Corporate Transformation : Hughes’ Chairman Engineered a Dramatic Turnaround. But is the Job Complete?

In the five years since he took over as chairman and chief executive of Hughes Electronics Corp., C. Michael Armstrong has restructured the General Motors unit from a technology company focused on the defense and automotive industries into a leading player in the high-flying world of telecommunications.

Now, with Armstrong expected to depart to head AT&T;, it will be up to his likely successor, Michael T. Smith, a Hughes vice chairman, to implement the dramatic transformation, according to a company source.

Hughes spokesmen, as well as Armstrong and Smith, declined to comment.

When Armstrong arrived at Hughes headquarters in Los Angeles, the company’s stock was trading at $15. On Friday, as Armstrong reportedly agreed to take the helm at one of the world’s largest phone company, Hughes’ stock closed at $65.25, down $1.50 on the New York Stock Exchange.

The remarkable growth in part reflects the optimistic outlook for the telecommunications industry, which relies largely on satellites Hughes builds to provide everything from wireless phone calls to digital television to Internet access.

The defense industry, on the other hand, has been shrinking since Armstrong’s arrival, as the Cold War’s demise made military contracts ever more scarce. In January, Hughes decided to sell its defense operations for $9.5 billion to Raytheon Co. of Lexington, Mass., one of only three remaining big defense firms.

As part of the deal, Hughes’ Delco automotive electronics unit will be transferred back to GM and merged with the auto maker’s Delphi auto-parts business.

What remains is an enviable commercial aerospace business. Hughes’ Telecommunications & Space division is the world’s largest manufacturer of commercial satellites, and its DirecTV unit is the market-share leader in satellite television.

“Armstrong has completed 95% of his job at Hughes,” said Jon Kutler, president of Quarterdeck Investment Partners, a Los Angeles investment bank that focus on the aerospace industry.

“During his tenure, he completely transformed the culture of the company from a technology hothouse to a marketing-oriented and customer-friendly organization,” Kutler said. “Now, with the consolidation of the [defense] industry winding down, what do you do for an encore?”

Others report hearing rumblings of a General Motors plan to sell off Hughes assets--including DirecTV, satellite manufacturing, business communications systems and PanAmSat, the Greenwich, Conn., satellite firm that sold Hughes a 71.5% stake for $3 billion--which would have left Armstrong with little to do had he remained at Hughes. Other scenarios, however, have GM spinning off Hughes Electronics in its entirety.

Armstrong, who turns 59 today, arrived at Hughes after 31 years at IBM, where he rose from a sales position to become senior vice president in charge of IBM’s worldwide marketing. Although he is faulted for his role in squandering Big Blue’s lead in the personal computer business in the 1980s, he is credited with turning around the company’s European operations.

Armstrong has said that his experience at IBM taught him to put customers’ concerns first. That helps explain the success of DirecTV, the 3-year-old service that beams more than 100 television channels to satellite dishes the size of pizzas. Hughes has followed up with DirecPC, a similar service that provides high-speed Internet access via satellite.

Analysts said Hughes Electronics will be in good hands with expected successor Smith, who worked closely with Armstrong during his tenure.

“Michael Smith certainly knows the company extremely well, and he has every skill that I think he needs to take over,” said Paul H. Nisbet, president of JSA Research Inc., an aerospace research firm in Newport, R.I.

“I think given the Smith-Armstrong relationship, the company won’t miss a beat,” Kutler added. “Armstrong set the trajectory, and there’s no question that Mike Smith can handle it from now on.”

Smith joined Hughes parent General Motors in 1968, working in the accounting department of the assembly division plant in Framingham, Mass. Over the next 18 years he held a variety of finance-related positions in Michigan and Spain before becoming vice president and chief financial officer of Hughes when GM purchased the company in 1985. In addition to his vice chairman role, Smith is chairman of the Hughes Aircraft Co. subsidiary.

Smith, who lives in Alexandria, Va., is the brother of John F. Smith, the chairman, chief executive and president of GM.

AT&T; ANNOUNCEMENT: Armstrong could be appointed Monday. A1

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Apostle of Change

During his five-year tenure as chairman of Hughes Electronics Corp., C. Michael Armstrong has transformed the company from a defense contractor into a consumer electronics firm. AT&T; is expected to announce next week that Armstrong will become the telecommunication giant’s chief executive. Known for his political savvy and strong marketing skills, Armstrong engineered Hughes’ “customer is king” approach. A look at the 59-year-old’s legacy at Hughes:

Armstrong’s Accomplishments

* Changed corporate culture: Slashed Hughes’ work force by more than 25%. Set a goal of being No. 1 or 2 in each market.

* Jump-started military earnings: Consolidated defense businesses. Was at the helm when General Motors--Hughes’ parent company--agreed to sell Hughes’ defense operations to Raytheon earlier this year. The deal is still pending approval by the companies’ boards.

* Focused commercial business: Concentrated on satellites, telecommunications and auto electronics. Introduced DirecTV, the nation’s first direct-broadcast satellite provider. The service has signed on more than 2 million subscribers in the United States. Other new services include DirecPC, a satellite hookup to the Internet.

* Spurred further growth: Posted growth in Hughes’ defense business of between 6% and 10% and growth in the telecommunications unit of about 20%.

Changing Units

With the pending sale of Hughes’ defense operations to Raytheon and the planned absorption of the auto electronics unit into General Motors, a majority of Hughes operations will be composed of telecommunications and space operations. How these units ranked in terms of sales when Armstrong arrived in 1992 versus the end of 1996:

1992

Telecommunications and space: 26%

Automotive electronics: 34%

Aerospace and defense systems: 40%

*

1996

Telecommunications and space: 18%

Automotive electronics: 32%

Aerospace and defense systems: 44%

Commercial technologies: 6%

Sources: Company reports; Times and wire reports

Researched by JENNIFER OLDHAM / Los Angeles Times