Loral Could Wind Up Being The Biggest Gun Of AllThane Peterson and Amy Borrus
Bernard L. Schwartz, the wily chairman of Loral Corp., has long been the defense industry's savviest dealmaker. So when he was elbowed aside by giants such as Lockheed, Martin Marietta, and France's Thomson during the long battle to buy the defense and aerospace assets of bankrupt LTV Corp., many industry gurus wondered if Schwartz had lost his touch. But as he's done so often in the past, Schwartz surprised the experts: In late July, he swooped in with an eleventh-hour offer. Though rival bids could still appear, Schwartz now has the inside track to buy LTV's missiles unit for $240 million--20% less than Thomson was offering. "I don't see anybody being able to mount a serious attack on our position," Schwartz says.
The maneuver was vintage Schwartz. If, as many analysts expect, the LTV purchase gains bankruptcy-court and government approvals, it will be his seventh sizable defense acquisition since 1985. He has paid $1.6 billion to snap up defense units from such name companies as Goodyear, Honeywell, and Ford--at ever-lower prices, as plunging U.S. defense spending has made armsmakers seem too risky for other buyers (table).
WHIP HAND. So far, the deals look smart. Loral's revenues are up sixfold in seven years, to $2.9 billion for the year ended Mar. 31. And Schwartz has made his acquisitions pay off by whipping them into shape with cost-cutting measures and better management. Margins have suffered from defense-spending cutbacks, but Loral still netted $121.8 million last year. "Bernard has a great reputation as being a very imaginative purchaser," says Martin Marietta Chairman Norman R. Augustine. "He's putting together a first-class company."
The question now: With defense spending in a seemingly endless downward spiral, when will it all catch up with Loral? Some analysts think that Schwartz, 66, is on a treadmill that keeps going faster. As contracts dry up, Loral's existing operations have begun shrinking, they say, forcing Schwartz to acquire additional big properties to keep up growth. But potential acquisitions, including LTV's missile business, are shrinking, too. Funding for its two main missile programs, which accounted for the lion's share of its $745 in revenues last year, winds down between 1995 and 1998. Given that, most of Loral's big rivals contend that even the reduced price Schwartz is paying is too much.
Schwartz, though, has always thrived on flying against the prevailing defense-industry wind. In a clubby business traditionally dominated by WASP engineers, he's an outsider--a poor Jewish kid from Brooklyn who bootstrapped his way up. True to his roots, he remains a Democrat in an industry full of rock-ribbed Republicans. He learned dealmaking by working with New York financier Saul P. Steinberg. He took the helm at Loral 20 years ago when it was a troubled jumble of assets. He turned it around by selling everything but a defense electronics unit, and then began buying more defense businesses.
Schwartz' trademarks are speed and daring coupled with financial discipline. The LTV deal, he contends, is a prime example. He nosed around the bidding for months. But he mainly watched until Thomson's leading $450 million joint bid with Carlyle Group, a Washington investment bank, was stopped by fierce political opposition to foreign ownership of defense companies. Schwartz then put together a formal offer in just 72 hours, but only after a looming July 31 bankruptcy-court deadline induced a nervous Carlyle and its partner, Northrop Corp., to raise their offer for LTV's aerospace unit, cutting the missile business' price.
Raytheon Co., the other main bidder, won't comment. But insiders in the negotiations say it was too concerned that the acquisition would depress its earnings to sign an agreement so fast. "Schwartz moved quickly and the other bidders couldn't," says David Rubenstein, Carlyle's managing director.
`LORALIZING.' As in past deals, Schwartz says he went into the LTV deal with a plan. If he wins ownership, he claims he can recoup LTV's purchase price in four or five years out of the operation's $40 million-plus annual cash flow. In the meantime, he and Loral President Frank C. Lanza--an engineer who plays Mr. Inside to Schwartz' Mr. Outside--will begin "Loralizing" LTV. In the past, this approach has meant dispensing with the acquired company's executives and instilling its managers with Loral's gospel of speed and stringent cost controls. Schwartz confidently predicts that the formula will allow the LTV operation to start adding to Loral's earnings almost at once.
With the LTV deal not even bagged yet, Schwartz already is scouting his next move. Loral's long-term debt is about 30% of capital, and Schwartz is paying for most of LTV in cash. Schwartz is already hinting that his next acquisition may be a big one, perhaps as big as Loral itself. Says Schwartz: "I don't think there's any defense company that we don't have the resources to buy."
Say that again? Bernard Schwartz is still on the prowl.
LORAL'S BARGAIN-BASEMENT SHOPPING SPREE Year Acquisition Annual sales Purchase price Millions of dollars 1985 Rolm military computer unit $81 $88 1987 Goodyear Aerospace 681 581 1989 Fairchild Weston 270 177 1989 Honeywell Electro-Optics Div. 135 54 1990 Ford Aerospace 1,800 685 1991 Librascope 75 9 1992* LTV Missiles 745 240 *Pending DATA: COMPANY REPORTS