Loral Space & Communications Ltd.

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Loral Space & Communications Ltd.

600 Third Avenue
New York, New York 10016
U.S.A.
Telephone: (212) 697-1105
Fax: (212) 338-5662
Website: http://www.loral.com

Public Company
Incorporated: 1948 as Loral Electronics Corp.
Employees: 3,400
Sales: $1.07 billion (2001)
Stock Exchanges: New York
Ticker Symbol: LOR
NAIC: 513340 Satellite Telecommunications; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Loral Space & Communications Ltd., or Loral SpaceCom, is a leading satellite communications company that both assembles satellites and markets satellite-based communications services. The company is a partner in the Globalstar consortium, which operates a 52-satellite global telecommunications network, albeit under Chapter 11 bankruptcy protection. Loral’s primary satellite services business is Loral Skynet, purchased from AT&T in 1997. Other ventures include Europe*Star and XTAR.

Formation of Loral Electronics: 1948

Loral Electronics Corp. was founded in 1948 in New York by William Lorenz and Leon Alpert, who combined the first syllables of their last names to create the name of their company. The young firm initially concentrated its efforts on developing radar and sonar detection methods following World War II, winning contracts for advanced airborne radar systems and U.S. Navy navigation computing. In 1959, with a series of U.S. military contracts under its belt, Loral went public, offering 250,000 shares at $12 each. It used the proceeds to build and equip a new building at its Bronx, New York headquarters.

Loral’s newly found capital allowed it to expand and diversify through acquisitions. In 1959, the company purchased Willor Manufacturing Corp., which made stamped metal parts, and the electronic-equipment leasing arm of Allor Leasing Corp. In 1961, Loral formed a division for developing communications, telemetry, and space navigation systems for satellites. It also bought American Beryllium Co., Inc., of Sarasota, Florida, for 95,840 shares of stock. American Beryllium was one of the largest precision machiners of beryllium, a lightweight, toxic material that could withstand harsh environments. Under Loral, American Beryllium became a contract manufacturer of components for aerospace guidance systems and nuclear reactors. In 1961, Loral bought Arco Electronics, and in 1963 acquired A & M Instrument Co., Lerner Plastics, and Circle Plastics. To help pay for this expansion, Loral borrowed $15 million from the Massachusetts Mutual Life Insurance Co. in 1965.

Loral’s diversity won it a number of military contracts in the late 1960s. The company won a $3.9 million Navy contract for Doppler navigation radar in 1965, and in 1969, a $14 million contract from General Dynamics for advanced electronics for the Air Force F-lll, and a $3.9 million contract for airborne counermeasures for the RF4C plane. By the late 1960s, Loral specialized in radar receivers, which identified the signatures of enemy radar systems on missiles and anti-aircraft guns, separating them from the numerous non-threatening signals also present.

Despite its contract successes, Loral’s buying spree was hurting the company by the late 1960s. Loral lost $3 million in 1971, and was not always able to make its loan payments. Many of its acquisitions were unprofitable and unrelated to Loral’s primary business, earning Loral the reputation of being a company with good engineers and bad management. Lorenz and Alpert were ready to sell half their interest. Robert Hodes, a Loral director, helped bring in troubleshooter Bernard Schwartz to revitalize the company. Schwartz, a former accountant, had helped turn around a packaging materials business run by his brother during the mid-1960s, and in 1968 he became the chief strategist in the diversification of Leasco, a computer leasing company.

New Leadership in the 1970s

Schwartz became president and chief executive officer of Loral in 1972 with a $2 million investment that brought him about 11 percent of the company. Alpert and Lorenz resigned from Loral’s board and management. Schwartz reduced costs through measures such as reducing security at the firm’s South Bronx plant. To make certain he understood what his engineers were doing, Schwartz secretly hired a Columbia University Ph.D. candidate to give him lessons in advanced electronics. To help win and keep talented engineers, he began offering stock options. This move helped bring Frank Lanza., a vice-president of the Dalmo Victor division of Textron, to Loral, where he became executive vice-president and engineering chief.

Schwartz renegotiated the firm’s loans and quickly sold many of Loral’s money-losing acquisitions, concentrating on getting the firm’s government contracts back on schedule and within cost. An important project to design a computerized display system for a Lockheed-built U.S. Navy plane was running behind schedule, so Schwartz flew to California to meet with Lockheed officials. He convinced them that Loral could finish the job, and got their backing for the firm’s bid to produce the components. But Schwartz realized that the firm’s growth depended on their move from building components to building entire electronic warfare systems.

