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Westinghouse Gets A Big Dose Of Reality


The Corporation

WESTINGHOUSE GETS A BIG DOSE OF REALITY

Every so often, Westinghouse Electric Corp. finds a way to embarrass itself. Back in the 1960s, it embarked on a misguided diversification into everything from watchmaking to low-income housing. In the 1970s, it lost a bundle on uranium contracts, then pleaded guilty to bribing a former Egyptian prime minister to win a power-plant contract. By comparison, the 1980s were a rousing success--a fact not lost on Paul E. Lego. At his first session with Wall Street analysts as chairman, in October, 1990, Lego was downright ebullient as he reviewed the previous decade. Westinghouse had exceeded all its goals, Lego crowed, with double-digit earnings growth and average return on equity of more than 18%. "In fact, we did more than we said we would do," he said.

Did they ever. Even as he addressed the analysts, Lego was sitting on a powder keg of bad loans for real estate and leveraged buyouts in his financial-services unit, Westinghouse Credit Corp. Management had leaned heavily on Westinghouse Credit for growth during the 1980s, but the explosion hit within months of Lego's taking office, rocking the company with two write-offs totaling $2.7 billion. Last year, Westinghouse posted a $1 billion loss (chart, page 112).Now, the company is holding a fire sale to liquidate much of Westinghouse Credit's $8.6 billion in assets. It is also selling a handful of industrial businesses. On Jan. 29, the board sliced the quarterly dividend, to 18c from 35c, to save $240 million--a move Lego vowed last October would be a last resort. Westinghouse's battered shares have climbed five points this year, to around 18, after falling 66% since 1990.

LONG HAUL. The asset sales probably won't spark a quick turnaround, though. Ongoing weakness at Westinghouse Credit will continue to sap cash. "It will take three to five years or longer to dig out of this mess," says a former Westinghouse senior executive. And after a decade-long makeover, the $13 billion parent company is saddled with a mix of mature industrial businesses that probably won't grow as fast as management would like. Lego doesn't dispute that prosperity is a long way off. "It's going to be the end of 1993 or the end of 1994" before Westinghouse profits are growing by 10% a year again, he says.

Just as the crisis at Westinghouse is blasting the bottom line, it is raising serious questions about Lego's leadership. His upbeat forecasts have fostered disbelief on Wall Street. As late as last spring, he was predicting only a slight earnings decline for the year. "His credibility is weakened" by such rosy predictions, says Judy A. Meehan, an analyst with Parker/Hunter Inc. Lego argues that his predictions have been as sound as could be expected.

Within the company, many view the 61-year-old chairman as distant. Rather than rallying the troops, Westinghouse executives say, he confers in his office with two longtime friends, Eileen P. and Anthony A. Massaro Jr., head of corporate communications and environmental systems, respectively. He declines to see many senior executives, current and former managers say. "Lego has circled the wagons," says one retired executive.

The chairman insists he gets plenty of advice, much of it from investment bankers at Lazard Freres & Co. and Shearson Lehman Brothers Inc. "You don't turn to 15 or 20 people [within the company] to look at a problem that is essentially oriented at the financial-services operation," Lego says. "You look for specific advice from people who have specific knowledge in this area." In an effort to lift morale, though, he plans a whirlwind visit to all 16 Westinghouse operating units later this month.

SHUFFLING ASSETS. To many, Westinghouse's problems are a classic example of pushing for short-term gains at long-term expense. Worried about a hostile takeover in the early 1980s, then-CEO Douglas D. Danforth started an overhaul of Westinghouse's far-flung 135 divisions. He also bought back 20% of the company's stock and jacked up dividends. But in the rush to woo investors with ever-bigger returns, Danforth and his successor, 41-year veteran John C. Marous, seem to have promised too much. Quality and productivity gains could widen margins only so far in such businesses as power plants, garbage incinerators, military guidance systems, and refrigeration trucks.

To achieve its ambitious growth targets in the 1980s, management relied heavily on cash gathered by shuffling assets. From 1985 to 1990, sales of more than 70 businesses--from elevator makers to a 7-Up bottler--generated $3.5 billion. A big chunk was booked as reserves and "other" income, contributing an average of more than 30% of total annual operating profits. Meanwhile, research and development and capital spending slid 30% from the peak of $1 billion in 1982. Says First Boston Corp. analyst Martin A. Sankey: "For most of the 1980s, Westinghouse strategy was running a slow liquidation."

