Corning: Back From The Brink
In early 2002, James J. O'Connor, the lead outside director of Corning Inc. (GLW ), quietly began a campaign to replace CEO John W. Loose. Such unrest was unheard of at Corning, which for most of its 150 years had been governed by the descendants of founder Amory Houghton Sr. "But I felt the business was in a meltdown, and time was running out," says O'Connor. Just two years earlier, Corning had been a high-tech star, with $7 billion in sales and a market value of $100 billion. But now tornado-force winds were whipping through the telecom industry, slicing sales by more than half, sending the stock down 95%, and raising fears that Corning -- one of America's oldest and most innovative companies -- might not survive.
To have a chance, "we needed someone at the top whom everyone could rally around," says O'Connor. In the board's view, there was only one credible candidate: retired CEO James R. Houghton, 68, who had turned Corning over to an outsider in 1996 after 13 years at the top.
After the board approached him, Houghton went to see his older brother Amory at the hideaway suite of offices they keep above Market Street in Corning, N.Y., two blocks from the company's headquarters. "Jamie didn't particularly want to do it," recalls Amo, as he's universally known in town. Jamie was engrossed in a glittering second career in the nonprofit world, serving as both chairman of the Metropolitan Museum of Art and as "senior fellow" of the Harvard Corporation, the super-secret body that governs the nation's premier university. But as the brothers talked, Jamie realized that he needed to answer the call, just as Amo had stepped in to lead the recovery effort after Hurricane Agnes flooded Corning in 1972. He knew what the townspeople would say: "The Houghtons have been around a long time. They're going to fix it."
"WE WILL SUCCEED"
Sure enough, Houghton electrified the company and its hometown in his maiden speech at the annual meeting a few weeks later. He compared Corning's predicament to the darkest days of World War II and his role to that of Winston Churchill's. He vowed that Corning would reinvent itself just as previous generations had invented the technology for mass-producing Thomas Edison's light bulb, the glass tubes that fueled the explosive rise of TV, and optical fiber, which ultimately made the Internet possible. "I am confident of victory," he concluded. "We will succeed." Within days, "We Will Succeed" posters, banners, and buttons had popped up everywhere.
Despite the bravado, Houghton knew success was far from guaranteed. That summer, hedge funds would bet against Corning, nearly sinking its efforts to raise the cash it needed to stay afloat. Houghton would have to gut Corning's world-leading optical-fiber business and entirely exit the photonics business, which had been its brightest hope during the telecom boom. Ultimately he would have to slash the payroll in half, by some 20,000, to save $2 billion. "We have been through a hell worse than the Great Depression," says Thomas E. Nettleman, manager of Corning's remaining operating fiber plant in Wilmington, N.C.
Today, Corning's survival is no longer in doubt. True, the fiber optic market -- still Corning's biggest business -- remains deeply depressed. Corning is only now acknowledging that those conditions are likely to persist well beyond 2005. On Oct. 6 the company announced it will take $2.8 billion in noncash charges against third-quarter earnings, primarily related to a writedown of goodwill and assets in its telecom business. Still, in the first half of 2004 sales jumped 21%, and Corning earned $163 million, a sharp turnaround from the more than $7 billion in losses it has posted since 2000. Houghton has cut debt nearly in half, to $2.7 billion. And he says he has a replacement for fiber: Corning is the leading producer of ultrathin glass for the liquid-crystal displays (LCDS) in TVs and computer monitors.
During his earlier term as CEO, Houghton nurtured the LCD business through years of losses. Now that investment is paying off. Overall demand for LCD glass is expected to triple by 2008, says Paul Semenza, vice-president of El Segundo (Calif.) market researcher iSuppli Corp. Corning equips more than half of the LCD market, and this year alone Houghton is sinking $800 million into boosting capacity, triple last year's spending. LCD is the key reason Corning has recovered faster than such pure-play telecoms as Nortel Networks Corp. (NT ) and JDS Uniphase Corp. (JDSU ). Before the fiber writedown was announced, Corning's stock was trading at around $11. That's up from $1.10 in late 2002 -- but far below its high of $113 in September, 2000.