By late 1973, with the firm’s work back on schedule, Loral began looking for ways to expand its markets. An important early victory was the contract to develop the radar warning receiver for the U.S. Air Force’s F-15 fighter plane. To counter NATO warning receivers, the Soviet Union constantly shifted its radar signals, meaning that NATO planes had to have their receivers taken out and rewired to detect the new signals. Loral proposed a system that used computer tape to reprogram the microcomputers in the warning receivers. This could be done in 20 minutes rather than the days or weeks required for rewiring. Actually putting this system into practice took Loral over four years and required an investment of $2 million beyond the $20 million invested by the U.S. government. Loral’s system proved successful, and by 1980 had resulted in $400 million in orders.

Electronic warfare gear had been low on lists of defense priorities, but the 1973 Yom Kippur War changed that. Egypt used Soviet radar-guided weapons to shoot down 100 Israeli planes in one week. Israel’s American-made fighters did not have the equipment to detect and jam the radar frequencies used by the missiles, which caused NATO countries to increase electronic warfare spending 600 percent over the next seven years. In 1974, Loral began buying again, purchasing Conic, a maker of missile-tracking systems and microwave communications equipment, for $4.5 million. The purchase of Conic, which had profits of $1.1 million in 1973, allowed Loral to lessen its dependence on government contracts.

Another successful mid-1970s deal was a $4.8 million contract with the Belgian air force for an integrated radar system. Loral had no international experience and had never built the tracking and jamming equipment required for an integrated system. Since no single company built all these components, Loral decided to go after the contract, though it faced competition from bigger firms including ITT and Sanders Associates. To increase Loral’s chances of winning the contract, Schwartz signed an agreement with MBLE, one of Belgium’s biggest electronics houses, that arranged for MBLE to produce part of the system if Loral won the contract. It did. The victory simultaneously made Loral a full supplier of electronic warfare gear and put it on the map of NATO weapons suppliers.

The Belgian radar system had such tight deadlines that Loral actually lost money on the deal, but Loral executives were confident that Belgium would later expand the contract. It did so in 1979, bringing Loral a further $75 million. Other countries soon expressed interest in buying the system. In the late 1970s, Loral sold electronic surveillance systems worth about $200 million to Canada, Britain, and West Germany. In each case Loral agreed to share the production with companies in the customer countries to help seal the contract.

In 1979, Loral acquired Frequency Sources Inc. through a stock trade. Frequency made smaller components for electronic warfare and telecommunications systems, and had about $27 million in sales. By the end of the decade, Loral was the largest electronic warfare company in the United States. Loral’s successes led to a significant rise in the price of its stock. As a result, the firm was able to raise $58 million in a January 1980 stock offering. The money was used to make acquisitions and pay for a new $25 million electronics headquarters in Yonkers, New York, intended to help the firm attract talented engineers.

Company Perspectives:

“When we created Loral Space & Communications in 1996, we had a very specific mission in mind for the company: Capture the exciting opportunities represented by the satellite-based communications and information technologies emerging at the brink of the 21st century.

Since then Loral has aggregated some of the most important assets and resources in the industry. In the process we ’ve created global satellite-based networks for services like video broadcasting, data delivery and Internet access. These unique global networks, arising from and coupled with our satellite manufacturing and technology capability, advance our mission to develop and operate a seamless, global networking capability for the information age of today and tomorrow.”

—Bernard L Schwartz, chairman and CEO

Reagan Era Defense Buildup

The electronic warfare market continued to grow in the 1980s, fueled by a defense buildup during the Reagan administration, and the Falklands War, during which a $200,000 missile severely damaged a $50 million battle cruiser. Loral made equipment for virtually every electronic warfare system in the U.S. military, including new airborne warning systems. Even so, Loral became the number two electronic warfare company when Dallas-based E-Systems surpassed Loral’s $197 million in electronic warfare sales, though Loral remained far more profitable. It had total sales of $255 million in 1981, with profits of $24 million, and an order backlog of $346 million. The reprogrammable radar receiver for the F-15 had become its biggest program, with 750 sets delivered by 1982, and the likelihood of at least 250 more. The integrated system originally designed for Belgium had been bought by Israel as well. The U.S. government had passed over it, however, in favor of a non-integrated system developed by ITT, Westinghouse, and Itek.

Loral did well partly because it put so much of its resources into improving products before customers were even ready for the improvements, thus meeting or exceeding reliability requirements. It also brought projects in on schedule and without cost overruns by identifying potential problems early on, before they had a chance to mushroom. Because problems usually came from subcontractors, Loral frequently sent personnel to subcontractors to check up on their operations.