Things were anything but slow over at Westinghouse Credit, though. In 1986, the parent decided to remake its financial-services unit into a reliable cash producer to offset cycles in Westinghouse's other operations. It pulled financial services out of low-margin consumer lending and focused on risky, high-return real estate and investment banking. Soon after becoming chairman in early 1988, Marous directed the credit arm to report directly to him. He leaned hard on its new chairman, William A. Powe, to keep pumping out its 20% annual revenue growth, say current and former Westinghouse executives. They believe Marous was overeager to put his stamp on the company in the 2 1/2 years before his mandatory retirement. He denies the suggestion and says he was simply working toward long-established goals.

Supersalesman Powe was the man for the job. As head of real estate from 1980 to 1988, he had built the portfolio from $600 million to a prodigious $2.6 billion, much of it by financing hotels and apartments. When the building boom fizzled, Powe tried leveraged buyouts, pouring billions into takeovers such as the now-bankrupt Hills Department Stores Inc. His moves had the desired effect: Credit Corp. became a cash cow, producing more than 16% of the parent's profits.

OPTIMISTS. But big trouble was brewing. Lego--then Westinghouse's president and a Westinghouse Credit board member--shared Powe's overly optimistic view that Credit could nurse the sick portfolio without taking a big hit. Others in the organization saw it differently. "It was so bad that two years ago, even guys in the mail room were asking when there would be a write-off," jokes a former Westinghouse financial-services executive. Should Lego have known how severe the problems were? "The operations didn't report to me," he says.

When Lego finally brought in Lazard Fr eres in late 1990, management took a conservative course. On Feb. 27, 1991, after the board had awarded senior management its 1990 bonuses based on what looked like record earnings, Westinghouse announced a $975 million write-off, about half from real estate. The directors, who declined to comment, kept the bonuses intact. Then in October, with its credit ratings under pressure and the economy sinking, Westinghouse revealed the shocking second charge: $1.7 billion. Powe, no longer at the company, couldn't be reached for comment.

More write-offs could lie ahead. The financial-services debacle and the recession are proving that Westinghouse's businesses are not the countercyclical mix management wanted. Even without the financial-services unit's $1 billion loss, operating earnings for the company's other business groups fell by one-third last year. Analysts forecast a slight rebound this year if the economy picks up, but "Westinghouse doesn't have the horses to get through a recession" with 10% earnings gains, says Nicholas P. Heymann, an analyst at County NatWest Securities.

DOWNSIZING. At least Lego promises not to pump up earnings with asset sales anymore. "That's a deliberate strategic change," he says, adding that he has no interest in "onetime events that create no future cash stream." But he will try to buy some breathing room by lightening Credit's portfolio--where he can. Some of the real estate assets may not be easy to unload. In late 1990, Westinghouse sold its Holiday Inn Crowne Plaza in Kansas City, Mo., only to have the buyers default and toss the property back to Westinghouse this year.

Even if he could, Lego doesn't necessarily want to get rid of the whole Credit unit. "We'll continue to downsize financial services until it can sustain its own debt," he says. "When that happens, we will make a decision to downsize further, operate the business, or exit it." After what it has done to the company's bottom line, many Westinghouse managers would probably vote for the latter.AT WESTINGHOUSE,

REAL ESTATE WOES--AND MORE

ELECTRONIC SYSTEMS Defense contracts account for 70% of sales, so defense

budget ax will cut deep. Long haul to make up lost ground in commercial

electronics

Est. 1991 revenues: $3.2 billion

Est. 1991 operating profit: $260 million

INDUSTRIES Recession squeezes cyclical, slow-growth electrical component

businesses. One or more units may be for sale

Est. 1991 revenues: $3.1 billion

Est. 1991 operating profit: $165 million

POWER SYSTEMS Electric utilities' need for added capacity has been a boon for

turbine business, but construction slowdowns hurt margins, and nuclear

resurgence is years away at best

Est. 1991 revenues: $2.6 billion

Est. 1991 operating profit:

$190 million

ENVIRONMENTAL SYSTEMS Incinerator and land reclamation businesses may now be

slowing. Public opposition to incinerators is starting to halt projects

Est. 1991 revenues: $1.25 billion

Est. 1991 operating profit: $70 million

FINANCIAL SERVICES More write-offs expected from deeply troubled real estate

portfolio. Parent company liquidating much of $8.6 billion in assets

Est. 1991 revenues: $968 million

est. 1991 operating loss: $1.1 billion

DATA: BW, COUNTY NATWEST SECURITIES

Michael Schroeder in Pittsburgh


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