GM to Purchase Hughes Aircraft : Will Pay $5.2 Billion in Cash, Stock; Outbids Ford Motor Co. and Boeing
General Motors said Wednesday that it will pay about $5.2 billion in cash and special GM stock to buy Hughes Aircraft, in a marriage of the nation’s largest auto maker and its seventh largest defense contractor.
GM’s offer was selected after nine hours of intense deliberation Tuesday in New York by the trustees of the Howard Hughes Medical Institute, which owns the El Segundo aerospace and defense firm.
The sale will make the institute the richest private charitable foundation in the world, according to its president, Dr. Donald Fredrickson. The Ford Foundation, which has assets of $3.5 billion, has been considered the largest charitable trust until now, he said.
GM agreed to pay $2.7 billion in cash and an estimated $2.5 billion in a new class of GM stock that carries provisions to guarantee the value of the shares for three years. The values of rival bids by Ford Motor Co. and Boeing Co. were not disclosed but the GM bid was reportedly far ahead of them.
The sale was structured to provide Hughes with as much autonomy as possible “by maintaining the company intact as a separate and independent enterprise, with the current management having discretion and full authority to run their business,” said GM Chairman Roger B. Smith.
The provisions for creating a separate subsidiary to operate Hughes, which would be combined with several GM divisions in the electronics business, seems to allay the worst fears of Hughes management that a new buyer would break up and sell off the company piecemeal. Hughes executives and employees, who have sought to remain independent, praised the GM offer as the best possible for Hughes future.
The choice of GM was announced to Hughes’ employees over the public announcement systems in Hughes’ offices and plants at 13 California locations and in Tucson. A message from the company’s chairman and chief executive, Dr. Allen E. Puckett, was read at 8:15 a.m. and again an hour later. With about 68,500 workers in California out of a total work force of almost 74,000, Hughes is the state’s largest industrial employer.
Long, Bitter Fight
The sale of Hughes stems from a long and sometimes bitter fight for control of the medical institute that erupted after the eccentric billionaire Howard Hughes died in 1976. Rivals in the Hughes organization fought for control and last year a Delaware court named a new board of trustees to take control of the medical institute.
The new trustees decided in January that as a matter of prudent investing, they were obliged legally to diversify the institute’s investments. Also, the Internal Revenue Service has long contended that the medical institute was conducting an insufficient amount of medical research to justify its special tax status. The IRS case would also have ultimately caused a divestiture.
The institute expects to step up its funding of medical research to $200 million annually from as little as $50 million in recent years, according to institute President Fredrickson. The institute conducts a broad variety of medical research at 20 universities and hospitals around the nation.
Under provisions of its purchase offer, GM will issue 70 million shares of a new stock, called General Motors H class, which will be traded separately and have a value based partly on Hughes profitability. The medical institute will receive 50 million shares and current GM shareholders will receive 15 million shares. An additional 5 million shares will be sold in a public offering at a future date.
GM agreed to create a new company to own Hughes, called GM Hughes Electronics. It will transfer to the new subsidiary three of its automobile and defense electronics units that have combined annual sales of about $3 billion. They are Delco Electronics Division, Delco Systems Operations and the Instrument and Display Systems Business unit of AC Spark Plug Division.
Hughes Chairman Puckett will continue to hold his present jobs and will be a member of the board of the new subsidiary. He was not immediately placed on the full GM board.
Founded in 1953
Since its founding as a separate company in 1953, Hughes Aircraft has grown to be the largest defense electronics contractor in the nation. The firm is the largest manufacturer of radar and satellites and the second largest manufacturer of tactical missiles.
Nevertheless, Hughes, with its $4.9 billion in 1984 sales, will be just a small component of GM, which posted $83.9 billion in 1984 sales.
GM and Hughes officials enthusiastically praised the agreement at a New York press conference Wednesday. Hughes executives said they favored GM over other bidders because GM would have the least amount of overlap with Hughes’ operations. If Boeing or Ford had won Hughes, then overlapping operations would probably have been consolidated, with displacement of hundreds of Hughes employees, one top executive said.
“General Motors probably put in five times more evaluation in going through each group than did the other competitors,” the executive said. “If you really want to buy something, you put in a lot of time to study it, and GM put in the most.”
Exchange of Know-How
GM and Hughes officials also said that Hughes electronics technology will increasingly show up in GM cars and that GM manufacturing know-how will benefit Hughes.
GM Chairman Smith said Hughes’ military technology might be applicable in such automobile features as a collision avoidance system based on radar technology. He also cited a potential for a “position location system"--a computerized map.
But several financial analysts dismissed the expected synergies between the two companies, saying that GM could have obtained the same type of electronics technology at a lower price and that it is still unclear how GM can apply Hughes’ weapons technology to automobiles.
‘Impressive Fuzz Buster’
“Hughes could make a very impressive Fuzz Buster, but it would cost a couple of hundred thousand dollars,” said Larry Lytton, an aerospace analyst at the New York investment house of Drexel Burnham Lambert. “Hughes can do a lot of fancy things in the laboratory, but applying them at an affordable price is something else.”
At the same time, Lytton said that Hughes, which has been troubled in the past year with quality control problems at many of its defense products plants, could pick up some manufacturing tips from GM.
The Pentagon stopped accepting Hughes missiles last year because of a broad variety of quality defects. Those manufacturing problems and a major slip in a missile program cost Hughes well in excess of $200 million, a company official said.
‘Negative on the Deal’
Wall Street auto analyst David Healy also said that GM may not realize technological benefits from Hughes and that the large cash drain of the Hughes purchase could hurt the firm’s ambitious effort to restore its competitiveness against foreign auto makers.
“I am negative on the deal on balance,” Healy said. “I think GM isn’t going to get anything from Hughes that it couldn’t have gotten from the outside at much less than $5 billion. The real effect of this is diversification, but not synergy. But Roger Smith is fascinated with high technology.”
Indeed, the generous GM offer represents a large premium over Hughes’ net worth of $1 billion. GM may have to charge off against future profits the difference between that net worth and at least a part of its purchase price. In addition, GM paid a large premium over what similar electronics firms would command in the marketplace.
Last year, Hughes earned $266 million. GM thus paid nearly 20 times those profits to buy the firm, while many of Hughes competitors command market values of only 10 to 15 times their profits.
WHERE HUGHES WILL FIT IN THE GENERAL MOTORS FAMILY GM Hughes Electronics (new subsudiary of General Motors) Hughes Aircraft Based: El Segundo, Calif. Employees: 74,000 Principal Businesses: weapons and military and commercial electronics Delco Electronics and Systems Based: Kokomo Ind. and Santa Barbara, Calif. Employees: 19,700 Principal Businesses: auto and aerospace electronics AC Spark Plugs’ Instrument and Display Business Based: Milwaukee Employees:4,000 Principal Business: automotive electronics