BERNARD L. SCHWARTZ : Ford Aerospace: Hidden Jewel : Loral Corp. May Wind Up ‘Getting a Good Asset Free’
Bernard L. Schwartz, chairman and chief executive of New York-based Loral Corp., doesn’t make any apologies for the fact that his $3.2 million in compensation made him the defense industry’s highest-paid executive last year.
Asked recently about his compensation, Schwartz said: “We’re in a competitive market and we pay well for good performance. I’m reminded of a remark made by Babe Ruth when he was asked why he made more money than the President. He said, ‘Well, I had a better year.’ ”
Indeed, Wall Street has long regarded the 64-year-old executive as a savvy businessman. And, as Schwartz says, he has had a very good year.
Even before the Middle East crisis began in August, Schwartz believed he could find hidden values in the defense industry, which many on Wall Street had written off after the warming of U.S.-Soviet relations.
Schwartz believes he’s found just such a hidden jewel in Ford Aerospace Corp., the Newport Beach-based defense subsidiary of Ford Motor Co. In July, Loral and its partner, Shearson Lehman Hutton Inc., announced plans to acquire Ford Aerospace for $715 million, outbidding two other rivals who had more financial resources than Loral.
With Ford Aerospace, Loral gained a company with revenue of $1.8 billion and 17,000 employees, including 2,600 at the Aeronutronic missile division in Newport Beach.
Even before the sale closed, however, Schwartz was making deals. He agreed in September to sell Ford’s BDM International consulting division for $130 million. In late October, Schwartz announced that he would sell 49% of Ford Aerospace’s space systems division in Palo Alto for $182 million.
Meanwhile, the long-profitable defense electronics company expects combined sales in excess of $3 billion as a result of the Ford purchase. It also expects continuing profits despite the bleak outlook for many contractors.
Michael Beltramo, a Los Angeles defense analyst, said Schwartz’s purchase of Ford Aerospace is looking smarter every day in light of the Persian Gulf crisis and the amount of money the asset sales have generated for Loral.
“Pretty soon, he (Schwartz) will wind up getting a good asset for free,” Beltramo said recently.
The acquired company in Newport Beach will be known as Loral Aerospace, a subsidiary of Loral Corp. In a recent interview with Times staff writer Dean Takahashi, Schwartz discussed the Ford Aerospace acquisition, Pentagon budget cuts and the impact of the Mideast crisis on the industry.
Q. A lot of companies such as Ford Motor Co. and Unisys Corp. are diversifying out of the defense business these days. What is scaring these people away from the defense industry?
A. I think there are a number of things. The perception that the defense budget is declining and may be vulnerable to sharp cuts in the future.
Secondly, there is the general perception that everyone is unfriendly to the defense industry. Some of that perception has been caused by the Department of Defense itself, which is just emerging from a time when there has been a lot of contractor bashing in the media, in the defense circles, in financial circles.
As a result of both of those issues, it’s harder to secure financing for defense projects, and that is another negative or cost of being in the defense industry.
Q. You obviously think the rewards of the industry are worth the risks.
A. Yes. I think there’s a difference between the reality and the perception in this case. The perception of the industry cuts have been overstated and fully discounted the values of the business. Secondly, I believe the worst has passed as far as the defense industrial base is concerned. Both the government and the industry recognize that a viable and healthy industrial base is an important part of national security.
We as an industry have been living in an atmosphere of no-growth budgets for five or six years. Loral still sees opportunities because we’re on the cutting edge of technology. We’ve grown throughout this period. Our experience is different from the perception.
Q. Regardless of what is happening right now in the Persian Gulf, what is the outlook for the defense industry over the next five years?
A. I think the defense budget will continue to be under pressure because the political resolution of the deficit has not really been achieved. Because of the Gulf and the recognition that the world is still dangerous to America’s interests, the expected Draconian cuts will be avoided.
Secondly, I believe there will be reallocation of defense resources toward mobile, fast-response and high-technology capability. The total amount of defense may be the same, but there will be new priorities to reflect the new realities. Therefore, some will win and some will lose.
Q. On a more immediate level, what is the impact of the Persian Gulf crisis for the defense industry?
A. I think there will be some winners and some losers. The high-tech, electronic segment, fast-response, highly mobile capabilities will be winners. I think there may be a reorganization away from the kind of threat that Russia posed to us five years ago. The total amount of defense may be the same but there will be a new priorities.
