CAN GENERAL SIGNAL ESCAPE ITS HIGH-TECH HELL?
Edmund M. Carpenter inherited a hydra-headed monster when he took on the top job at General Signal Corp. in 1988. Back then, the company was a grab bag of 44 businesses ranging from telecommunications gear to subway fare boxes. General Signal had also just finished a disastrous foray into high-tech fields such as semiconductor-equipment manufacturing. So, Carpenter pulled out his machete: He lopped off $202 million in assets and reduced General Signal's work force by 20%.
Today, General Signal is leaner, though not much meaner. Despite incessant cost-cutting and a new corporate culture where even the chief executive answers his own phone, the red ink is flowing: General Signal lost a record $32.9 million last year, after special charges to dispose of discontinued operations, on flat sales of $1.7 billion.
Carpenter is far from finished selling off pieces of General Signal. The problem these days is finding buyers. Financing for acquisitions has all but dried up--and Carpenter is stuck with a portfolio of businesses in industries that aren't likely to grow much in the near future. Says Carpenter: "The next year is going to be extremely difficult."
Even so, Carpenter seems intent on taking General Signal back to its low-tech roots--if only the marketplace would let him. Last year, he put General Signal's $130 million telecommunications unit on the block, but he still hasn't found a suitor. A buyout of one semiconductor-equipment subsidiary, Ultratech Stepper, fell through last summer when the buyers couldn't get financing. Carpenter has to sit out the recession before he can get rid of some of his problem assets. General Signal executives, for their part, are putting on a brave face. Says Senior Vice-President Peter A. Laing: "You play the hand you're dealt."
Unfortunately, it's a pretty awful hand. General Signal's problems run much deeper than its secondary subsidiaries: The company's core business, industrial and electrical controls, is hurting as well. The recession is reducing demand for the valves, pumps, and other gadgets that orchestrate the flow of material used to make paper, chemicals, cement, and other basic manufacturing products. During the fourth quarter of 1990, operating earnings were off 33% at the electrical controls division, while process controls were off 19%. Carpenter expects a modest 3% overall growth in 1991, much of that coming from price increases. And that's a tough call during an economic downturn.
Carpenter has precious few other options. General Signal is hemmed in by $395 million in debt--47% of total capital--taken on during a stock buyback in 1988. "They just don't have much financial flexibility," complains one large institutional holder.
FADED PROMISE. The 1980s provided a bitter lesson in how not to diversify that Carpenter is only now beginning to apply. Under former CEO David T. Kimball, General Signal tried to transform itself from a supplier of equipment to capital goods manufacturers into a high-tech powerhouse. Management siphoned cash from its more prosaic businesses, such as valves and transformers, and used the money to buy its way into the then-promising semiconductor-equipment field. All told, General Signal spent $240 million to buy high-tech operations from 1985 to 1988.
But just as General Signal joined the party, the Japanese started overrunning the chip-equipment industry. Suddenly, General Signal faced the grisly prospect of slugging it out with cash-rich Japanese competitors such as Canon Inc. and Nikon Corp., which now command 80% of the market. With its high-tech gambit in a shambles, General Signal brought in Carpenter, a former president of ITT Corp. who lost out in a power struggle there.
Despite the problems, Carpenter has made some progress. He has scaled back the high-tech division by selling some semiconductor-equipment operations. And he's investing what he can in the less-glamorous but better-performing electrical gear and process controls businesses. He recently picked up two small electrical companies to broaden General Signal's line of electrical controls. He figures process controls will make up about 80% of total sales by yearend, up from 59% in 1987.
Carpenter is a demanding boss who routinely grills division presidents about their profit projections and pushes relentlessly for efficiency. He ordered more than 500 managers to sign up for inventory management training and told them to slash administrative costs to the bone. Division presidents are also now required to pull down at least a 20% return on assets. Those businesses that can't make the cut will soon be on their way out. "There are no special cases," says Carpenter.
Perhaps. Yet General Signal's largest chip-equipment maker, GCA, will probably be hanging around for a stretch. Once the industry leader, the company now has only a 4% market share and has lost $4 million in each of the last two quarters. Carpenter is counting on GCA's new XLS stepper, a semiconductor-manufacturing machine that lays out the circuit pattern on a chip, to trigger acomeback.
POLITICAL PERILS. Trouble is, since General Signal has announced its intention to go low-tech, customers are understandably wary. In fact, analysts and some company insiders say Carpenter would like to unload GCA. Carpenter is mum on that point. But GCA hardly fits the profile of his ideal unit. Orders were down 25% in the third and fourth quarters of 1990. It requires heavy investments in research and development to remain state-of-the-art. And the unit isn't likely to hit his 20% return-on-assets goal.
Yet selling out may prove equally difficult. Few American companies care to venture into such a risky business. And potential foreign suitors are scared off by the political ramifications of buying out one of the few remaining American manufacturers in such a crucial industry. "I'm not sure that they would be able to unload GCA," believes G. Dan Hutcheson, president of VLSI Research Inc., a consultant to the semiconductor industry.
Still, Carpenter isn't letting up. He remains hell-bent on getting more "operating muscle back in the company." But before Carpenter can get General Signal truly fighting trim, this unwieldly conglomerate will definitely have to shed a few more pounds--and companies.Lisa Driscoll in Stamford, Conn.