Mike Armstrong's Leap Of Faith

The timing couldn't have been much worse. A day earlier, Robert C. Stempel had returned from his bruising January trip to Japan with President Bush. But C. Michael Armstrong was determined to meet with the General Motors Corp. chairman anyway. Armstrong, a lifelong IBM employee and possible heir to Chairman John F. Akers, was considering leaving Big Blue to run GM's Hughes Aircraft unit. But first, Armstrong needed assurance that he could run the business without too much interference from GM. "What's essential for the success of Hughes is for you to decide," Stempel promised. "You have that freedom."

That was all Armstrong had to hear. After a brilliant rise at IBM, including building its European operations into a $26 billion powerhouse, Armstrong stunned IBM on Feb. 19 by announcing his departure. He'll report to Hughes's Los Angeles headquarters in April. His mandate: weaning the company from its dependence on Pentagon contracts.

PROBLEM CHILD. Armstrong's decision to leave IBM was largely driven by his prospects there. Both IBM CEO Akers and Armstrong say Akers made it clear that Armstrong was not going to get IBM's top spot eventually. Armstrong, 53, says there was no acrimony over the issue, adding: "I happen to know IBM has not made a decision on succession." But apparently he was restive enough to pursue the top slot at Allied-Signal Inc., a post he lost to Lawrence A. Bossidy, according to a friend of Armstrong's.

Hughes seems an odd place for an IBM lifer to make his sthelping to pioneer everything from satellites to guided missiles to sophisticated fighter-jet radars, keeping costs down and production lines on schedule has been another matter. When Pentagon budgets tightened in the late 1980s, GM executives winced as Hughes stumbled.

Now, with far deeper cuts on the way, and Hughes's parent in hot financial water, the pressure will only grow more intense. Hughes's advanced medium-range missile orders, which account for 5% of total sales, are secure for now. But it has been losing scarce contracts for other missiles, including a $270 million orderof Mavericks recently snared by Raytheon Co.

The same is true in radar equipment as production winds down on two of the three fighter jets that Hughes supplies. Plans to scale back the B-2 program will also hurt: Hughes produces radar gear for the bombers. And prospects for new work dimmed when Hughes lost to Westinghouse Electric Corp. in a bid to build the radar system for the F-22 advanced tactical fighter.

Armstrong's predecessors began laying the groundwork for a move away from defense in the late 1980s. Hughes moved earlier than most in slashing employment levels. It prodded engineers to use their expertise on flashy applicationext to none in 1988.

But earnings growth may be harder to come by. After buying its way into commercial flight simulators in 1988, for instance, Hughes found itself rocked by the recession, as airlines stopped buying the units. That led to a $40 million charge in the third quarter of 1991. For the year, estimated operating earnings slid almost 19%, to $539 million, on flat revenues of $7.7 billion. Then there's the matter of its parent. To continue diversifying, Armstrong will have to rely on cash-strapped GM to keep the money flowing. "The key question is: Will GM's financial situation affect Hughes's ability to continue making acquisitions?" says Lawrence Harris, an analyst with Kemper Securities Group.

Remaking a defense contractor isn't something Armstrong had ever contemplated. But in early December, he received a call from headhunter Pendleton James, a former Reagan White House staffer. At the time, Armstrong, chairman of IBM's overseas business, was busy commuting between IBM headquarters in Armonk, N.Y., and Paris to pin down an alliance between IBM and France's Groupe Bull. Meeting with James for less than 30 minutes in Armstrong's sparsely furnished office, the IBM executive listened politely. James hinted that Armstrong wouldn't have much of a run heading IBM--where the retirement age is 60--by the time Akers steps down in 1995. How about Hughes, where he could retire at 65? Armstrong says he was "intrigued."

GOOD VIBRATIONS. What Armstrong didn't know was that Malcolm R. Currie, the retiring Hughes chairman, felt uneasy about going outside Hughes for a successor. After a painful five-year restructuring that cut 20% of Hughes's 82,000 jobs, Currie planned to pick one of his own people to carry on. In fact, he had been grooming five possible candidates--three of them scientists or engineerswith long track records at Hughes. But he had hired James to scout outside prospects, too.

The headhunter set up a meeting with Armstrong and Robert J. Schultz, the GM vice-chairman who oversees Hughes. On Jan. 19, the three sat down to breakfast at the Sky Club in New York's Pan Am Building. "The vibes were good right from the start," recalls James. Both Schultz and Armstrong grew up in Detroit, and they had known each other since Armstrong was head of IBM's marketing services and GM was one of his biggest customers. But before learning the details of the job, Armstrong had to know if he would truly be the boss at Hughes. Says Armstrong: "I was absolutely not interested in becoming a division or group president, and Bob needed to know that."

Schultz and James left the meeting feeling anxious. "We both sat there convinced he was the right guy," recalls the headhunter. But they weren't sure he wanted the job. The next step for James was getting Armstrong together with Currie. By this time, with Pentagon budget cuts heightening the need to diversify, Currie had softened on the idea of bringing in an outsider. But he wondered why the IBM heir apparent would come to Hughes. "Is he really interested in us?" Currie asked James. "Can we really get him?"

Eleven days later, the two met at the Sky Club. Currie brought a briefcase bulging with charts and graphs to map out his plans for Hughes. The meeting started after lunch and lasted nearly five hours. Armstrong grilled Currie, pressing hard on the problem of declining defense budgets and General Motors' expectations for the subsidiary. Armstrong came away convinced he could take over quickly and "without making a lot of changes." But, he adds, "there was still one more call I had to make." He needed to talk to Stempel.

Once the GM chairman told Armstrong what he wanted to hear, Armstrong flew back to Armonk to inform Akers. For more than 30 years, since meeting at IBM's sales school, the two had worked their way up the IBM chain of command. At times, they even vacationed together. But Akers says he told Armstrong in the fall that he wasn't going to run IBM, and Akers knew Armstrong was considering other jobs. Their final meeting, as Armstrong recalls it, was tellingly brief. "I think, John, come the end of February, I'll be retiring from IBM," Armstrong said. "I'm considering taking this CEO job at Hughes." After a moment's silence, Akers responded with an outstretched hand, saying only: "That's one hell of an opportunity, Mike. I'm going to miss you, but good luck."

While Armstrong has never worked outside the computer industry, Schultz and Stempel obviously think he is up to the task. They're counting on his marketing experience, operational skills, and international contacts. "When we decided to go outside, we wanted someone who could come in with immediate credibility," says Schultz. Armstrong also sees himself as a sort of diplomat. "I have a lot of good friends around the world," he says. Leading a defense contractor into an uncertain future, he'll need all the friends he can get.

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