Q. Everybody is preparing for some kind of defense budget crunch and also changing their plans as a result of the Persian Gulf crisis. What is Loral doing different?
A. For one thing, we’re concentrating in five or six core business areas. We have been doing that for a period of years, and we believe that those choices have turned out to be fortunate ones in terms of today’s relevancy.
They are self-protect; reconnaissance; training; anti-submarine warfare; command, control and communications; and now space. We believe each one of those is going to be a growth area because they represent the priorities of the Defense Department. We positioned ourselves in those areas that continue to get support.
Q. Analysts are saying your purchase of Ford Aerospace is looking smarter every day. If you had to purchase Ford Aerospace Corp. today, do you think you would have to pay more than the $715 million?
A. I think the answer to that is probably, yes. Loral, in effect, has educated the marketplace as to the hidden values of Ford Aerospace. There were elements within Ford Aerospace that were considered negatives that are turning out to be positives. Having brought the harsh light of scrutiny to those issues, I think the values would have been increased and would be perceived to be more valuable today.
Q. Do you expect a war in the Persian Gulf?
A. That’s a tough question because it’s a political question. I don’t pretend to be able to calibrate that issue for the government. I think the President has a tough decision because there are some important political objectives that need to be accomplished in any settlement in the Gulf. Not the least of which is this country must not be setting diplomatic and economic objectives staring down the barrel of a hostile gun. We have to resolve that issue, but I think it would benefit everybody if we did it peacefully, thereby using our strength in a deterrent way, rather than in a hostile way. I hope we can achieve our objectives without hostilities.
Q. According to Wall Street, you’ve estimated $100 million in additional revenue in 1991 as a result of the buildup in the Mideast. Is that accurate, and if so, how will that break down?
A. That is not accurate. What we have done is identify $100 million worth of potential bookings that could be made in a year’s time, but there would be a longer lag in the revenue base. I think the booking potential is a little higher than when I made that estimate a month ago. There is a long tail to it, and it will take a couple of years to realize that in sales.
Q. Based on the media coverage of the Persian Gulf crisis, what sort of image do you think the defense industry has in the mind of the public? Is this a better image than, say, 10 years ago?
A. I think so. I think most people realize if we get a peaceful solution, it could not have been achieved without the deterrence of a strong military. If there are hostilities, I think everybody will want our men and women to be protected by the best equipment available. I think there will be a new recognition that American interests are global and can only be protected from time to time by military capabilities.
Q. Loral has stayed away from big-ticket items in the defense budget. Do you expect certain programs will be cut in the next five years?
A. Yes. I’m reluctant to get into a debate as to which ones. I think there will be a change in priorities away from the kind of weapons systems that were important when two global powers were confronting each other to more regional requirements.
More geared to the kind of conflicts that will arise from the Gulf, Central America, the Pacific Rim--there are many areas of the world that are potentially dangerous and will affect America’s interests and the civility of the free world. Our deterrent power will be called into play. There is a shift and that shift is very profound.
Q. Do you think there is ever going to be something like a peace dividend? If so, how soon will it come?
A. I think there will be a significant peace dividend and it will take a couple of years to get there. The GNP is expected to rise above the present level of defense spending, and the difference is going to the peace dividend. If, in 1995, we’re spending not 3% but 2% of GNP on defense, we’re talking a $100-billion-a-year peace dividend that can be available for very proper uses elsewhere.
Q. Do you believe a recession is here or coming?
A. I’m not an economist, but it sure feels that way. I travel around the country, and I’ve found that not many industries or companies feel good about their bookings. So much of our economy depends on consumers. If we have a good Christmas season, that will soften the blow. I’m optimistic it won’t be a long one or a severe one, but I think we’re in one.
Q. Do you think that is going to spell more layoffs for the aerospace industry? Have we seen the worst of layoffs?
A. I think we have had the worst impact, though this is not to say there won’t be some adjustments going forward in various companies. I think there will be continued consolidation in the industry, and that in itself will create dislocations that for a temporary period might be reflected in layoffs. But from a recession point of view, I think we’ve seen the worst of it.
Q. Is there much hope for defense contractors to look overseas for sales as the domestic defense budget decreases?
A. Yes. I think places like Europe will produce a great deal of protectionism for the European defense industry. But there will be increased requirements for countries like Turkey, Saudi Arabia, Israel, Egypt and the Gulf area. That will provide very good opportunities for Americans. I think the same will happen in Japan. I think around the world, overseas opportunities will be a significant part of the high-tech defense industry’s growth.
