since the buyout dance began and found delivering this news not unlike telling a child his dog had been run over by a truck. Pat was in a state of disbelief and denial.

Arthur told Pat furthermore that, based on Homeco's gross margin, and based on what Arthur knew about Pat's cash position, he had maybe six months left.

"Pat," he said, "you're getting killed. We can't possibly do this deal. This isn't going to work."

We had already committed a great deal of limited start-up capital to buying Homeco, but we realized that if we bought the company, just paying off Pat's debts would suck us dry. We would have no money left. This one store would kill us in the womb. We just couldn't do the deal.

Pat said he understood, but he was in shock. He was losing pallets of money? He was going broke? How^ could that be? Wasn't this the coolest home improvement store on the planet? So much of his personality, who he was, who he wanted to be, was tied up in the Homeco store.

"Why don't you just close it up," Arthur said, "and we'll all go somewhere else and start over."

"I can't do that," Pat said. "We have our own investors, and I have all these people who left National Lumber to work for me. I can't just

BUILT FROM SCRATCH

quit on them like that. We are going to go fight it out and see if we can make it."

For Pat, our decision not to buy Homeco was far more painful than his earlier departure from National Lumber. About three months later, Homeco couldn't pay enough bills to stay afloat, and Pat filed for bankruptcy—both business and personal.

m m m

Two days after Pat closed Homeco's doors, I called him. "Well, Pat," I said, "I still want you to join Arthur and me in this new venture."

Pat felt horrible, terribly guilty about all the money he had lost, the employees and investors he had let down. (After The Home Depot went public, he organized a get-together for the original Homeco investors and gave them all their money back—S415,000—in Home Depot stock. Nobody knew it was coming. Today that stock would be worth more than S362 million.) He was burned out on the whole business. Plus, he thought that maybe I felt obligated to offer him a job, because we didn't have a business to buy.

Despite the Homeco fiasco, I still had stars in my eyes. I could not understand why Pat didn't jump at my offer to be a part of another hardware store warehouse concept with tentative financing.

Two more days went by and I called Pat again.

"I don't think you understand what Fm saying, Pat," I said. "I can't believe you aren't taking me up on this. You are a great merchant. You have a great concept—you just don't have us.You need us. And we need you.''

Pat was dumbfounded. A man of infinite energy and verbosity, he couldn't think of a single response, so I kept going.

"We are going to do the deal the same way. You will be the third partner in this thing with Arthur and me."

What was there left for him to say but yes?

The Pirst Stores

"They Locked Me Up Because I Sold at Such Low Prices!"

Bernie: A key part of our plan to form what became The Home Depot was our partnership. Arthur no longer wanted to work for me—or anyone else, for that matter. We were each going to bring an equal measure of necessary ingredients to the recipe, based on our individual strengths, so we agreed to be partners.

I took the traditionally higher titles of chairman and chief executive officer because of my greater experience, and I ended up with slightly more stock for that reason, 18 percent to Arthur's 15 percent. Arthur became president. (Once Pat concluded his and Homeco's bankruptcy proceedings, he was granted an amount of stock that was almost, but not quite, equal to Arthur's holdings.) But the idea from day one was that the gap would close, both financially and in terms of the company hierarchy.

We knew that we couldn't afford to construct anything, because new stores would cost a great deal of money, so we started searching for vacant buildings that we could afford to lease. Our preference, since we all lived there, was to start in Los Angeles. But that wasn't enough justification, so we began a nationwide search. If we couldn't be in Los Angeles, where else would we want to live? We needed to be

BUILT FROM SCRATCH

near an airport with a hub that we could fly in and out of, a place from which we could grow and raise our children. We took turns visiting sites across the country, looking for real estate.

We recognized that we would be hiring talented people at every level. We needed a place where families would be happy and transportation would be easily accessible.

In our travels, we decided on several things. One, we were going to build a national chain, not a single market group of stores. Actually, we planned to open a thousand stores—seriously, we believed that was possible from the beginning, although we were careful not to put it in writing—so we needed to be in an appealing place to which we could recruit the best people.

