Employees at Hughes Aircraft Co., even those who aren't football fans, took an unusual interest in this year's Super Bowl game.
Hearsay circulating through Hughes' large Southern California operations had it that General Motors Corp. had bought three television ads on the Super Bowl broadcast to announce that it had acquired Hughes.
The absurd rumor is only one indication of how intently Hughes people are watching for clues about the impending sale of their company by its sole owner, the Howard Hughes Medical Institute. The Miami-based medical research foundation announced last month that it would "move forward" to divest at least part of its Hughes Aircraft holdings.
The fiercely proud company and its technically oriented management had hoped that any divestiture would leave Hughes Aircraft an independent company. They had even promoted plans in the past year for a partial employee buy-out. But sources say that an employee stock plan or a public offering is increasingly unlikely.
Historically, the El Segundo-based firm has supplied the institute with a portion of its profits but has had little input with its owner. The institute, for its part, offered little direction on how Hughes Aircraft should run its business. That arrangement suited management fine, until the current high-stakes game.
Wall Street analysts have widely suggested that Hughes Aircraft will fetch between $3 billion to $5 billion. But one knowledgeable banker, who asked not to be identified, offers a markedly higher estimate of between $5 billion and $8 billion. In either case, the sale of Hughes is expected to be the largest sale of a non-oil corporation in U.S. history.
Hughes executives, owing to their distance from the medical institute, have little direct knowledge of how the sale will be orchestrated and even less influence on determining its outcome.
"There isn't much management can do if somebody is sitting there holding all of the stock certificates," says one Wall Street source involved in the sale. "But this is not in any way adversarial."
Still, things could be proceding more smoothly. For example, the official announcement issued by the medical institute last month over financial news wires, saying that its investment banker would begin efforts to sell Hughes, took the company by surprise. When one Hughes employee complained to the company newspaper that he heard the announcement on his car radio instead of from management, he was told that the "control of such releases lies solely with the trustees."
Although Hughes Aircraft has sought assurance that its style and substance will not be altered in any change of ownership, some traditional business relationships already are coming unglued. Hughes Aircraft broke tradition when it retained its own investment banker, First Boston Corp., and recently hired an outside public relations firm, partly to enhance the corporation's image for a hoped-for public offering.
Workers Are Top Asset
Hughes' management does hold one ace. The management and the company's top technical staff are probably the most valuable asset that any potential buyer will seek. Hughes scientists and executives are regarded as leading experts in satellites, radar and optics. If they should become disenchanted--or worse yet, leave--the value of the company would be seriously eroded.
"The assets of Hughes Aircraft go down the elevator every night," says a financial expert involved in the sales process. "Any potential buyer is not going to want to acquire a disgruntled company."
Indeed, three decades ago, two of Hughes top scientists did leave in an impasse over the style of Hughes Aircraft's original owner, Howard Hughes. The two men, Simon Ramo and Dean Woldridge quit Hughes in August 1953 to form the company that today is TRW Corp. Two other top Hughes executives, Roy M. Ash and Charles Thornton, also resigned in that crisis to form Litton Industries Inc. Today, both companies are multibillion-dollar competitors with Hughes in the defense electronics market.
It was that crisis that precipitated the formation of the Howard Hughes Medical Institute and the transfer of Hughes Aircraft stock to the institute under pressure from the Defense Department.
Nobody expects a similar defection of talent today, but Hughes' top officials are casting a wary eye to the sale and the changes that it will precipitate.
Opposes Major Changes
"People are anxious to know what is going to happen," says one of Hughes' corporate officers. "The facts of life are that if somebody came in here with the attitude that they wanted us to double profits, cut research and go after programs just to make a quick buck, my attitude would be 'I don't need this.' I would go out and consult or find another company."
Officials of the medical institute say it is attempting to make sure just that doesn't happen.
"Hughes must remain powerful and what it is," says Donald S. Fredrickson, president and chief executive of the institute. "At the same time, we have a fiduciary responsibility of our own to protect our assets."
The decision to sell Hughes Aircraft outright has not been made and probably will not be made for at least a couple of months.
Morgan Stanley & Co., the medical institute's investment banker, is following a so-called "parallel path" of exploring an outright sale of the firm and a public offering. But an outright sale of the company is seen as more likely. The superficial reason is easy enough to understand.
Premium for Control
"There is a premium people pay for control. When you sell public, you are selling a lot of minority interests and you lose that premium. You never will reach the true value of the enterprise," says an attorney who has worked on Hughes matters for years.
Irving Shapiro, a leading member of the medical institute's board and chairman of the its finance committee, said in a recent interview that Morgan Stanley has advised the board that an outright sale of Hughes Aircraft is likely to raise more money than a public offering.
"We can't afford to give away the company just to be nice guys," Shapiro said about the desires of Hughes management. "The advice from the investment bankers is that we can get more from an outright sale. That is why we are traveling down that path."
Even Hughes executives do not expect the trustees to vote against the advice of their investment bankers, though they are trying to make a public offering a plausible alternative.
