Company in Transit : Transportation: Chairman William J. Agee is gambling that contractor Morrison Knudsen can become a force in the multibillion-dollar rail and subway car construction business. There are many doubters, however.


William J. Agee has had a one-track mind lately.

Sure, the chairman and chief executive of Morrison Knudsen Corp.--an 80-year-old engineering and construction giant--can boast like a proud father of the company's key roles in the superconducting super collider project in Texas, Superfund cleanups and hydroelectric plants. And he can glibly tick off historic successes, such as helping build the Hoover Dam, the Alaska Pipeline and General Motors' Saturn plant in Tennessee.

But what really gets Agee revved up these days is Morrison Knudsen's transit-car manufacturing operation, the fledgling business for the Boise, Ida.-based company best known for digging tunnels and building highways.

For a couple of years now, Agee has spent much of his time--and substantial company dollars--taking his "trust me" message on the road, vying for high-profile transit contracts against far more experienced foreign competitors.

His competitive bids, promises of local jobs and go-get-'em touting of Morrison Knudsen as the only U.S.-based maker of passenger rail cars have won over transit officials nationwide. As a result, the company has snagged $1 billion worth of contracts in Illinois, New York and California, even though it has yet to deliver an order of new passenger cars.

In February, Agee fomented a headline-grabbing rebellion over Los Angeles' selection of a Japanese firm to build cars for the Norwalk-to-El Segundo Green Line. Amid a "buy American" frenzy after President Bush' ill-fated trade mission to Japan with U.S. auto makers, he succeeded in persuading transit officials to rescind the contract with Japanese-owned Sumitomo Corp. of America. The uproar threw the project's bidding process into disarray, but Morrison Knudsen plans to go after that business again.

While acknowledging that Agee's strategy has great potential, many industry analysts and insiders see a fair amount of risk in his steamrolling approach. They wonder whether Morrison Knudsen can deliver on its many promises, given its lack of car-building experience and the hefty backlog it is accumulating. And they contend that the company's image could be bruised if it loses face by blowing a deadline or delivering faulty cars.

"My fear is that, in keeping their eye on the clouds, they may lose track of what's at their feet," said Byron K. Callan, an analyst with the Prudential Securities investment firm in New York. Callan recently lowered his sights for the company's 1992 and 1993 earnings until he sees evidence of its ability to execute orders.

At least one executive at a rival car builder, watching the process with skepticism and amazement, predicts that the company could overload its resources.

"I don't believe there is any other car maker in the world who would have taken on the commitments MK has with so little new-car experience behind them," said J. Gary Hallman, director of marketing and sales for the mass transit division of Montreal-based Bombardier, the largest maker of passenger rail cars in North America. "Every other builder walked before they ran."

But Agee has little patience with the worrywarts and naysayers. With U.S. cities choking on smog and congestion and the federal government throwing billions of dollars at regional transit projects, Agee views rail as one of the businesses of the 1990s. Morrison Knudsen foresees as much as $5 billion in transit contracts during the next five years, and Agee craves a big chunk of the action.

"For the last 40 years, we've been in love with the automobile and the airplane," he said in an interview at Morrison Knudsen's headquarters, with its view of the Statehouse and the mountains where he hiked as a boy. "Now we'll see cities like Los Angeles and San Francisco . . . served to a much greater degree by rail."

Morrison Knudsen is not an all-out newcomer to the rail business. Since 1970, the company has laid more than 20,000 miles of railroad track and built more than 40 bridges and 70 tunnels, including those for Bay Area Rapid Transit, or BART. It has also made or refurbished more than 800 locomotives.

The company holds 70% of the domestic market for refurbishing rail cars. At its leased facility in Hornell, N.Y., it has rebuilt 3,000 transit cars, including more than half the subway cars in New York City.

In 1989, it added new-car manufacturing at the plant and won its first order the next year. To date, it has delivered four prototypes, which are being tested by the Chicago Transit Authority; deliveries of other cars are expected to begin in late July or early August.

For the last decade, the passenger car market has belonged to overseas manufacturers, which have enjoyed strong domestic markets. Five foreign-owned companies--Canadian, Japanese, Swiss and two German--run car plants in the United States. Morrison Knudsen--which routinely teams up on big projects with many of the foreign manufacturers--is single-handedly attempting to revive a once-robust U.S. industry.

