The Decline And Fall Of Westinghouse's Paul Lego

When Westinghouse Electric Corp.'s board prepared to meet on Jan. 27, it had two goals. The first was to oust Chief Executive Paul E. Lego. The second was to prevent his departure from becoming the sort of public spectacle that had recently humiliated General Motors Corp. and American Express Co. Westinghouse's directors succeeded on both counts. Despite weeks of behind-the-scenes maneuvering, no word of the plan leaked out. Not even Lego knew that day would mark the end of his 37-year career with the diversified electrical and technology giant.

Perhaps he should have. By January, the $12 billion company was on its knees. Westinghouse's stock price had plummeted from 36 in July, 1990, when Lego became CEO, to 13 in January. During his tenure, the company posted $2.1 billion in losses. It didn't help that Westinghouse's cyclical businesses were pummeled by recession. The 62-year-old Lego's central problem, however, was Westinghouse Credit Corp., which, like hundreds of other lenders, had been hammered by the collapse of the real estate market.

But if Westinghouse and Lego were dealt a bad hand, current and former Westinghouse executives and sources close to the board suggest that they played that hand poorly. The old-line industrial company and its chief, an electrical engineer, were on unfamiliar terrain when it came to financial services and real estate. Westinghouse executives underestimated the problems at Credit Corp., and they distrusted real estate types. As a result, they fumbled several deals with outside investors that might have taken all or part of

the troubled property portfolio off their hands. Both Westinghouse and Lego declined BUSINESS WEEK's requests for interviews. In a written response, Westinghouse refused to answer detailed questions, saying they were based on erroneous assumptions.

OLD WOES. Perhaps worst of all for Lego, he had the misfortune to be at the top of an ailing company just as booting the boss became the trend of the moment in Corporate America. In fact, many of Westinghouse's problems began in 1987, long before Lego became CEO. That was when the Westinghouse board picked 62-year-old John C. Marous as CEO. Marous pumped up Credit Corp.'s leveraged-buyout and commercial real estate businesses. In 1986, the unit had $5.7 billion in assets and $681 million in revenues. By the time Lego took over in July, 1990, Credit Corp. had $10.3 billion in assets, with revenues of $1.2 billion.

Unfortunately, the real estate business was heading into a crater, dragging Westinghouse and Lego with it. Two months before his tenure as CEO began, Lego attended an analysts' gathering and struggled--with little success--to allay concerns about the problems brewing at the finance subsidiary. "It's the area I know the least about," he confessed. Bad reviews sent Westinghouse stock plunging $2 a share, to 3512. Then, in October, Lego assured analysts that Credit Corp. could weather the storm without a major hit. Four months later, Westinghouse took the first of three write-downs, a $975 million charge, mainly to cover real estate losses.

Lego decided that the only way to salvage Credit Corp. was to shrink it. But he left that job to executives at the parent company who didn't know how to restructure debt on hotel projects or housing developments. Perhaps understandably, they snubbed the advice of their own experts at Credit Corp., whom they blamed for the unit's woes. "The feeling was that we got them into this mess," says a former Credit Corp. executive. "If an idea came from Credit Corp., their view was that it had to be bad." Instead, Lego and his colleagues relied on investment bankers, such as Lazard Frres & Co. and Shearson Lehman Brothers Inc., for advice. The executives rebuffed proposals to hire workout specialists and to spin off the real estate problems into a new unit.

OVERTURES. Westinghouse also spurned overtures from developers who could buy Credit Corp.'s properties and get the company off the hook. On Sept. 28, 1991, for instance, JMB Realty Corp., the big Chicago real estate investment company, wrote Lego with an offer to manage or buy all or part of Credit Corp.'s real estate portfolio, according to a copy of the letter obtained by BUSINESS WEEK. But after some preliminary talks, Lego scheduled, then canceled a meeting with JMB. "We made a proposal, and they weren't interested," shrugs JMB President Neil G. Bluhm.