Corning may never see those lofty heights again. To keep growing at its current pace, Houghton must surmount some formidable challenges. By spinning off its glass cookware and health-care services businesses in the '90s, Corning traded stability for faster growth. Now, Houghton is betting that his scientists can solve some of the thorniest problems facing society, such as how to build a fuel cell that could revolutionize electricity generation. That requires hefty investments in research and development -- $344 million last year, or 11% of sales. And that kind of R&D can take years to pay off. Corning lost money for 17 years on optical fiber before the market took off.
Meanwhile, Corning has to be careful that it doesn't end up with a glut of LCD capacity, as it eventually did with fiber. Houghton's two other big bets are on technology to bring high-speed fiber directly to homes and offices and a ceramic filter that could dramatically reduce emissions from diesel engines. Both are still losing money. And because of its heavy investments in R&D and LCD production, Corning says it could burn through up to $100 million in cash this year. "They need to be generating cash to move back to an investment-grade rating," says Robert Schulz, a director at Standard & Poor's (MHP ). S&P's rating on Corning's bonds is BB+, a notch below investment grade.
IN HIS VEINS
Perhaps most daunting, Houghton must pass his job to a new leader who can build on his legacy. Curiously, the executives he has placed in the best position to take over are the very ones who marched Corning off the telecom cliff. One thing's for sure: He'll have to go outside the family because there are no willing heirs waiting in the wings. For a company that has looked to the Houghtons for leadership for most of its history, that's a worrisome prospect.
Houghton was groomed for his role from birth. As a child he would rise from his bed in the imposing family mansion known as The Knoll and look out his window at the Corning plant that stretched for blocks beneath him. At the dinner table, father Amory Houghton Sr. -- the founder's great-grandson, who ran Corning for much of the '30s, '40s, and '50s -- would lecture Jamie and his brother Amo on the rewards of investing "patient capital" in high-risk technologies. At the same time the boys learned to mix with Corning's workers by attending the same schools. Says his wife Maisie: "Corning isn't in his blood -- it is his blood."
To be sure, Houghton eventually was sent off to prep school at St. Paul's in Concord, N.H., the same school attended by Democratic Presidential nominee John Kerry. Later he followed a long line of Houghtons to Harvard University; there's even a Houghton Library in Harvard Yard. Then, after a disastrous first year at Harvard Business School, he flirted with the idea of life beyond Corning and had a ball working at Goldman, Sachs & Co. (GS ). But in 1962, after earning his MBA and deciding he didn't want to spend the next 30 years on Wall Street, he joined Corning. He was promptly sent off to its lightbulb plant in Danville, Ky. Later he was stationed in Europe and helped lead Corning's push into global markets.
In 1983, at 47, Jamie succeeded Amo as CEO. "We were barely breaking even, and the cupboard was bare," he recalls. So he got out of the mature lightbulb ventures while pushing more promising businesses such as fiber and medical testing. "He has a great commercial nose," says Amo. During his 13-year term, Jamie more than tripled sales, to $5.3 billion, and doubled return on equity, to 17%.
A CALL TO PUBLIC SERVICE
Then in 1993 a near-fatal accident seemed to reorder Houghton's priorities. He was hit by a car while walking through dimly lit Colonial Williamsburg after a meeting of the Business Council. Houghton spent weeks in the hospital. Three months later he showed up for a board meeting in a wheelchair. "He was pale and tired, yet showed great humor," recalls director Gordon Gund. Still, he could no longer play 6 handicap golf or downhill ski, and he still walks with a cane. And beneath the brave front, "I'm sure coming that close to death changed him internally," says Amo.
In 1996, when he turned 60, Houghton told the board he'd had enough. Public service had always been part of the family creed. So, like his father, who served as Ambassador to France under President Dwight D. Eisenhower, and Amo, now a Republican member of Congress, Jamie was itching to make his mark beyond Corning. Houghton's handpicked successor as CEO, Roger G. Ackerman, quickly and radically reshaped Corning. He jettisoned the mature medical-testing and CorningWare consumer businesses while ramping up fiber capacity. Simultaneously he embarked on a strategy to make Corning a big player in the red-hot field of telecom photonics, which includes lasers and amplifiers to move light through fiber. Problem was, "we didn't invent all the keystone components in photonics, and that meant we didn't have the same type of competitive advantage we did in fiber," says Corning President Wendell P. Weeks.