As we looked around, the site selection process quickly narrowed to four cities: Boston, Aflanta, Dallas, and Los Angeles.

Atlanta was a place that Arthur, who had previously lived in Griffin, Georgia, knew intimately from his days as president of Elliott's Drugs, but I was not too keen on it. Newspapers all across the country had carried terrifying stories of crime in Aflanta during the mid-1970s, and it just didn't sound like the kind of place to which we wanted to move our families.

But Atlanta was where opportunity beckoned. Zayre Corporation—which operated a discount chain of the same name—had two stores in Aflanta and two in Charlotte that it wanted to unload, and we seriously considered them. Studying all the available demographics and opportunities, all roads led to Aflanta. Real estate was readily available in the Deep South, so the die was cast. Arthur and Pat were so convinced that Atlanta was the right place, even without a signed store lease, that they were living out of hotels and making plans to relocate their families.

In fact, even as we moved on the Zayre properties, Arthur met with the Atlanta Journal-Constitution's, advertising director, to talk about our potential ad budget.

The ad director mentioned a rumor that J. C. Penney was looking to scale back its monster 180,000-square-foot Treasure Island discount stores. He said J.C. Penney was reportedly looking to sublease 40,000 square feet in each of its four area locations. He also men-

THE FIRST STORES

tioned that Handy City was looking at the sites. (I got my job at Handy Dan when George Hanzi^ the founder of Handy City and former head of Handy Dan, was starting a clone. Handy City, on the side. He had to leave, and I was given the assignment because of my personal experience with Wall Street.)

Even more ironically, Pat had already approached J.C. Penney about the Treasure Island stores. Everywhere we went while driving around Atlanta, the greatest locations were taken by Treasure Island stores. Pat already knew they were subleasing spaces on the West Coast, but they told him at the time that they weren't interested in subdividing the Atlanta space.

Arthur went straight to the nearest pay phone and called me in Los Angeles. I agreed about the desirability of the Treasure Island locations—and the opportunity to tweak Handy City—so I called Ken Langone in New York and asked if he knew anyone at J.C. Penney. "No, I don't," Ken said. "But by the end of business today, I will."

Ken got J.C. Penney's address and literally left his desk at In-vemed, wandered over to J.C. Penney's real estate department, introduced himself, and opened negotiations.

Treasure Island—a latter-day knockoff of Two Guys—had failed to distinguish itself from J.C. Penney, even going so far as to carry J.C. Penney branded clothes and other products. Treasure Island stores also operated supermarkets in the back of the store, a business they had absolutely no business being in. Their whole concept just didn't work. The supermarket in the back of the store didn't generate volume in the other departments. The stores were too big and soon became a cash drain.

William E. "Bill" Harris was the executive vice president of JCP Realty, the real estate arm of J.C. Penney. He was assigned the task of subleasing space in the Treasure Island stores.

The initial program to lease those 30,000-square-foot supermarkets was a failure. They were located at the back, poorly laid out, and for the amount of rent Harris was asking, no one was interested.

Treasure Island itself wasn't performing very well, so Harris suggested another tack to J.C. Penney: consolidate the Treasure Island

BUILT FROM SCRATCH

Stores into 120,000 square feet and free up a narrow 605000-square-foot space, including frontage space.

By the time J. C. Penney agreed, however, the retail market was extremely soft. W.T. Grant, Spartan, and Woolco were all in the process of throwing in the towel, closing stores and creating a glut of available big box space. Prices plummeted.

In December 1978, Harris received a call from a Treasure Island senior vice president who had met with Ken Langone who told him we were interested in leasing 60,000 square feet in four Atlanta-area Treasure Island stores. Harris then invited us to his office.

Arthur made that first meeting memorable. He and Pat walked into Harris's office bearing a loaf of French bread and a bottle of wine to break the ice.

The gesture—meant to suggest our sincere interest in negotiating a deal—was not lost on Harris. He understood that when we were done, we expected to break bread together as friends. It's a good thing we brought a snack, too; that first session lasted eight hours.