Q. Does that create a concern that some of our weapons might be used against us or our friends?
A. Absolutely. I’m hopeful the appropriate agencies in the government will be very conservative before granting licenses. For the United States, the high-tech weapon has always been important. I think there’s an opportunity to help our allies overseas with weapons that do not compromise America’s lead in high technology. I think we can do both if we’re smart.
Q. Getting back to the Ford Aerospace deal, Loral is allowing Ford Motor Co. to keep $100 million from Ford Aerospace’s overfunded pension fund, correct?
A. Ford is not letting us keep it. The arrangement was they transferred to Loral an amount that kept the pension fund intact and transferred a surplus above the requirement. Above that amount, they kept a certain amount. They transferred to Loral sufficient and surplus funds to take care of all the liabilities.
Q. I have seen a copy of a January, 1989, report from the Defense Department’s inspector general’s office that estimates the government had a claim of about $90.9 million out of a total of $527.3 million in excess pension assets after 11 defense contractors’ plans were terminated between 1982 and 1987. Do you think the Pentagon has any claim on the money that Ford is keeping?
A. I haven’t seen that report. Everything you’ve seen in print up to this point is speculation. The government has not maintained a claim--they have not said they won’t but they have not yet done so--and there’s been no quantification of what that claim might be. There’s been all kinds of speculation of how to compute that. It’s a very complex issue, having to do with what portion of the pension assets came from overseas, what came from commercial activities over which the DoD would have no claim, what portion came from fixed-price versus other types of contracts, how much was charged by Ford Motor Co. to the government. It’s a complex issue, and no claim has been made. If they did make it, I don’t know how it would stand in the courts.
Q. As far as your 17,000 new employees are concerned, do you think there was a political risk to that transaction involving pension assets?
A. No. I think the interest of the employees was to make sure that there were adequate assets to protect the expected liabilities. Beyond that, the employees’ interests end. They have an interest in making sure the integrity of the plan was taken care of.
Q. Do you expect any other big changes with Ford Aerospace?
A. No. I think we’ve done the things we wanted to do. We’ve sold BDM and the part of the space systems unit. Now our goal is to get synergies from the combination of the companies. We’re well on our way to that. I’m very pleased about the progress.
Q. In Southern California, there’s a lot of concern about aerospace companies leaving the area because of the high costs of manufacturing here. In the long term, how big a problem is this, and how much of a factor is this to your company strategy?
A. I don’t like to move plants, I can tell you that. Our commitment to our work force is a significant positive for why we’re successful as a company. I’m not suggesting there’s never a need to close a plant or move an operation. I don’t foresee any of that in Loral’s arena. We have an eight-year lease with the Aeronutronic operation. After six years, the rent goes up quite a bit, so we have to look as management for a way to solve that problem. That is not a unique problem since we have a lot of leased property. You work out what you have to work out.
Q. In six years, you’ll be paying $1 million a month to rent the Newport Beach land. Will you be able to make missile products profitably with that lease?
A. We think it’s profitable now and it will continue to be profitable. When the rent factor becomes uneconomic--and I have to tell you that’s generally not the reason companies relocate--management has to do some things to respond. We think we’re in good shape. If we can go out and book new business and raise the level of business activity at Aeronutronic, the rent portion will be unimportant. The division management and Loral’s viewpoint are the same. This is not a decision that will be made by me in New York. What to do with the facility when we face that issue is not going to be decided in an isolated place away from Newport Beach.
Q. What are the most important programs for Aeronutronic right now?
A. The most important potential program is the U.S. Navy’s AIM-9R missile. If that goes into production, Aeronutronic is going to have a very large program. Getting the F-18 forward-looking infrared pod (an electronic warfare device) into production in good shape . . . is an important part of Aeronutronic’s future. Because of the situation in the Persian Gulf, the Chapparral missile program is going to be (important to the Newport Beach unit).
Q. Some of your employees will no doubt be reading this. What sort of message would you like to impart to them?
A. You can tell them I’m extremely pleased with the progress we have made in becoming one family. I feel confident we have a cultural and a community objective that will be mutually good for everyone. Their joining the Loral family is a significant plus for us. I’m excited as the devil.
