Westinghouse: More Pain Aheadby
Through the Pennsylvania autumn, Westinghouse Electric Corp. stock seemed to glide downward with the falling leaves. As it dropped, the pressure grew on Paul E. Lego to act. The Westinghouse chairman needed billions to keep the Pittsburgh giant afloat. But tapping the stock or bond market was out of the question: The company's bad credit ratings and festering financial portfolio scared away underwriters. Lego had drawn down the company's $6 billion line of bank credit almost to the limit. Angry investors aired savage critiques in the press. By mid-November, the pressure was evident. In at least one meeting with investors, Lego was nearly in tears. "He got very emotional," says someone who was there.
Not long after, Lego finally made his move. On Nov. 21, he summoned the board to an emergency meeting in Washington. There, he pushed directors to approve the sale of a slew of company assets--everything from its gruesome real estate portfolio to the venerable Westinghouse Electric Supply Co., the last link to the refrigerators and ranges that made Westinghouse a household name. Recognizing that the sales wouldn't come at a profit, Lego called for a painful $1.13 billion aftertax charge against fourth-quarter earnings. Meanwhile, to satisfy the clamor for management changes, three top executives walked out the door. Then, on Nov. 23, he announced to a roomful of stock analysts gathered at New York's Plaza Hotel that Westinghouse was back on track.
BUYING TIME. Not for long. Although his company's battered stock climbed back into double figures on Nov. 23, rising 2 3/8, to 12 1/8, it gave up 1 1/8 of that gain the following day as investors digested the import of the restructuring--and a 44% dividend cut. As the stock action suggests, Lego needs much more than one dose of pain and downsizing to turn Westinghouse around. He must make the hidebound conglomerate not only smaller, but more nimble, turning a bureaucracy that has been likened to the Soviet Politburo into a hotbed of entrepreneurs. With his latest moves, says Ralph V. Whitworth, president of United Shareholders Assn., Lego and his team have only "bought themselves some time."
They're paying dearly for the respite. Unloading the units now on the block would shrink the company by a third, from last year's $12.8 billion in sales to $8.6 billion. But selling in today's flaccid markets is easier said than done. In fact, many of the assets have been on sale for months, even years. Westinghouse was shopping its sick financial services arm, Westinghouse Credit Corp., to General Electric Capital Corp. a year ago. And Westinghouse Supply has been carrying a discreet For Sale sign since the late 1980s. By speeding up the selling, Lego is effectively lowering the prices. More may be on the block soon. "The less he gets for the Westinghouse Credit portfolio, the more of the company he has to sell," warns one analyst.
The current round of divestitures was clearly a wrenching decision for Lego. Until recently, he stoutly denied that the problems at Westinghouse Credit imperiled his diversification strategy. He attributed the crashing noises coming from Westinghouse Credit to regional soft spots in the economy. Quarter by quarter, he took charges against Credit's losses, claiming that each one would be the last. "This is a company that has been dribbling out the bad news, making a practice out of rationalizing reality," says Joseph A. Grundfest, a former SEC commissioner now at Stanford University Law School.
Retired Westinghouse executives grouse about Lego's mismanagement and blame him for their withering pension portfolios. But in fact, the seeds of the decline were sown a decade ago, under the leadership of Douglas D. Danforth. As Westinghouse watched its Pittsburgh neighbor, Gulf Oil Corp., fall prey to raiders in 1984, they moved to defend themselves with high earnings and revalued stock. Fueling this growth was Westinghouse Credit, which grew unchecked through the 1980s.
CRUNCH TIME. Like a fast-buck savings and loan, Westinghouse Credit embarked on a footloose lending spree, becoming a lender of last resort. "We were approving loans at 110% of value," says one former employee. "It was crazy."
When the portfolio began to plummet in 1990, Lego's response was to deny the depth of the problems. An engineer who prides himself on his mastery of numbers, Lego monitored the bad news from a computer in his executive office. Isolating himself with only a couple of intimate advisers, the Westinghouse chairman decided to tough it out, throwing lifelines from the parent company to Westinghouse Credit.
The generosity to the financial unit drew the parent company into its morass. By last summer, Westinghouse was facing a liquidity crunch. Credit agencies downgraded its debt, blocking it from commercial paper markets. Westinghouse's efforts to issue stock met with derision on Wall Street. With no other alternatives, Lego had to turn to the banks, which had extended a $6 billion revolving line of credit last December. By Nov. 3, the credit line was down to its last $500 million, with hun-dreds of millions in debt coming due.
Suddenly, Lego was feeling the squeeze from both shareholders and banks. Since last winter, when Westinghouse awarded fat stock-option packages to top executives, shareholders had been loaded for bear. By summer, many were already drafting resolutions for the April, 1993, annual meeting. Then came October's board coup at General Motors Corp. The shareholder groups had more time to zero in on Westinghouse.
By the fall, their dissatisfaction had grown so vocal that Lego was spending much of his time flying around the country to meet with institutional investors. In late October, at a business conference in Texas, Lego found himself seated next to Dale M. Hanson, chief executive of the California Public Employees Retirement System (CalPERS). Hanson took the opportunity to press Lego for change. Lego outlined a reform plan that he expanded upon later at a Nov. 9 meeting with CalPERS officials. But participants complained that while he defended Westinghouse's diversification, his presentation was short on strategy.
