Lockheed Wins, but Shareholders Get Point Across : Proxy fights: The firm’s board may have gotten 60% of votes, but its investors let directors know they want the company to make a profit and boost its sagging stock.
Although Lockheed has won the proxy battle brought by Harold C. Simmons to unseat its board, the victory may prove to be a hollow one that could leave the company weaker.
The vote was the clearest indication yet that shareholders of major defense firms are souring on the weapons business as a place to make a return on investment and are seeking a more pragmatic approach to the arms business, securities analysts and defense experts say.
The proxy vote disclosed Tuesday, in which the challenging directors won about 40% of the vote cast, is likely to intensify pressure on Lockheed to show a profit and boost its sagging stock.
Lockheed Vice President Stephen Chaudet said Tuesday that the vote was a “strong endorsement” of management. Yet, Lockheed directors received the votes of less than 50% of the outstanding shares (because 17.5% of the shares were not voted).
Chaudet acknowledged that the company had received a “message” from shareholders and recited a statement from Chairman Daniel M. Tellep in which he said the experience was a “baptism by fire.” It is not clear whether Lockheed will be burned by the experience, though.
“The institutions want to exercise some influence over the company to get its short-term profits up at the expense of long-term profit, so they can get out of the stock,” said Prudential-Bache aerospace analyst Paul Nisbet. “If that leaves the company a shambles, then so be it.”
Just a year ago, Lockheed shares were worth $46.125 each and rose at one point during the year to a high of $54.50 before tumbling to its close of $37.875 Tuesday, putting Simmons and others in a major loss position.
Lockheed faces a difficult challenge in satisfying shareholders who want higher profits in a period when the international weapons market is coming unglued and major programs are facing cancellation. At the same time, Pentagon regulations have sharply reduced the profitability of weapons contracts.
The options that Lockheed chooses to satisfy its shareholders will tell a lot about the kind of defense industry that the Pentagon will end up with.
“What are their options? They can not spend money on research and development or not spend money on bids and proposals or not pay bonuses,” said Paine Webber analyst Joseph Campbell. “They can fire people. They can avoid making moves that in the long term may save money but cost operating profit in the short term.”
Most of those options would sacrifice technology and manufacturing capability in the long term for payout in the short term. And, quite possibly, that sacrifice is appropriate in the current weak defense market.
“Most people don’t agree with Lockheed about their previous assessment of the future of the business,” Campbell added. “Lockheed is being told by shareholders, ‘We don’t have the same confidence in future business that you do, and so don’t make investments now.’ The Pentagon gets technology when it wants to pay for it.”
Historically, the defense industry has proclaimed a commitment to the nation’s defense interests that in today’s environment may no longer be in the best interests of shareholders.
J. Landis Martin, president of NL Industries, which was Simmons’ vehicle for his proxy fight, said the battle was not waged to force cutbacks in long-term investments or change Lockheed’s contribution to national security.
“What the Pentagon wants is people who know their costs and can deliver products at their cost,” he said. He added that the Simmons group is opposed to cutbacks in technology spending and to the liquidation of money-losing units unless they cannot be turned around.
But it is not clear how Lockheed can cut overhead, which Martin believes is too high, without cutting engineering overhead and excess production capacity.
“It is a long-term industry, and if it is not run for the long term then it is going to disappear,” analyst Nisbet said.
Indeed, the company has nearly disappeared more than once. Lockheed traces its history to 1913, when founder Alan Loughead developed a three-seat aircraft that shortly forced his first company into bankruptcy. A second Loughead company also went bankrupt in the 1930s. It wasn’t until World War II that the third attempt succeeded.
The company nearly went bankrupt in 1971 when it was forced to plead with Congress for a bailout through a $250-million loan guarantee. By the early 1980s, the Reagan Administration defense buildup restored the firm to financial health until the current problems emerged.
Lockheed’s poor profit and stock performance mirrors similar problems at McDonnell Douglas, Northrop and Grumman, among others, whose shares are selling at a discount to shareholder investment.
The problem, many experts say, is that management was slow to grasp the massive changes imposed by the Pentagon in the late 1980s and adapt. Now Lockheed and other firms are stuck with money-losing contracts, high overhead and excess capacity for the 1990s.
“It is partly the prisoner’s dilemma: You do what you are doing because you can’t figure out what else you are supposed to do,” Campbell said.
Lockheed, along with other major defense contractors, has reported quarter losses and weak profits for several years, and the real pain has yet to begin with the defense budget cutbacks anticipated in 1990s.
Elmo Zumwalt, a retired Navy admiral who was defeated in his bid for a Lockheed seat, observed: “I am concerned because I see the company headed for disaster under present management.”
LOCKHEED CORP. AT A GLANCE
Net income in millions of dollars 1985: $401 1986: $408 1987: $421 1988: $624 1989: $2 Source: Lockheed 1989 annual report
Weekly closing stock price, in dollars per share
Tuesday close: $37.875, up $0.375
Source: Knight-Ridder TradeCenter
LOCKHEED REVENUE
Sales by division
In billions of dollars
1989 1988 1987 1986 1985 Missiles and space systems $4.780 $4.706 $4.614 $4.448 $4.277 Aeronautical systems 2.572 3.337 4.215 4.055 3.797 Technology services 1.432 1.134 1.023 1.010 1.044 Electronic systems 1.107 1.256 1.226 0.429 0.105 Total sales $9.891 $10.433 $11.078 $9.942 $9.223
Source: Lockheed 1989 annual report
Times staff writer Nancy Rivera Brooks contributed to this story.
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