IS DAVID HOAG LTV'S MAN OF STEEL?
Raymond A. Hay has certainly suffered his share of slings and arrows. Ever since the LTV Corp. chairman led the company into bankruptcy court in mid-1986, Hay hasn't exactly been a beloved figure. Outraged retired LTV steelworkers torched him in effigy after medical benefits were temporarily cut off in 1986. That same year, Hay's wife, Grace, opened a letter sent to the couple's home in Dallas only to find an envelope full of live cockroaches. "People need someone to shoot at--and I've been the cannon fodder," Hay says.
Well, it seems they won't have Ray Hay to kick around much longer. On Jan. 4, LTV announced that David H. Hoag, president of the company's steel unit, would take over as chief executive officer at the aerospace and steel concern. Hoag, 51, also personally assumed the company's bankruptcy negotiations from LTV Chief Financial Officer James F. Powers. For now, Hay will retain his title as chairman. Even so, the shakeup essentially marks the end of Hay's stormy eight-year tenure as CEO at LTV, most notable for the 1984 acquisition of ailing Republic Steel Corp. that ultimately led to LTV's Chapter 11 filing.
While Hay played a hand in naming Hoag as his successor, there's some evidence that the longtime LTV chief may have been nudged out. Indeed, a source close to the board and four key LTV creditors, who were consulted about the management changes, told BUSINESS WEEK that the board decided to give Hoag the CEO job when it became clear that he might bolt to another company. While Hay lobbied LTV's board late last year to promote Hoag as the company's president, he also wanted to keep full control over LTV for about a year. In the end, the board, under pressure from creditors, opted to give Hoag the CEO job, sources say.
Hay, reached on vacation in John's Island, Fla., denies that the board pressured him to leave. Rather, Hay insists that he had tagged Hoag as his eventual successor from the beginning. Hay also maintains that it was his idea "alone" to promote Hoag to CEO immediately. "Dave didn't put any pressure on" for the top job, says Hay.
RIGHT STUFF. While these versions of what transpired are at odds, it's clear that Hoag became the catalyst for the shakeup early this year. At one point, he considered leaving LTV and entered into serious negotiations for a CEO job at another company. As a highly regarded manager, Hoag carried considerable clout inside the company--so much so that LTV's board "didn't want to lose a person of Dave's caliber," says Colin C. Blaydon, an LTV director and dean of Dartmouth College's business school.
Just how long Hay will be around as chairman at LTV is another matter. Creditors say that they've won assurances that Hay will be out by June. Asked how long he'll remain at LTV, Hay says: "Until Dave wants the job or until the board wants someone else."
Until then, Hoag and his team face a thicket of challenges. For one thing, LTV still has a year or two more of negotiations with creditors before it can emerge from bankruptcy court. LTV's once-promising aerospace and defense business has misfired badly, losing $100 million since 1989, while the recession has halted an astonishing recovery in LTV's steel business (chart). Last year, LTV's earnings fell 73%, to $71 million, on sales of $6.1 billion.
LTV still hasn't made peace with the Pension Benefit Guaranty Corp., the nation's pension-insurance agency, in a four-year blood feud over who should foot LTV's pension liabilities. The PBGC assumed LTV's $2 billion liabilities in 1987 following the company's bankruptcy filing. But the agreement soon fell apart. First, LTV's retirees rebelled when they realized they wouldn't get full benefits under the PBGC. And then, LTV--against the PBGC's wishes--negotiated new retirement benefits to avert a strike by the United Steelworkers.
Fearing for its own solvency, the PBGC ordered LTV in 1987 to reassume the pension liabilities. The issue went to the U. S. Supreme Court, which last June ratified the PBGC's action. Since then, the PBGC has proposed a repayment schedule of $300 million a year for 30 years, which LTV says it can't afford. Hoag and James Lockhart, the PBGC's executive director, are now trying to hammer out a workable repayment plan.
If talks fail, the pension plans could be terminated again, triggering another lengthy round of litigation. U. S. Bankruptcy Court Judge Burton R. Lifland has ordered LTV to prove by Feb. 28 that a pension settlement is at hand. Failing that, the judge could lift the company's exclusive right to propose a reorganization plan. And that could throw the bankruptcy into turmoil if creditors put forward competing plans.
'IMPERIOUS.' These headaches might have been avoided had it not been for Hay and Powers' swaggering manner during negotiations, say former PBGC officials. One example: During a July, 1987, meeting with PBGC officials and then-Labor Secretary William E. Brock III, Hay "demanded" that the Secretary reverse the PBGC's position throwing the pension liabilities back on LTV. When Brock refused, the officials say, Hay retorted: "I'll take this to the Hill." Adds Kathleen P. Utgoff, former PBGC director and now a private lawyer: "If we could have dealt with Dave Hoag, it might have been solved three years ago." Hay doesn't dispute the run-in with Brock but says he decided to go over the PBGC's head because of the agency's stubbornness during negotiations. Powers couldn't be reached.
Hoag also inherits rather strained relations with some of the company's creditors. In fact, a few creditors have complained about Hay's lofty compensation at bankrupt LTV. In late 1989, several creditors objected when Hay was included in a key executive incentive program that would have paid him an additional 40% of his $600,000 base salary a year. Judge Lifland knocked Hay off the plan. Even so, Hay isn't hurting: He stands to earn $1.9 million in consulting fees for helping LTV develop a reorganization plan.
At the same time, Hoag faces some big operational difficulties. LTV's aerospace and defense unit is in a slump. Although LTV's ground-attack missiles look promising, orders for the company's military aircraft sections and components have dried up. LTV also suffered a big blow last summer when the company's Sierra Research Div. defense-electronics unit pleaded guilty to illegally obtaining classified U. S. Air Force information on project bids and paid fines of $1.5 million. LTV recently put Sierra on the block after taking a $25 million write-off.
TEPID STEEL. LTV is now counting on its $3.9 billion steel business to pull the company through these tough times. Under Hoag, LTV's steel unit slashed its annual capacity by 50%, to 9.8 million tons, and work force by 60%, to 16,900. It hasn't come cheap: LTV has taken an estimated $5.2 billion in write-offs since 1986. But by refocusing LTV into higher-priced, quality steel sheet--serving U. S. auto and appliance makers--Hoag returned the unit to profitability in 1986. He has also used LTV's stronger cash flow to triple capital spending, to $350 million annually, since 1986. "Hoag has done a great job," says Peter F. Marcus, an analyst with PaineWebber Inc.
True enough. Yet Hoag is facing leaner times again. The recession has cut deeply into LTV's two big markets, autos and appliances. The steel division lost $11.1 million in the fourth quarter, and the outlook for 1991 is so-so.
Hoag is looking to cut corporate overhead--and fast. Several creditors would like to see him move LTV out of its glittering headquarters in Dallas. Relocating to cheaper digs would be a symbolic break with the past. And given the company's rather stormy recent history, LTV and its new chief would be wise to put the past behind them.Michael Schroeder in Pittsburgh, with Zachary Schiller in Cleveland