Taking An Ax To Allied

During his 34-year tenure at General Electric Co., Lawrence A. Bossidy became a devotee of Chairman Jack F. Welch Jr.'s up-or-out philosophy of conglomerate management. Under Welch, a business unit that wasn't the No. 1 or No. 2 player in its market didn't have much life expectancy. So it should come as little surprise that Bossidy, who in late June left GE as vice-chairman to take over as chief executive of Allied-Signal Inc., has already started storming through the sprawling manufacturer of auto parts, aerospace components, and chemicals.

In early October, Bossidy announced a top-to-bottom restructuring that will eliminate 14%, or 5,000, of Allied's salaried workers, slash capital spending by 24%, and divest eight business units (table). But that's just the start. By next year, Bossidy plans to sell Allied's 39% position in Union Texas Petroleum -- which could fetch $1 billion or so. And more asset shuffling seems certain: Bossidy will scrutinize all of Allied's 76 manufacturing units through 1993. "He's a very decisive man," warns Norman P. Blake Jr., chairman of USF&G Corp. and a former colleague of Bossidy's at GE.

Bossidy clearly intends to restore some needed discipline and bottom-line focus to Allied, whose return on equity was 13.7% last year, compared with an average of 15% for most conglomerates. The 56-year-old Bossidy is hell-bent on getting that up to 18% by 1994. Says the new chief: "We have to restore confidence that we can meet goals."

Hitting profit goals was never a strong suit of his predecessor, Edward L. Hennessy Jr. In a flurry of acquisitions over the past decade, Hennessy expanded Allied beyond its core chemical business into everything from spark plugs to aircraft engines. But while revenues rose from $3.2 billion to $12.3 billion from 1978 to 1990, profit margins averaged only 5%. Hennessy, 63, resigned this summer--18 months ahead of schedule--but will retain the chairman's title until January. Now, Bossidy is calling the shots. And he's likely to focus Allied's dwindling pool of capital expenditures only on proven earnings performers.

That's probably wise, because Allied doesn't have a lot of wriggle room right now. Thanks to last decade's spending splurge, Allied's debt is more than 40% of capitalization, and cash flow has been negative for two of the past three years. Worse, the economic downturn has played havoc with all of Allied's key businesses--auto parts, aerospace components, and chemicals. Earnings were off 13% last year, to $462 million, on revenues of $12.3 billion. And the recent restructuring will likely produce a loss of $355 million this year on flat sales.

LIGHTER BURDEN. If the company's stake in Union Texas does fetch $1 billion, it will go a long way toward cleaning up Allied's balance sheet. Bossidy plans to use the proceeds to pay down debt, which would pare that burden to a more comfortable 27% of capital. His decision to cut Allied's dividend nearly in half--from $1.80 to $1--will generate annual savings of $350 million a year and should help transform Allied's negative cash flow of $250 million this year into a positive stream by 1993.

Another challenge that Bossidy faces is finding new growth vehicles. Allied has plenty of promising products to choose from, including a new computerized collision-avoidance system for airliners that it expects to contribute about $ 500 million to revenues by 1995.

But can Bossidy fix, rather than just dump, more mature Allied units? Take Bendix, a parts maker that has been hit by the hard times in the automotive industry and hobbled by a legacy of underinvestment in recent years. As the No. 3 worldwide producer of antilock braking systems for cars and trucks, it could gain ground with enough attention. Yet rivals wonder whether Bossidy can refashion Bendix into a leader, given his pressing need to keep a lid on costs. "They will either step up and be a player or be noticeably weaker," says Tim Leuliette, president and CEO of ITT Corp.'s automotive unit.

For now, investors are applauding Bossidy's arrival. Since he took over in June, Allied's stock has jumped roughly 33%, to around 40. Whether investors feel the same way a year from now will depend on whether Bossidy's autumn pruning of Allied results in a springtime of growth.

      Salaried work force will be reduced by 14%, or 5,000 salaried employees
      Eight business units, mostly small auto-parts and aerospace operations, will
      be jettisoned
      In 1992, capital spending will be slashed by $250 million, or 24%
      Annual dividend will be reduced to $1 from $1.80
      DATA: BW
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