For Raytheon, a Return to Its Roots?

NEW YORK —  Less than a year ago, Raytheon Co. Chairman Dennis J. Picard boasted of his company’s “historic transformation from a firm dominated by government and defense electronics to a diversified, multi-industry company.”

Sixty percent of Raytheon’s 1995 sales came from such commercial businesses as engineering, appliances and civilian aircraft, Picard said in his annual report to shareholders, and only 40% came from the rapidly shrinking defense industry.

However, with its proposed $9.5-billion purchase of Hughes Electronics Corp.’s defense operations from General Motors Corp., announced Thursday, Raytheon would complete its return to where company watchers say its heart has always been.

A decade ago, Raytheon was an obscure but well-regarded player in the defense industry. Only in the last year has it made a stunning rise to the top of the industry.

Against intense competition, Lexington, Mass.-based Raytheon has emerged from the bidding wars of the last two years with what Lehman Bros. analyst Joseph Campbell called “the defense electronics dream team.”

In that area, Raytheon will be rivaled only by Lockheed Martin Corp. of Bethesda, Md., with its $23 billion in annual sales. Los Angeles-based Northrop Grumman Corp., which lost out to Raytheon in the Hughes bidding, drops back to a distant third place in defense electronics, with 1995 sales of about $7 billion.

Once it closes both the Hughes deal and its $3-billion agreement earlier this month to buy the military electronics operations of Texas Instruments, the new Raytheon would derive nearly two-thirds of its $21 billion in annual sales and an even higher share of profits from defense.

The flip-flop in corporate strategy is just one of the things Picard will be called on to explain in the coming days.

A more pressing issue is how the company proposes to turn its high-priced new acquisitions into a decent return for shareholders. Raytheon shares gained $1.50 on Thursday on the New York Stock Exchange, closing at $48.50--the same price they closed at last Feb. 1.

The Hughes purchase is “totally consistent with Raytheon’s long-held objective of remaining a top-tier player in defense,” Picard said Thursday at a New York news conference, where he appeared with GM Chairman John F. Smith Jr. and Hughes Chairman C. Michael Armstrong.

Picard was short on specifics about what cost savings could be wrung from the merger, but he did say he expects “synergies” among the Hughes, Texas Instruments and Raytheon operations to result in work force reductions of 10% in the defense business over the next 2 1/2 years. With 83,000 defense workers in the combined company, that could mean 8,000 job cuts, although Picard would not be pinned down on that number or on where the cuts will come from.

Layoffs are politically sensitive everywhere, of course, but any cuts will be scrutinized especially closely in Massachusetts, which has recently awarded significant tax breaks to its local defense giant to help it cope with the consolidation brought on by the vast reduction of the federal military procurement budget since the end of the Cold War.

Aside from cutting the staff and combining overlapping manufacturing facilities, some analysts expect Raytheon to sell one or more of its commercial operations. The Amana division, which manufactures ovens, refrigerators and other appliances, is the leading candidate for the sales block, but some think the Raytheon Engineers & Constructors division, with 17,000 employees and annual sales of $3 billion, could also be auctioned off to reduce debt.

Raytheon has grumbled in the past that the stock market fails to recognize the full value of the company’s commercial businesses because they are entwined with the riskier defense lines. A logical way to capture that “trapped value” would be to sell or spin off those lines, analysts said.

Lehman’s Campbell, while noting that the Hughes and Texas Instruments properties were among the most sought-after prizes in the defense industry, said the price of about 1.5 times Hughes’ annual sales is much higher than the typical price-to-sales multiples in the industry.

Raytheon “better have a lot of synergies because the numbers don’t work unless they do,” Campbell said, adding that Raytheon needs to find more than $1 billion a year in savings for the deal to make sense.

Another analyst called Thursday’s announcement of sale plans “the most expensive defense sale of the last several years.”

More optimistic was Wolfgang H. Demisch, analyst for BT Securities in New York. Demisch said Raytheon can handle the debt load from the Hughes and Texas Instruments deals without being forced to sell any other businesses.

After the closing of the Hughes deal--expected next summer--Raytheon will be carrying $11.1 billion in debt, up from $3.75 billion at the end of 1996, Demisch said, but the debt is at the relatively low interest rate of 7.5% and the much bigger company will easily generate the cash to make its payments.

Picard said the Hughes deal will depress earnings slightly this year, add “minimally” to profit next year and keep adding to profit thereafter.

Citing the increased debt, the top credit-rating agencies of Standard & Poor’s and Moody’s Investors Service both downgraded Raytheon’s bonds and commercial paper Thursday, and said they were keeping the company under watch for possible further downgrades.

