Varian Finds Itself Tangled in Pentagon Scandal
Varian Associates, a granddaddy of high technology in Silicon Valley that has been criticized in recent years for failure to mesh its far-flung operations, now finds that a Texas company it bought three years ago has pushed it into the Pentagon procurement scandal.
On Friday, Defense Secretary Frank C. Carlucci announced that the Navy has started suspension proceedings against one of Varian’s divisions, Varian Continental Electronics, a Dallas maker of high-power radio frequency transmitters that it bought in 1985 for an estimated $35 million.
The company faces a suspension on future Navy contracts for one of its divisions in an action that may have little financial impact on the Palo Alto company. But, analysts suggest, it could hurt Varian’s reputation for years.
Carlucci’s announcement came after court papers unsealed in U.S. District Court in Dallas showed that FBI agents investigating the growing Pentagon fraud scandal said they listened in while one of Varian Continental’s executives, Joe Bradley, swapped information for money with a defense consultant, Mark C. Saunders. Varian Continental was also searched by the FBI two weeks ago.
The company said Bradley, vice president of marketing at Varian Continental, has been put on paid administrative leave until the investigation is finished.
Varian Associates Vice President Gary Simpson said the company did not believe that its Continental division was a target of the fraud investigation until the affidavit was unsealed Thursday in Dallas.
“It is always disconcerting when this sort of thing surfaces,” Simpson said. “We have specific policies and procedures that prevent the kind of activity that is alleged in the affidavit that was unsealed. We would be very surprised if the remarks attributed to our employee prove to be accurate and taken in context.”
Varian Associates was founded 40 years ago by brothers Russell and Sigurd Varian, who took science to new thresholds in the late 1930s when they developed the klystron tube, the basic component for radar and microwave communications. As of late, however, the company has done little to distinguish itself.
Throughout the 1980s, Varian has been plagued by erratic profits and management turmoil. According to industry analysts and consultants familiar with the company, Varian has become a decentralized collection of more than 20 divisions that has difficulty functioning as a seamless operation.
“Periodically, they sort of lost control over a business. They then would receive a series of nasty surprises that it would take a couple of years to fix,” said Donald Mitchell, a management consultant who heads Mitchell & Co. in Weston, Mass.
A Navy suspension at Continental would appear to have little financial impact on Varian Associates. For one thing, Continental’s overall sales are estimated by analysts to be only $45 million to $50 million, or roughly 5% of the company’s $982.7 million in annual sales for the year ended Oct. 2, 1987.
In addition, about half of those sales are to the military, but the company would not disclose the exact amount of Navy work. The rest involves sales of radio transmitters to such customers as radio stations and Radio Free Europe.
Furthermore, Varian spokesman Simpson said, it would not affect current contracts, only future ones.
What a suspension could do, analysts said, is tarnish the company’s reputation at the Pentagon. Varian derives nearly 25% of its total revenue from defense work.
Could Hurt Reputation
“The more important question is what kind of black eye will it receive from that operation on an ongoing basis. If everyone thinks they are a bunch of crooks, that will really be a problem,” said Timothy J. Allen, a securities analyst with the Eberstadt Fleming investment banking firm in New York.
Varian’s name comes from Russell Varian, who died in 1959 of a heart attack while trying to prevent a boat from crashing during a storm in Alaska, and his brother, Sigurd, a former Pan-American pilot who was killed in 1961 when a plane he was flying crashed into the ocean off Mexico.
With $100 in seed money from Stanford and the use of a lab, the brothers and two associates in late 1939 developed the klystron tube, an instrument that generated short, powerful radio waves like a flashlight beam that became crucial in the developing radar and microwave technologies.
For its $100, Stanford received licensing fees equal to about $10 million in current dollars before the patent expired in the 1970s. The campus today has the Russell Varian Physics Building and the Edward L. Ginzton Laboratory, named after one of the people who helped start the company with the Varian brothers.
Biggest Problem Area
In 1948, the company was founded in a tiny, 1,200-square-foot building in San Carlos, about 15 miles north of Stanford. In 1953, the company moved to Palo Alto as the first tenant in what was then called the Stanford Industrial Park, widely considered to be the nation’s first high-technology office park.
For the past seven years, the company has been led by Thomas D. Sege, a tough electrical engineer who frequently spins off disappointing divisions and acquires new ones in a search to find the right mix that will perform well, frequently firing those who head the operations that slump.
“They are not very well managed and have a history of problems. If they have a problem in one division, they decide some guy is a schlep and they get rid of him,” said Carolyn A. Rogers, a securities analyst with the investment banking firm of Hambrecht & Quist in San Francisco.
Varian’s biggest problem lately has been its semiconductor equipment business, caused by the prolonged, three-year slump in the semiconductor industry that finally turned around last year.
In the year ended Oct. 3, 1986, the company lost $14.9 million on sales of $891.1 million.
Last year the company recovered, earning $21.4 million on sales of $982.7 million. Last May, it said it expects its earnings in its current fiscal year to exceed that because of the turnaround in the semiconductor equipment market.
