Triage For Battered British Aerospace

Before John C. Cahill arrived at British Aerospace PLC in May, he had plenty of time to study the company whose chairmanship he was about to assume. While flying from New York to London to meet his new board, Cahill, who stands 6 feet, 4 inches tall, hit his head on the bathroom door and was knocked unconscious. He broke his leg in the fall. While recuperating, Cahill pored over company files and news clippings -- only to find that the pride of Britain was in worse shape than he.

British Aerospace (BAe) may be the kingdom's largest manufacturer, its biggest exporter, and the mainstay of its national security, but it's also one of England's most troubled companies. It ended last year with a $ 300 million aftertax loss on sales of $ 20 billion. Recent attempts to diversify away from defense into cars and real estate have proved disastrous after two years of punishing recession. Regional aircraft operations are hemorrhaging at a rate of about $ 1.5 million a day. Last fall, instead of shedding assets and shutting plants, BAe raised $ 700 million by issuing new shares -- creating a mountain of ill will with existing shareholders, who were hoping for a radical restructuring, not a rights issue.

SLICE AND DICE. Since the flap over the rights issue, former Chairman Sir Roland Smith has been ousted and the share price has plummeted by two-thirds. The final insult came on Sept. 21: With BAe's market value at $ 800 million, an all-time low, the London Stock Exchange dropped BAe from the FT-SE 100 share index, the prestigious list of Britain's 100 most valuable companies.

But now Cahill, the 62-year-old former chief executive of conglomerate BTR PLC, has a dramatic plan to put BAe back on its feet. Unveiled on Sept. 23, Cahill's strategy involves a frenzy of cuts, spin-offs, mergers, and closures. The market's initial reaction: BAe's share price fell 32% to $ 1.44. Alarmed, Cahill visited the trading floor of one large London broker to talk up the shares. Rumors spread that predators were circling. In one day, 10% of its shares changed hands. "The situation is worse than I thought," says Nick Cunningham, an analyst at S.G. Strauss Turnbull Securities. "There are still some black holes to fill."

The massive company is reorganizing itself around four core activities: defense, Rover cars, Airbus Industrie, and construction (table). "Most of the other unrelated businesses will be sold off," Cahill says flatly. That includes everything from satellite communications and machine tools to electric generators and airline pilot schools. "We will no longer be viewed as a lumbering conglomerate," he vows.

Cahill is putting what he calls BAe's "problem child," the ailing regional aircraft group, into a joint venture with Taiwan Aerospace Corp., and contributing a plant to the new venture. But BAe still is taking a $ 1.3 billion writedown to cover the cost of closing one plant, laying off 3,000 workers, and moving operations to a BAe facility in Scotland. Eventually, Cahill envisions merging the small airplane group into an Airbus-style consortium starting to take shape among Dutch, German, French, and Italian manufacturers.

That's not all. In coming weeks, Cahill expects to sell the satellite communications group to either Matra Marconi Space or Deutsche Aerospace. BAe will force hundreds of suppliers to renegotiate contracts, and it will rewrite the leases on 100 regional jets. One large plant is due to be closed, and others will be cut back. Cahill is expected to lay off about 5,000 employees and shed one-fifth of its assets. He's also cutting the dividend by two-thirds.

WINGS OVER EUROPE. Despite all the gloom, things could be looking up. Saudi Arabia soon is expected to sign a contract to buy $ 2 billion worth of fighter jets, plus $ 6 billion more in support and maintenance costs, further cementing BAe's long relationship with the Saudi royal family. Meanwhile, Airbus, 20% owned by BAe, is flying high. The consortium is projecting a $ 200 million surplus for the second year in a row.

The one dark cloud looming over BAe's aerospace program is the European Fighter Aircraft, the four-nation, $ 40 billion project that hopes to produce a next-generation fighter jet. The development phase is almost complete, and a maiden flight is scheduled for later this year. But Germany is pulling out of the EFA, and economic problems may push Italy and Spain to follow. That means Britain, with a 33% share in the program, either has to shoulder the production costs of the EFA alone or start all over with a less expensive model. Either way, the 16,000 workers whose futures depend on the fighter can probably count on long delays, layoffs, and plant closures.

SOUP TO NUTS. Cahill may pick up some of the slack in the Far East. BAe plans to supply countries such as Indonesia, Singapore, Malaysia, and even Japan with soup-to-nuts defense-logistics support. If it can line up such customers, the drastic cuts in defense spending by Britain and other NATO countries won't hurt BAe as much as U.S. defense cuts are bedeviling Northrop, General Dynamics, and McDonnell Douglas.

BAe isn't the first to employ a "core activities" retrenchment strategy. It appears to be mimicking the 1991 reorganization of General Dynamics Corp., in which GD sold off all but its tank, tactical aircraft, and submarine units, to the huzzahs of the stock market. Says Shearson Lehman Brothers Inc. analyst Keith Hodgkinson: "If it worked for GD, it should work for BAe."

Perhaps the biggest change at BAe is one that won't be visible from the outside. Cahill has already begun an overhaul of the BAe corporate culture by importing BTR's renowned system of financial controls. This rigorous planning program requires line managers to prepare a complicated monthly report on orders, costs, return on sales, and cash flow. These figures are appraised by senior headquarters managers who control the purse strings. The system allowed BTR to spot trouble early and squeeze profits out of such unglamorous businesses as plastics and rubber fittings.

But the process could be painful for BAe middle managers, who until now have operated more or less independently. "Everyone at BAe is going to know who John Cahill is, right down to the shop manager at Rover," warns Robert F. Faircloth, BTR chief operating officer. "He can scare the hell out of people." Cahill insists he's not so tough. He just expects hard work, conscientious performance, and no surprises.

That could be the motto for his own life. He joined BTR in 1955 as a rubber-hose salesman and stayed on for 38 years. He admits he has few interests outside his family and his work. He has no fancy credentials -- not even a college degree. He's no social butterfly, either: In five months at BAe, he has gone out to lunch once, preferring to eat a cheese sandwich at his desk.

London's financial analysts are happy to see the down-to-earth Cahill running the show after years of drift. His dramatic downsizing is likely to produce a much smaller, more manageable, and potentially very profitable company. But while BAe-watchers credit Cahill with making lots of tough decisions quickly, they want to see if he can live up to his edicts. Just don't tell him to break a leg.

       --  DEFENSE Missiles and guided weapons, Tornado and Hawk fighter jets, 
      Harrier ground attack jets, and 33% of the troubled European Fighter Aircraft 
       --  ROVER Up-market Rover cars and Land Rover sports-utility vehicles. May 
      reintroduce MG sports car line
       --  AIRBUS Makes wings for all Airbus models, owns 20% of the Airbus consortium
       --  COMMERCIAL PROPERTY Largest owner of industrial parks in Britain, intends 
      to further develop commercial properties surrounding London and bid on large 
      Far Eastern infrastructure projects
       --  CORPORATE JETS Makes Corporate 800 and 1000 series of executive jets
       --  REGIONAL JETS BAe 146 "Whisper Jet," is being spun off into joint 
      venture with Taiwan Aerospace
       --  SATELLITE COMMUNICATIONS Builds military and maritime communications 
      satellites and scientific research satellites. To be sold, probably to Matra 
      Marconi Space or Deutsche Aerospace
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