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The Deal

Hughes Electronics’ defense operations, which General Motors on Thursday agreed to sell to Raytheon Co. for $9.5 billion in stock and debt, are Hughes’ largest revenue source. These operations are owned by Hughes Aircraft Co. and consist of four business units, each of which is considered a market leader.

What Will Be Sold

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Weapons systems: Participates in about half of the current U.S. tactical missile programs.

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Information systems: World leader in air defense systems and is the second-largest training and simulation systems provider in the world.

* Radar and communications systems: Has radar on four of the five front-line U.S. fighter aircraft, as well as on the B-2 bomber and the U-2 reconnaissance aircraft.

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Electro-optical systems: Has produced more tactical military laser and thermal electro-optical systems for armored combat vehicles than any other company.

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Hughes Aircraft bought in 40.2% of Hughes Electronics’ 1995 revenue of $14.7 billion. Here’s how Hughes Aircraft revenue of $5.95 billion broke down:

Weapons systems: 38%

Information systems: 29%

Radar and communications systems: 20%

Electro-optical systems: 13%

The Buyer

Hughes Aircraft is the latest in a series of defense acquisitions for Lexington, Mass.-based Raytheon Co., which had 1995 sales of $11.7 billion and earnings of $792.5 million.

Recent Acquisitions: Planned purchase of Texas Instruments’ missile and defense business for $2.95 billion in cash announced on Jan. 6; Chrysler’s defense electronics and aircraft modification units for $455 million in cash and a $20-million dividend in April 1996; E-Systems, a defense and commercial electronic systems maker, for $2.3 billion in cash in April 1995.

Four business divisions: Commercial and defense electronics (which manufactures air and vessel traffic control systems, satellite equipment, radar, sonar, mine hunters, surface launch systems and missiles); engineering and construction; aviation; and major appliances (manufactured under the Amana brand).

Sources: Bloomberg News; Hughes Electronics; Raytheon Co.; Times reports Researched by JENNIFER OLDHAM / Los Angeles Times

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Continuing Consolidation

General Motors’ sale of Hughes Electronics’ defense lines to Raytheon Co. for $9.5 billion is part of an effort by GM to take advantage of the mergers that are shrinking the defense industry. A look at Hughes Electronics and its divisions and how they contribute to GM’s bottom line:

GM’s Units

Company division Percentage of earnings in 1995

N. American Operations/Delphi Electronics 34.9%

International Operations 23.8%

Hughes Electronics 16.1%

General Motors Acceptance Corp. 15.0%

Electronic Data Systems* 13.6%

Other --3.4%

*Spun off in 1996

Hughes’ Holdings

Westchester-based Hughes Electronics has a number of facilities in Southern California with upward of 22,500 employees. A look at the company’s divisions:

Automotive Electronics

Specialty: Consists solely of Delco Electronics Corp., which manufactures audio systems; air bags; anti-lock brakes; theft-deterrent systems; engine and transmission controls; vehicle displays; and instrumentation, navigation and communications systems.

Locations: Has operations at Hughes Electronics’ research labs in Malibu and Santa Barbara and in eight states and 17 countries. Headquartered in Kokomo, Ind.

Employees: 31,000 worldwide

Market share: Delco is one of the world’s leading providers of vehicle electronics, with 23% of the global market.

Telecommunications and Space

Specialty: Includes Hughes Space & Communications Co., Hughes Communications Inc., DirecTV and Hughes Network Systems Inc. This division is the world’s largest commercial satellite manufacturer and distributor of satellite communications services.

Locations: Headquartered in El Segundo, with offices in Long Beach and Torrance. Hughes Network Systems has offices in San Diego.

Employees: About 15,000 worldwide, with approximately 7,500 working on space and communications systems in Southern California. About 650 are employed by DirecTV.

Market share: Had a 51% share of the worldwide commercial satellite market in 1996, based on contracts awarded.

Aerospace and Defense Systems

Specialty: Consists solely of Hughes Aircraft Co., which manufactures missile systems, torpedoes, sonar systems, electro-optical systems, airborne radar systems, air traffic control systems, information systems and guidance and control systems.

Locations: Headquartered in Washington, with locations in 23 states and 21 countries. Its Southern California offices are in Malibu, Santa Barbara, El Segundo, Fullerton, Irvine, Newport Beach and Torrance.

Employees: About 15,000 in Southern California, 40,000 worldwide.

Market share: Has about 65% of the worldwide market for air defense systems.

Sources: Company reports and representatives

Researched by JENNIFER OLDHAM / Los Angeles Times

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More Hughes Coverage:

* Landlords and real estate brokers prepare for the fallout. D2

* Hughes workers worry when the cuts will come and how deep they’ll be. D2

* How Hughes and its units contributed to GM’s bottom line. D5