Harris was a deal-maker, very pragmatic. One real sticking point, however, almost quashed the deal. Harris insisted we take space in all four Atlanta-area Treasure Island stores or there was no deal. We were ambitious, but not that ambitious; we were uncertain we had the financial resources to open two stores, let alone four. But we gulped hard and agreed.

Arthur negotiated tremendous leases with J.C. Penney that tilted heavily in our favor.

The only reason we could ever guess why J.C. Penney did this was they thought if our concept worked, they might eventually buy us out. But that's just conjecture, because the issue was never raised by them.

Harris required a financial statement from us, as well as a business plan. It showed the %2 million that our equity partners had committed. That didn't impress Harris, but one of the names of our investors did: Colonel Frank Borman. Harris didn't recognize the names of any of the other people in the group, but everyone knew the commander of the Apollo 8 moon mission and the then-president of Eastern Air Lines. Borman gave us much-needed credibility (although we didn't realize how much until Harris fessed up twenty years later in an interview for this book).

THE FIRST STORES

Our plan for a wholesale-priced home improvement operation sounded good to Harris and his associates, too. They thought it might be a more complementary draw for the Treasure Island stores than the supermarkets.

Harris made a commitment to us that he could get the lease done quickly. "Quick" in J.C. Penney parlance might mean as long as six months on a lease like this. We made it quite clear we couldn't sit on our hands that long, and he actually turned it around in a month. In fact, he ordered work started to build the walls between Treasure Island and our store-to-be-named-later even before the leases were signed.

J.C. Penney was a large company, and we were upstart entrepreneurs building our dreams. Surprisingly, they treated us with dignity and respect. Certainly Bill Harris did. Whenever we had conversations with him, he was honest and forthright. That was a great learning experience for us, that a company could be big and yet have a human face. (We liked Harris so much that, a few years later, after he had retired from J.C. Penney and returned to his native Cleveland, we hired him to guide our own real estate decisions. He was a person whose values appealed to us. Harris joined us in 1986 as senior vice president of corporate development when we had fifty stores. Over the next decade, he guided us through our five hundredth store.)

We backed out of the Zayre deal. In fact, if Arthur had not been in the newspaper's office that fateful day to hear about the Treasure Island stores, we might not be here today because those Zayre locations were terrible.

Arthur, Pat, and Ron moved to Atlanta ahead of me because I had family obligations that kept me in California. I commuted for six months. Ron crossed his fingers that the company would take off; he didn't have enough money to move back.

m m m

So now we had four stores, only we didn't have any money to purchase inventory and run them.

Try telling Ken Langone what a problem this little matter of money is. "No big deal," he'd say. "I have banks all over. [Original

BUILT FROM SCRATCH

Home Depot investor] Ed Cox is the vice-chairman of a bank in Dallas. We'll have plenty of money. You'll see."

One more time, Ken and I crisscrossed the country, only to be turned down by banks everywhere in the United States—including Ed Cox's. Ken, with all of his connections, wasn't having much luck.

Cox did arrange an interesting lunch with a bank in Dallas that I attended. The man next to me was Jewish, and when I asked what he did at the bank, the man explained that he met with all the bank's potential Jewish clients.

"Say that again?" I thought surely I had misunderstood.

"I am their token Jew," he explained. "I'm a businessman in Dallas; I don't work for the bank per se. But whenever a Jew comes into town, they call me. I go to the bar mitzvahs and weddings of their Jewish clients, or, if somebody like you comes into town . . ."

"In other words," I said, "they identified me as a Jew? Not a potential customer, but a Jew?"

"Yeah."

To be honest, the bank was actually very nice, despite this inauspicious start. But they turned us down, too.

One of Ken's leads was a little-known Boston-based venture capitalist who invested early in lots of good companies and made a ton of money.

His people were quite anxious to buy into our would-be business, which existed only on paper. Like Ken, they bought the vision of the first nationwide home improvement warehouse brand. For S3 million, he was buying us and our experience. And we needed that S3 million the way somebody dying of stab wounds needs blood in his veins.

This time, we agreed to terms. Afterward, with our group in a celebratory mood, I happily drove our new investor to the airport. But in the car, the man turned very serious again.