Hero or Heavy-Handed? All Eyes Are on Ford Aerospace’s New Owner : Buyouts: Analysts praise Loral Corp.’s financial razzle-dazzle in making the acquisition. But workers are worried about jobs and benefits.
On Wall Street, Loral Corp. Chairman Bernard Schwartz is something of a hero. Stock watchers use adjectives such as “brilliant” and “amazing” to describe his acquisition strategy, which has transformed a small, money-losing New York company into a highly profitable, $1.27-billion defense electronics leader.
But on Main Street, Schwartz’s reputation is a bit less stellar. His strict devotion to quarterly profit growth sometimes means belt tightening at newly acquired companies. And although Loral’s far-flung divisions are given considerable operational autonomy, it is Schwartz, the defense industry’s highest-paid executive, who calls the important shots.
Now that Loral has agreed to buy Newport Beach-based Ford Aerospace Corp., a subsidiary of Ford Motor Co. and one-third larger than Loral, Schwartz’s management methods will be put to their most rigorous test. The deal, which involves $715 million in cash and assumption of other obligations of undisclosed value, is expected be complete within three months.
Wall Street analysts praised Loral’s financial razzle-dazzle in landing Ford Aerospace. They note that the company bested rival bidders with deeper pockets with a deal structured to avoid a dangerous mountain of debt.
But Ford Aerospace’s 17,000 rank-and-file workers are worried about their jobs and benefits. Several managers, who asked not to be identified, said they fear that Loral will raid the company’s overfunded pension plan. And despite Loral’s statements to the contrary, they suspect--along with many analysts--that Schwartz will sell off some divisions and move the company’s missile operation from Newport Beach.
“Morale is low because people think Ford (Motor Co.) is selling us out,” said one middle manager with more than a decade of experience at Ford Aerospace’s Aeronutronic missile division in Newport Beach.
But Schwartz says employees have nothing to fear. “We don’t close plants, move people around; and in the main we’ve been able to create an employee structure that continues benefit programs and gives them additional opportunities for growth,” he said. “Everyone has a job.”
Schwartz declined to discuss the pension overfunding--estimated to be $300 million to $400 million--until the deal is final, although he noted that the company has agreed to pay all existing benefits to Ford employees and retirees for two years. Analysts said it is unlikely that Schwartz would make the politically unpopular move of using pension excess funds, which might draw intense government scrutiny.
And Schwartz said the structure of the deal, in which Loral formed a separate joint-venture company with Shearson Lehman Hutton Inc., will relieve the company of any pressure to sell off pieces of Ford Aerospace.
“It’s a brilliant move from Loral’s perspective,” agreed Peter Aseritis, defense analyst with First Boston Corp. in New York. “They can’t be hurt by the debt burden and they should be able to keep the operations in the short term.”
Loral, moreover, is widely viewed as a well-managed company that has done a remarkable job of assimilating acquisitions and delivering complex electronic warfare systems on time and within budget. Its markets, which include microwave and optical surveillance systems, electronic countermeasure systems and battle simulators, are among the few growth segments in an era of defense cuts.
“They started as an unknown company and built themselves through acquisitions,” said Walter Peterson, analyst for Ferris, Baker Watts Inc. in Baltimore. “There is likely some feeling among Ford people that it (Loral) is not part of the defense establishment. But it is winning bigger contracts now, and those concerns should go away.”
Schwartz, a plain-spoken 64-year-old Brooklyn native who has a financial background, manages the sprawling firm with a combination of local autonomy and strict corporate oversight. Management of acquired companies is generally left intact--as long as rigorous profit objectives are being met.
But there are enough blots on Loral’s record to give the employees at Ford Aerospace pause. Loral pleaded guilty last year to a fraud charge related to the Pentagon procurement scandal known as Operation Ill Wind. The company was accused of lying to the government when asked if it had hired anyone to find out who was bidding on a contract.
In December, Loral took a charge of $10.6 million against earnings to pay fines and related claims, which led to an earnings drop of 26 cents a share.
Schwartz himself has drawn criticism. Just before its earnings drop was reported publicly in December, he sold 19% of his stock for $4.5 million, and three other Loral officers and a director also sold stock. Schwartz said the sale was motivated by personal and tax considerations and he had warned analysts for weeks that the special charge was coming.