The U.S. passenger car business peaked more than four decades ago when trains were the main mode of long-distance travel and there were plenty of orders for Budd Co. of Pennsylvania, St. Louis Car Co. of Missouri and Pullman Standard Co. of Illinois.

In the 1960s and early 1970s, big projects such as BART and the Metro subway in Washington beckoned aerospace giants including Rohr Industries of Chula Vista and Boeing of Seattle into the industry. But, as car and plane usage increased and transit officials insisted on expensive variations from project to project, the rail car business began to run long on frustration and short on profits. The last U.S. car maker, Philadelphia-based Budd, quit in 1987.

Getting the U.S. industry back in gear won't be quick or easy, Agee acknowledges. As it stands now, workers at the Hornell plant assemble "car kits" using shells--or one-piece frames--produced overseas. To become an original manufacturer, Morrison Knudsen is having to reinvent the wheel, building a staff of engineers and learning about making shells from foreign companies. To handle some of its new orders, it will be refurbishing manufacturing facilities in Chicago and Pittsburg, Calif., in the East Bay.

Meanwhile, the global nature of the business--transit car components come from contractors all over the world--makes it tough to play on the emotional issue of jobs, as Agee learned recently in Chicago. After Morrison Knudsen won a tough contest to build and refurbish cars for Metra, the metropolitan Chicago commuter rail agency, it was sued by a United Auto Workers local that accused the company of exporting jobs overseas by hiring a Japanese firm to do 23% of the work.

The Japanese company, ironically, was Sumitomo--the company Morrison Knudsen went up against in Los Angeles. The UAW local, which preferred a proposal by Bombardier of Canada under which 225 laid-off workers would have been hired back to do the work, lost its case but has appealed.

Meanwhile, Agee's aggressive approach in Los Angeles angered members of the Los Angeles County Transportation Commission, who had selected Sumitomo to build the Green Line cars even though Morrison Knudsen's bid was lower. The commissioners contended that Sumitomo was far more technically capable. Some of them felt bushwhacked by what they regarded as his Japan-bashing campaign to get the contract overturned.

"They chose the political route," said Commissioner Jacki Bacharach. "That's not the way to establish a U.S. company that can be competitive." The LACTC on Wednesday is expected to review revised options for Green Line car specifications, with bids due in late June at the earliest.

Commissioner Ray Grabinski criticized Agee as "very cavalier in how he does business." At one point during the Los Angeles flap, transit insiders hoped that Agee and Sumitomo could come to terms and agree to handle the Green Line as a joint venture. In meetings, however, Agee pushed Sumitomo to make a quick decision. Sumitomo declined.

"Had MK and a foreign firm been able to get together," Grabinski said, "we'd be light-years ahead." Instead, it is looking likely that the start-up of the Green Line will be delayed past the planned date in late 1994--and that Los Angeles commuters will be making some sacrifices in service to boot.

Some observers say the Los Angeles flap helped steer other business Morrison Knudsen's way as wary transit officials sought to avoid trouble. In March, BART directors said they awarded a contract to Morrison Knudsen over two Japanese companies because of the merits of its bid and not because of "buy American" pressures.

But one director acknowledged to the Idaho Statesman newspaper: "I must tell you that even if they had not been the low bidder, I still would have voted for the American company."

Agee, 54, is no stranger to controversy and risk-taking. He burst into the public consciousness in 1980 when, as chairman and chief executive of Bendix Corp., he was romantically linked with Mary E. Cunningham, a married protege whom he had rapidly promoted at the big auto industry supplier.

She resigned, and the two were later married. They have two children and make frequent getaways in the corporate jet to their Mediterranean-style home on 17 Mile Drive in Monterey, overlooking the 13th fairway at Pebble Beach Golf Links.

In 1983, Bendix attempted a hostile takeover of aerospace giant Martin Marietta in what some observers still maintain was simply a flexing of Agee's MBA muscles. The ensuing battle gave rise to some of the most popular catch phrases of the merger-crazed 1980s.

When Martin Marietta turned around and began buying shares of Bendix, wags quickly labeled it the "Pac-Man defense," after the popular arcade game. Allied Corp. (now Allied-Signal Inc.) eventually ended the standoff by intervening on Martin Marietta's behalf and swallowing Bendix.