In his meetings, Lego was promising action by yearend. Investors called for it sooner, and they raised questions about the quality of Westinghouse's docile board. Lego defended it. "We have Frank Carlucci," he said, referring to the former Defense Secretary. "Yes, but he's on 10 boards," one shareholder retorted, implying that the capable Carlucci was spreading himself thin. The meeting went downhill from there, recalls one shareholder. Finally, Lego let his emotions show, growing teary defending his company.
WOOING BANKERS. The stockholders went away from the meetings more convinced than ever about the need for shareholder resolutions in the spring--and eager to force Lego's hand before then. They told Lego they wanted to meet some of the company's outsidedirectors.
Lego was more concerned about money--he needed billions, fast. Without a quick cash infusion, he ran the risk of overstepping the tough covenants--controlling net worth and leverage ratio--established in the $6 billion credit line. Breach of the covenants would effectively turn over control of the company to the banks.
With his fate tied to the banks, Lego turned to them for help. He put out feelers, says a source close to the banks, asking if they could spring for another $2 billion or $3 billion. The 49 banks, led by Chemical Banking Corp., turned him down. Westinghouse then invited bankers to a Pittsburgh meeting.
Early on Nov. 16, Westinghouse finance officials gathered for the meeting. By midmorning, bankers from Deutsche Bank, Chemical, Banque Paribas, Barclays, and dozens more descended on the elegant William Penn Hotel in downtown Pittsburgh. Security was tight. Lego was nowhere to be seen. The Westinghouse executives were equipped with a paper outlining the talking points for one-on-one encounters with the bankers. But at the bottom of the memo was a directive urging them to steer "tough questions" to the members of thebanking committee who weren't at thegathering.
Westinghouse officials assured the bankers that decisive action would be coming at the Dec. 2 board meeting. The sale of Westinghouse Credit assets would be speeded up. The dividend might be cut or eliminated. They pointed to continued profits at the company's core businesses of electric generation and electronic instruments. They outlined a worst-case cash-flow scenario, one which showed them keeping their nose above the limits of the covenants. The mood, says one banker at the talks, "was upbeat."
IN SUSPENSE. Cheering the bankers was news that Westinghouse had hired a host of investment banks to study the rapid sale and liquidation of Westinghouse Credit's holdings. Lehman Brothers, Babcock & Brown, and Goldman Sachs were all busy crunching valuations of the $9 billion portfolio, chock-full ef deserted hotels and defaulted IOUs. They would tell Lego how big a hit he would have to take. Only then would he know how much he would have to sell to cover the losses.
Lego looked to the December meeting to push through his new program. But the market continued to pound on Westinghouse, driving it to single digits on Nov. 20. Lego called an emergency board meeting in Washington.
The board lived up to its reputation for passivity. Following Lego's cue, the directors accepted the proposed changes with little argument or discussion, says a company insider. Along with the moves to sell big chunks of the company, they accepted the resignations of three senior executives. On Nov. 23, the company announced the departures as part of a big management reorganization. But in fact, says a source in the company, the three who left--Chief Council Robert F. Pugliese and Executive Vice-Presidents Theodore Stearn and George C. Dorman--all wanted out. That leaves Lego, who leans heavily on Executive Vice-President Anthony Massaro and his wife, Eileen, a vice-president, with his core team intact.
For now, Lego has forestalled his own ouster. But he's still in a tight spot. His plan hinges upon raising 37 cents on the dollar for the real estate portfolio, with its $2.3 billion in underperforming loans. That's more than many analysts think he'll get. He's in a hurry, and prospective buyers know it. Worse, he's competing with the Resolution Trust Corp.'s massive S&L sell-off. And even if Lego raises enough money through asset sales to pull Westinghouse back from the brink--and even optimists predict a close call--he must refashion what'sleft of the company into a lean global competitor.
That description doesn't fit now. Frustrated employees describe endless streams of meetings with outside consultants, whose advice is rarely heeded. "It's what I imagine business was like in the '50s, sluggish and slow," says a former executive of Westinghouse's furniture group, Knoll International Inc.
Even with nimble globalists at the helm, Westinghouse core businesses hardly seem designed to thrive in the marketplace of the 1990s. At the heart of the company is nuclear energy. Public support of the U.S. atomic power industry has been slipping steadily since the 1970s. The electronics unit, anchored in the Pentagon, faces a decade of shrinking contracts. No wonder Westinghouse officials so often sing the praises of Thermo King Corp., the company's profitable refrigerated truck unit.
For now, Lego has little time to spend on the core businesses. He'll be too busy disentangling the parent company from Westinghouse Credit. If he comes up short, he told analysts in New York, he may have to spin off the company's treasured TV and radio stations.
Assuming he gets through the next six months, Lego faces what is sure to be a contentious annual meeting in the spring. Shareholders will insist on reforms. For one, they want a nominating committee to find new, more active directors. And they'll push to separate the chairman from the chief executive post, taking away half of Lego's job. That means that if Lego's going to remake Westinghouse, chances are he won't be doing it alone.