That forced Corning to acquire much of what it needed. In a little over a year it spent $10 billion to buy 10 or so companies. Wall Street -- deep in the grip of telecom fever -- suddenly saw Corning through new eyes. In early 1999 "there wasn't a single telecom analyst covering Corning," recalls Katherine M. Dietz, then head of investor relations. But after Corning announced its first big photonics acquisition in late 1999, "our investor meetings were standing room only." In less than a year, the stock shot up from $25 to $113.
Ackerman ignored Wall Street's advice to dump the rest of Corning's nontelecom businesses, as well as pressure to pay $40 billion to buy SDL, a maker of pump lasers. SDL was snapped up by JDS Uniphase instead, in a deal that later triggered one of the largest writeoffs in corporate history. Still, like many in the industry, Ackerman was exuberant. In 2000 he predicted that over the next four years telecom networks would expand "17-fold in North America alone," a forecast that proved wildly inaccurate.
In January, 2001, Ackerman retired as CEO and handed the job to then-President Loose, a 36-year Corning veteran. No sooner had Loose taken charge than the bottom fell out of the market. As the year began, Corning predicted that its photonics sales would double, to $1 billion. By April the forecast was trimmed to zero growth. In early July, with sales in freefall, Corning was forced to take a $5.1 billion writeoff on its recent acquisitions.
The board was becoming increasingly uneasy. In June, when Ackerman retired as chairman, O'Connor asked Houghton -- who had remained on the board since his retirement -- to become nonexecutive chairman. But Loose was unable to stem a growing panic as the crisis deepened. "Concern over bankruptcy was on everyone's mind," says Dietz. By April, 2002, the board had seen enough and unanimously backed Houghton's return as CEO. Even Loose, who insists he wanted to retire because of a "personal issue," supported the change. "My goal in life was never to be CEO," he says now. "And I felt there was nobody better to lead this company than Jamie."
EXECS, CLEAN UP YOUR MESS
Inwardly, Houghton was fuming. "Someone has really screwed up," he recalls thinking. "So let's line everyone up against the wall and figure out which one you shoot." He was especially enraged at the damage to Corning's culture. "The company had been ripped apart in a lot of ways, and there was a lot of backbiting and very little teamwork," he says. And the arrogance of the telecom group had become insufferable. "The wave-guide guys [felt they] were king of the hill." Houghton's answer was to return to a team style of management. He immediately reconstituted the management committee structure he had used to govern Corning in his first term, composed of the top seven execs. "I told them we are going to be together all the time, and that 95% of what we decide, we decide together."
Problem was, Houghton would have to achieve this change with the same executives who had served under Loose. With Corning in such dire straits, recruiting stellar outsiders would have been difficult, if not impossible. He also knew that in a company dominated by lifers, ax-wielding outsiders would have quickly alienated the workforce and caused some of his best people to leave. So rather than fire Weeks, who had been in charge of Corning's entire optical-communications business, Houghton promoted him to president. "I need you to lead us out of this dilemma that you helped lead us into," he told the stunned executive. Similarly, he vaulted James B. Flaws, the CFO who had helped negotiate and arrange financing for billions of now nearly worthless photonics deals, to vice-chairman.
Houghton's most urgent priority was simple survival. On CNBC, one cynic cracked that a "do not resuscitate order" should be placed on the stock. In July, Houghton approved an equity offering to raise $500 million. To the hedge funds it looked like a desperate ploy, and they heavily shorted the stock, beating it down to $1.50 from $4 earlier in the month. That forced Corning to issue some 300 million shares to get $500 million, heavily diluting the stock. The tide didn't turn until November, when Corning managed to sell its precision lens business -- the world leader in making lens systems for rear-projection TVs -- to 3M for $850 million in cash. Although Loose had already announced deep layoffs, more were needed to stem the bleeding. Most were targeted at fiber and photonics. That fall, Houghton cut back to just one operating fiber plant, from five. Although those factories were far from upstate New York, the town of Corning also lost 3,500 high-paying jobs.