At about the same time, Westinghouse brushed off Chicago developer Jerrold Wexler, who had financing lined up from Goldman, Sachs & Co. and Bankers Trust Co. Lego and other senior executives dismissed these real estate companies as "bottom-fishers" seeking to profit from Westinghouse's woes, a former executive says.

Problem was, those woes were getting deeper. In October, 1991, the company took an additional $1.7 billion write-off. The primary culprit again: Credit Corp.'s souring real estate investments. The markets were starting to notice, and Westinghouse, which was having problems selling its commercial paper, faced a liquidity crisis. Lego turned for help to retired Chief Financial Officer Leo W. Yochum, who negotiated a $6 billion bank line of credit that probably averted a bankruptcy filing.

To dig itself out of its hole, Westinghouse appealed to archrival General Electric Co. In December, 1991, former Credit Corp. executives say, Westinghouse asked GE to make an offer for Credit Corp. by yearend. But a source close to GE says it lacked sufficient time to review Credit Corp.'s hundreds of assets, so GE made a initial low-ball offer that Westinghouse took as an insult. The talks collapsed.

LAST CHANCE. By the fall of 1992, Westinghouse seemed to be in a downward spiral. On Oct. 19, rampant market rumors forced Lego to issue a statement denying that the company would soon file for bankruptcy. By Nov. 3, Westinghouse had drawn down all but $500 million of its $6 billion line of credit.

Meanwhile, current and former executives, unhappy with the plunge in the stock price, were leaking internal data to the outside directors. Lego called an emergency board meeting in Washington in late November to push through a restructuring plan that included a $2.7 billion charge and the exit from several businesses, including a total liquidation of Credit Corp. It was Lego's last chance. Outside directors wanted evidence of a major asset sale, or Lego would be out. So he called GE Chairman John F. "Jack" Welch Jr. to revive the earlier negotiations.

They came close to a deal. Before Christmas, Lego and Robert A. Watson, the new CEO of Credit Corp., flew to Connecticut to meet with Welch and GE Capital Corp. Chief Gary C. Wendt. The sale, however, came unglued over such issues as warranties for environmental liabilities--details a source close to GE says should not have been deal-breakers.

The deal's collapse sealed Lego's fate. Beginning in early January, outside directors, led by former Defense Secretary Frank C. Carlucci and former Amoco Corp. Chairman Richard M. Morrow, held a series of conference calls to discuss a management change.

The first person outside the board to suspect a coup was Executive Vice-President Gary M. Clark. Clark and other executives attended the customary dinner with directors at Pittsburgh's Duquesne Club the night before the Jan. 27 meeting. He was startled when a director slipped him an envelope after dinner and told him in a hushed tone to open it in private. The note asked Clark to meet Morrow the following morning. Over breakfast at the Hilton Hotel near Westinghouse's headquarters, Morrow asked Clark, 57, to serve as interim CEO while the board searched for a replacement.

'NOT SURPRISED.' When the directors met shortly after 7:30 a.m. on the 23rd floor of Westinghouse's headquarters, Lego deferred to their wishes. The meeting lasted less than an hour. "We were shocked by the suddenness and timing of the move," says a senior Westinghouse executive. "But we were not surprised that it happened."

Lego's replacement, who is expected to be an outsider, will face a daunting task. Analysts reckon Westinghouse must sell $1.75 billion in assets this year to meet its financial obligations. Yet Credit Corp. remains "organized chaos," according to a real estate consultant. Dallas-based Eagle Development Corp., a joint venture between Ross Perot Jr. and General Electric Pension Trust, wants to buy some Westinghouse real estate assets but has had trouble getting its calls returned, say sources close to both Eagle and Westinghouse.

To free the company from its debt, Lego's successor may well be forced to consider selling one of the company's jewels--for example, Westinghouse Broadcasting or ThermoKing Corp., its profitable refrigerated-truck business. Another option would be to press the banks for debt relief. But even afterward, Westinghouse's recovery promises to be long and arduous. After all, it was the prospect of sluggish growth in the core businesses--nuclear energy and defense systems--that led Westinghouse into the treacherous world of real estate lending in the first place.

Before it's here, it's on the Bloomberg Terminal.