"If I hire an expert, either I follow his advice or I fire him and hire a new expert," said Richard Alden, Hughes Aircraft vice chairman, in a recent interview.
Alden said he was not present at a recent medical institute board meeting, in which Morgan Stanley made its first major presentation on the sale. But he said he believes that the effort to find a single buyer for Hughes is to test the waters of the market and hardly rules out a public offering.
Nonetheless, the factors weighing against a public offering seem to strike at the heart of the exercise of power on the medical institute's board of trustees, which was appointed by court order only last year.
Unusual Group on Board
The board brings together an unusual group of academicians and industrialists, including bitter past enemies and nationally recognized executives.
The Delaware Court of Chancery created the board of trustees after ruling in a 6-year-old case that two deputies of Howard Hughes, William Frank Gay and the late Chester Davis, had improperly taken control of the nonprofit medical institute after the late billionaire's death in 1976.
The ruling paved the way for the present sale, because under current standards of fiduciary responsibility, the trustees have an obligation to diversify their investment.
Delaware Chancellor Grover Brown told the new eight-member board last July that it should elect a ninth trustee. The selection of the ninth trustee would say a lot about the ultimate fate of Hughes Aircraft.
The man chosen was Frank Petito, the retired chairman of Morgan Stanley, who was sponsored in his election to the board by Shapiro, according to knowledgeable insiders. That was the first sign that Shapiro would be a key player in the sale of Hughes Aircraft.
Petito and Shapiro, who had used Morgan Stanley while he served as Du Pont Co. chairman, played a key role in selecting Morgan Stanley to represent the institute.
Came as a Surprise
The emergence of Shapiro as the financial leader on the board came as something of a surprise to many who had supported the lawsuit to create the new board of trustees in the first place.
William Lummis, a nephew of Howard Hughes who won control of the Hughes estate after a long court battle, also serves on the board and had been expected to take the financial leadership, according to an attorney who has represented the Hughes family.
If that had happened, the drift of the Hughes Aircraft sale might have been in another direction.
"Lummis favored the sale of 75% and the retaining of 25% at the time of the Delaware decision," said the attorney. "That was his original thinking. What Lummis wanted didn't happen. It just appears that he let Shapiro take and run with it."
If the institute were to retain a 25% holding of Hughes, the company probably would not be as saleable to a single bidder and the chances for a public offering would be enhanced.
Lummis is also known to have a high respect for Hughes Aircraft Chairman Allen Puckett and the rest of Hughes top technical team. That also may have given management greater influence with the board of trustees.
Lummis, the chief executive of Summa Corp., a holding company put together by Howard Hughes, declined comment through his representatives. He has not granted any interviews in recent years, if ever.
The Delaware court also appointed to the board Gay, the Howard Hughes aide who had assumed control of the medical institute in 1976 along with Chester Davis. Gay also is believed to favor the institute continuing partial ownership of Hughes Aircraft, but his power has been sharply curtailed.
Gay and Lummis battled for control of the Hughes estate and the medical institute after Hughes' death. The two men also fought bitterly in court over responsibility for the circumstances of Hughes death. In 1981, a Los Angeles court awarded Gay $6 million from Summa Corp., which Lummis controls.
The approaching sale of the Hughes Aircraft already is causing major changes in the business network built up by Howard Hughes for decades.
Merrill Lynch, Pierce, Fenner & Smith Inc., the investment banker that handled all of Howard Hughes business, has been cut out of the biggest piece of Hughes action. After conducting the public offering of Hughes Tool Co., the sale of Hughes Helicopters Inc. and the probate of the Howard Hughes estate, Merrill Lynch was rejected for the sale of Hughes Aircraft.
Hogan & Hartson, the powerful Washington law firm that for decades represented Howard Hughes and his medical institute, is losing its influence, according to attorneys knowledgeable about Hughes legal affairs.
And Carl Byoir & Associates, the public relations firm used by the publicity shy Howard Hughes decades ago, has been side-stepped in recent weeks.
It was Richard Hanna, a Carl Byoir vice president and long time Howard Hughes public relations man, who orchestrated the incredible 1972 telephone interview between Hughes and a panel of national journalists in which Hughes debunked the Clifford Irving hoax biography.
Hughes Aircraft has quitely hired Hill & Knowlton Inc., the New York-based public relations giant. A Hill & Knowlton official said the firm's responsibilities are still being worked out, but it is believed to be preparing for a potential public offering.
The run-up in the stock market in the last six weeks has substantially improved the firm's market value, analysts say. Shapiro said a larger number of companies than he expected already has expressed interest in Hughes.
The leading candidates to buy Hughes are Boeing Co. and General Motors, especially because banks would be eager to loan them money for such a deal, according to one banker. But rumors circulating among the many attorneys connected at one time or another with Hughes' many legal problems say General Electric Co. and United Technologies Inc. also are leading candidates.
Fredrickson brushes off such speculation, but says Morgan Stanley has begun preliminary talks with several potential biddders. Even so, the the institute has not completed its presentation package for the sale.