Loral and Schwartz also are facing lawsuits over a controversial deal in which a company controlled by Schwartz purchased two units of Loral’s Goodyear Aerospace. Banner Industries, which also was bidding for the units, filed a $100-million suit charging a conflict of interest, and shareholders have filed related suits. Loral said it does not expect the disputes to affect its earnings.
It is Loral’s actions after its $588-million buyout of Goodyear Aerospace in 1987, a deal that more than doubled the company’s size, that has some Ford Aerospace officials worried.
Loral outbid Martin Marietta for Goodyear Aerospace, which was on the block as part of Goodyear Tire & Rubber Co.’s effort to repel a hostile takeover bid by Anglo-French financier Sir James Goldsmith.
Schwartz said, after the Goodyear purchase, that he planned to retain incumbent management and the work force of 7,800, and that he did not intend to divest an aircraft brake division that didn’t fit any of Loral’s businesses. But within six months, about 500 Goodyear workers--including 300 salaried employees--were laid off, in part because of the loss of a contract to build blimps for the Navy.
And last year, Loral sold the brake division and the engineering fabrics division to Schwartz for $455 million, the deal that prompted the lawsuit from Banner, a Cleveland aviation parts distributor.
Robert W. Clark, who was chairman of Goodyear Aerospace when Loral bought it, called Schwartz a “straight shooter” and said he was very impressed with the Loral management team. “The top five officers are extremely perceptive and talented people,” said Clark, who remained with Goodyear for a year after the sale. “I didn’t think they understood systems management, but they did.”
Still, Clark noted that differences in “style” made working for Loral difficult for many Goodyear managers. “Loral brings decision making to a higher level,” he said. “The Goodyear style was very big on delegation, and when someone is used to having the authority to decide things and that’s taken away, that can be difficult.”
Despite his high regard for Schwartz and Loral, Clark said Goodyear had “a higher level of consideration for the personnel” than Loral. “Those differences were the fundamental area where we had trouble.”
Larry Stump, president of the United Auto Workers union local that represents about 1,200 hourly workers at the former Goodyear operations in Akron, Ohio, said the union had found Loral to be “a very negative employer, with some exceptions.”
He said his local had lost about 300 jobs since Loral took over, and he attributed the layoffs to subcontracting of work rather than any softness in Loral’s business. The union struck the company for 12 weeks two years ago, a walkout that Stump said was twice as long as any that occurred under Goodyear. The local now has a complaint against Loral, with the National Labor Relations Board charging that the layoffs violated the contract.
“We have seen the sale of entities, we have seen layoffs,” Stump said. “Loral is one of the most profitable companies in the industry, at the expense of management and labor jobs. The difference between Goodyear and Loral is that Goodyear was local, and they cared because they were local. They were stable, and we knew each other.”
Schwartz counters that the Goodyear business was “pointed in a downward direction” when Loral took over and that tough measures were necessary to turn it around. “Akron is an area that has lost tens of thousands of jobs over the years,” he said. “We’ve committed to the area, and we continue to invest in plant and equipment. The business looks much better today.”
In most cases, Loral has stuck with its pledge to leave local managers in place after a takeover. That partly explains how the company has been able to assimilate its long string of acquisitions.
When Schwartz took control of Loral in 1972, it was a mini-conglomerate making everything from toys to defense electronics and losing money--$3 million on sales of $32 million that year. But Schwartz quickly returned the firm to profitability and decided to focus on electronic warfare equipment.
In the early 1980s, Loral made a series of acquisitions in the $50-million range and started to go after bigger targets in 1985 when it purchased the military computer operations of IBM’s Rolm subsidiary for $100 million. The buyout of Goodyear Aerospace was followed by purchase of Fairchild Weston, a vendor of advanced aerospace cameras, from Schlumberger last year for $185 million. Loral also purchased Honeywell’s Electro-Optics unit for $54 million in 1989.
Loral’s aggressiveness has been tempered by caution. Schwartz proved willing to forgo deals in which the price wasn’t right, as in its failed efforts to buy Sanders Associates and Sperry Aerospace Group. He also avoided acquisitions of companies with big-budget programs that are now targets for defense cuts.