Because Houghton had continued to live on his sprawling 115-acre estate above the town after retiring in 1996, he was painfully aware of the impact. During the boom, Corning's housing market had exploded, and a subdivision sprouted near the company's research labs, with large homes averaging $300,000 -- triple the average price in the area. Outside the Houghtons' offices on Market Street, every storefront was bustling. At the union hall, so many supposedly blue-collar workers had grown rich, at least on paper, that there were jokes about them sitting at a "millionaire's table."
After the crash, Market Street was lined with vacant storefronts. The high-end houses were abandoned in mid-hammer-stroke. And paper profits evaporated -- in a town of true believers, virtually everyone rode the stock all the way down. Houghton insisted that the company go out of its way to help those being laid off. "It's very difficult for someone to walk down the street and get a job in Corning, N.Y.," he says. "There's nothing there." So the company gave most salaried workers at least five months' severance and offered extended insurance benefits, pushing the cost of layoffs to more than $1 billion.
These days, Houghton is focused on revving up growth. Corning's most promising market is LCD glass, which is expected to surpass telecom as the company's largest business this year. Today, Corning and its Korean joint-venture partner, Samsung, control 58% of the world market for LCD glass, says Ross Young, CEO of researcher DisplaySearch in Austin, Tex. -- and nearly three-quarters of the high-margin, largest-glass panels that are most desirable for making TVs. There is a chance that the biggest-screen TVs -- those above 40 inches -- will swing toward plasma and rear-projection technologies. But for now LCD remains dominant in smaller TVs, the bulk of the market.
A LIQUID-CRYSTAL BUBBLE?
Wary of repeating their fiber debacle, Corning execs swear they're far more skeptical of the LCD boom. The company is conducting its own surveys of demand for flat-panel LCD TVs and flat-screen computer monitors to make sure it doesn't get ahead of real demand. Nonetheless, some experts worry that a "crystal bubble" is developing, with excess capacity and falling prices. DisplaySearch's Young cautions that flat-glass fabricators are rapidly boosting capacity without regard for overall market demand. In August such fears drove Corning's stock down $2, or 17%. But Flaws insists Corning hasn't seen any slowdown and in early September predicted demand for its glass will surge 70% this year, higher than earlier expectations.
Corning's other big investments look more risky. Houghton believes the diesel-emissions market will explode in 2007, when tough new clean-air regulations take effect. He says Corning's ceramic filter -- similar to the substrates it invented for catalytic converters in cars -- could remove over 90% of the soot and other emissions from heavy-duty diesel trucks. And he's betting that could double the company's $400 million environmental business by 2009. But Corning must first beat out alternative technology being developed by Japanese rivals.
The biggest problem for Corning is that the fiber business remains flat on its back, some 75% below its peak. "That will be the albatross," says John Slack, an analyst at Morningstar Inc. who has a "sell" recommendation on the stock. Even Corning now concedes that the premium-priced fiber market won't be reviving anywhere near as soon as it had hoped. This more pessimistic outlook forced Corning to announce the $2.8 billion charge on Oct. 6, including a writeoff of an expansion of its now-mothballed fiber plant in Concord, N.C. Houghton is banking that telecom companies eventually will spend heavily to bring fiber directly to homes and offices in order to provide super-high-speed Web, HDTV, and other broadband services. But for the near future, fiber will be a drag on Corning's results.
Perhaps the most daunting remaining challenge for Houghton, though, is to ensure that this time he leaves a successor who can carry out his vision. Houghton doesn't believe CEOs should give much advance notice of their retirement, and he isn't saying when he'll step down. But when the time comes, Weeks is the clear frontrunner. He may seem a surprising choice, but supporters are banking on him having learned from his brush with disaster. "It made him a better executive," says Vincent Dupont, an analyst at Alliance Capital Management LP (AC ), which owns Corning shares. Still, the boyish-looking Weeks is just 45 and clearly in no hurry to take charge. "Hopefully it won't be for a while," he says.
When the time comes, it will mark the truest test of Jamie Houghton's remarkable return. His first retirement ended abruptly when a nonfamily member nearly took Corning over the edge. And next time, he won't be coming back. It will be up to outsiders to carry on the legacy of Jamie, Amo, and their ancestors.
By William C. Symonds in Corning, N.Y.