All three companies ended up with billions of dollars of debt. Deprived of his power, Agee departed, nicely insulated from the fallout by a $4.2-million golden parachute and adamant that the takeover battle had forced all three companies to make necessary changes, a notion that others involved in the battle disputed.

For several years after, he acted as a consultant and venture capitalist from a base in the exclusive Cape Cod community of Osterville, Mass., while serving as a director of such companies as Morrison Knudsen and Dow Jones & Co., publisher of the Wall Street Journal. In 1988, debt-ridden Morrison Knudsen--struggling with cost overruns, slumps in heavy construction, losses in shipbuilding and a disastrous foray into real estate--drafted Agee to head the company.

He took the job partly out of loyalty, he said. In 1942, Harry Morrison, who had founded a general contracting company by joining forces with Morris Hans Knudsen, helped Agee's father buy his business, a small steel company.

"I had said I'd probably never work for another public company again," Agee said. "This was the only unique situation that could have (worked)."

Agee quickly set about cutting costs by chopping the payroll, selling the beleaguered shipbuilding operation in San Diego and writing off the bad real estate deals. The company moved away from highway and bridge construction, concentrating on more profitable project management and design, tunnels and marine construction. Under Agee, environmental and power plant projects also have been emphasized. Agee got the company out of debt and returned it to profitability.

Although some analysts say the rail systems division should begin to produce healthy profits once deliveries begin in earnest later this year, the current lull in shipments has taken its toll. For the first quarter, which ended in March, the company reported that net income fell 28%, primarily because of a $1.1-million pretax loss in the transit car operation. For all of 1991, rail systems produced an operating profit of $20.3 million on sales of $425 million.

As a whole, Morrison Knudsen had operating income of $76.5 million last year on sales of nearly $2 billion.

By adding the rail car operation, Morrison Knudsen is looking to become a "cradle-to-grave" contractor, said John N. Simon, senior vice president of Seidler Amdec Securities in Los Angeles. The company would be able to lay the tracks, make the trains and run and maintain them.

"It's an opportunity," Simon said. "The question is: Can they pull it off?"

But Simon added that, no matter how much attention is being placed on rail cars right now, Morrison Knudsen is still primarily a dirt-moving and construction company.

Clearly, the jury is still out on whether Agee is on the right track. Stockholders want to know: Is he visionary or misguided?

"It's a completely new world for MK," said Katherine Collins, an analyst with Fidelity Management & Research in Boston. "If he's right, it'll be a corporate grand slam."

Morrison Knudsen on a Roll

Based in Boise, Ida., Morrison Knudsen has been pouring on the coals to win contracts for high-profile transportation projects, especially to build and refurbish railcars for big-city public transit systems. Still uncertain is what will happen with the controversial Green Line rail project in Los Angeles. Late last year, Morrison Knudsen lost a bidding contest with Sumitomo of Japan to build Green Line cars, but Sumitomo's contract was rescinded in January after a "Buy American" campaign erupted.

These are some key railcar projects:

* Illinois Metra: To manufacture 173 transit cars and rehabilitate 140 others. $380 million.

* Chicago Transit Authority: To manufacture 256 rapid transit commuter cars. $208 million.

* California Department of Transportation: To manufacture 88 new transit cars, with options for 260 more. San Jose-Sacramento, Oakland-Bakersfield, Santa Barbara-San Diego. $155 million.

* Metro North Commuter Railroad in New York: To manufacture 48 transit cars. $100 million.

* Bay Area Rapid Transit: To manufacture 80 transit cars, with options for 170 others. $142 million.

Other important rail projects:

* Texas: Morrison Knudsen heads Texas High Speed Rail Corp., a consortium that will build and operate a 200-m.p.h. train system linking Houston, Dallas and San Antonio. Franco-British GEC Alsthom will build the railcars, to be based on French "very high speed" rail technology. $5.8 billion.

* Honolulu: Morrison Knudsen heads Oahu Transit Group, a consortium that will build and operate an elevated light-rail system in Honolulu. Railcars will be built by AEG Westinghouse. The project awaits a vote to approve the sale of bonds for financing. $1.1 billion.

Sources: Morrison Knudsen, newspaper reports

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