Schwartz’s management strategy of compensating business unit chiefs based on the performance of their operations--and reviewing that performance frequently in New York--appears to be effective. Loral has reported consecutive earnings increases every year and an average 31% annual growth in compounded corporate sales.
“They certainly show positive numbers consistently, and they’re one of the few defense companies that has not pulled an ugly rabbit out of its hat,” said Byron A. Callan, defense analyst with Prudential-Bache.
Some analysts say the strong financial performance should reassure Ford workers. Schwartz, for his part, attributes the initial negative perceptions about Loral’s intentions to statements made by competitors in the heat of the bidding battle.
He denies any intention to sell or move Ford’s unprofitable Aeronutronic division from Newport Beach, even though Loral has no missile operations and the unit does not fit Schwartz’s stated goal of concentrating on selected core businesses that have growth potential within a declining industry.
Schwartz also said he expected profit from Ford, which he pegged at $130 million pretax on sales of $1.85 billion last year, to cover costs of the acquisition. Loral and Shearson Lehman will each put up $150 million, with the remainder financed by bank loans that Loral will not be liable for.
Analyst Callan said Loral’s takeover should not prompt a mass exodus of management from Ford Aerospace. “They aren’t going to line anyone up against the wall and fire them,” he said. “They will let the operations run themselves as long as they are profitable.”
One Ford executive who has been critical of Loral, however, expressed concern that Loral has been better at buying businesses than at building them through new contracts. But the manager said Loral had an impressive financial record.
Schwartz countered that Loral has been winning its own business for some time. For the first quarter, Loral’s order backlog was $2 billion, up from $1.5 billion a year earlier. Last year, the company won important contracts to provide $325 million in radar-jamming systems to Turkey and to produce radar warning receivers for U.S. combat and cargo aircraft, a potential $1-billion program.
And the contracts keep coming. Two weeks ago, Loral won a bid to build simulators for the Air Force’s MC-130 aircraft. The initial award is $71 million, but the program could be worth $2 billion in the long term.
With its focus on electronics subsystems, Loral--unlike many other defense firms--is not vulnerable to cancellation of big-budget weapons systems. Peterson, the Ferris, Baker analyst, said electronics will fare better than other defense industries as the Pentagon opts to upgrade existing weaponry instead of buying new systems.
Ford’s command, control and communications businesses mix well with Loral’s product line. And although much of Ford Aerospace’s business is non-military, Schwartz said he wants to keep the commercial satellite and space-related operations to balance out Loral’s defense units. Moreover, he said it is similar to the defense businesses from a technical standpoint.
Analysts believe, however, that Schwartz will be tempted to unload Ford’s unprofitable missile business and its BDM International Inc. defense consulting unit in McLean, Va. Although BDM is Ford’s biggest division with $342 million in sales last year, sources said its business of doing research on Pentagon contract proposals would pose a conflict of interest for any parent company wishing to bid on the contracts.
Schwartz acknowledged the potential for conflict but said it could be avoided if handled “professionally and smartly.” He said the missile division is expected to be profitable this year under Ford’s plan, and he plans to keep it along with all other units.
Phil Friedman, analyst with Paine Webber Group Inc. in New York, said he expected pressure to sell to come from Loral’s partner, Shearson, within a year or two, but Schwartz said Shearson officials have assured him that they do not have a “short fuse” on the acquisition.
The acquisition of Ford Aerospace will transform Loral from a components maker to a systems house with more than $3 billion in revenue. With stakes that high in a shrinking defense environment, Loral will have a smaller margin for mistakes, Peterson said, especially in bidding for larger contracts.
As someone who considers himself an entrepreneur, it’s fitting that Schwartz would have a greater incentive than anyone else to make sure that Loral’s acquisition of Ford Aerospace goes smoothly. He owns 5.3% of the company’s stock, valued at $43 million, and his compensation package gives him huge bonuses if earnings improve. For the year ended March 31, he made $3.2 million.
Asked about the compensation, Schwartz said, “We’re in a competitive market and we pay well for good performance. I’m reminded of a remark by Babe Ruth when he was asked why he made more money than the President. He said, ‘Well, I had a better year.’ ”