Loral’s non-defense businesses were also doing well in the 1980s. Its $15 million plastics packaging business was as profitable as its electronic warfare unit, and its $30 million telecommunications business was growing again by 1982 after two slow years. Nevertheless, defense was the firm’s major priority, and in 1986 it sold the packaging division to its president while trying to purchase Sanders Associates, which was for sale. Lockheed’s bid of $1.18 billion beat out Loral’s $980 million offer, but Loral made a major acquisition the following year when it bought Goodyear Aerospace Corp. from Goodyear Tire & Rubber for $588 million. Loral and Goodyear Aerospace already supplied electronics for some of the same military hardware, so integration was expected to be fairly easy.

In 1989, Loral bought the electro-optic division of Honeywell for $58 million. The division, which specialized in guidance systems, had been for sale for a number of years, and many industry analysts felt that Loral had gotten a good price, given the division’s annual sales of $130 million. The same year Loral sold the aircraft braking and engineered fabrics divisions of Goodyear Aerospace for $455 million. The buyer was a group headed by Schwartz and included Manufacturers Hanover and Shearson Lehman. The deal raised a few eyebrows and led to a number of lawsuits, though few felt the price was unfair.

Loral’s experience with guidance systems helped it become a leader in flight simulation and training, and in 1989 it won a Special Operations Force training and rehearsal contract worth up to $2 billion over the next 15 years. Loral also won a major contract to supply U.S. Air Force F-16 fighters with radar warning systems in 1989. However, after a complaint from competitor

Litton Industries, the U.S. General Accounting Office found that Loral had improperly acquired information on Litton’s system. Loral pleaded guilty to three charges and the government awarded a bigger share of the contract to Litton. As a result, Loral took a $10.5 million charge against earnings. Still, profits reached $87.6 million in 1989 on sales of $1.18 billion.

Bullish After the Cold War

In 1990, with the Cold War over and analysts predicting that defense expenditures would decrease dramatically, many defense companies began downsizing and selling defense-related divisions. Loral, however, felt that regional and ethnic conflicts would replace the superpower standoff. It therefore maintained its commitment to defense, and looked for bargains offered by other corporations.

In July 1990, Loral bought 51.5 percent of Ford Aerospace for $715 million, virtually doubling the size of Loral. Ford Aerospace had $1.8 billion in sales and $120 million in profits in 1989. Its primary focus was the building of commercial and military satellites, an area where Loral had only been a supplier of components and subsystems. The purchase strained Loral’s finances, and it quickly sold off parts of the company, recouping about 40 percent of the purchase price.

Some industry observers considered Loral’s refusal to downsize risky. The showdown leading to the Persian Gulf War began a few months later, however, and electronic warfare played an important role during the hostilities. In fact, the Tomahawk missiles used in the initial attack on Iraq used Loral computer guidance systems. The missiles received much praise for their accuracy during the war, though postwar analysis muddied the picture somewhat.

In 1991, Loral sold 49 percent of Space Systems/Loral to three European aeronautics firms for $182 million. In 1992, the firm bought 90 percent of LTV s aerospace and missile division for $261 million. Loral won a $202 million contract to supply the U.S. Army with a new antitank missile, a $71 million Air Force contract for REACT missiles launch control centers, and a $141 million contract to maintain tethered Aerostar radar systems for the Air Force. Loral also worked on its civilian businesses, forming a mobile phone services company called Loral Qualcomm Satellite Services with Qualcomm.

As the mid-1990s approached, Loral was an increasingly strong defense company, though it was trying to diversify into civilian telecommunications markets. It also was working on medical diagnostic imaging and computer-related information management. It was in the process of finishing a three-year layoff of 5,800 employees that further cut costs, resulting in $49 million in severance payments. Sales rose from $4 billion to $5.5 billion for Loral’s fiscal year ended March 31, 1995. Net income was up 26 percent to $288 million.

Key Dates:

1948:: Loral Electronics Corp. is formed in New York.
1959:: Loral goes public; begins buying spree.
1972:: Turnaround specialist Bernie Schwartz becomes CEO.
1973:: Yom Kippur War sparks boom in electronic warfare equipment.
1979:: Loral is largest U.S. electronic warfare company.
1990:: Loral doubles in size by buying half of Ford Aerospace.
1996:: Lockheed Martin buys most of Loral Corp.; Loral Space & Communications Ltd. is formed.
2000:: Globalstar satellite phone service goes online.
2002:: Globalstar files for Chapter 11 bankruptcy protection.

Loral reaffirmed its position as the country’s fastest growing defense company through purchases of IBM’s federal systems division in 1994 and of Unisys Corp.’s defense business in 1995. Loral outbid several defense giants, Raytheon in particular, to acquire the latter for $862 million. Including these buys, Loral had acquired seven sizeable businesses in the previous six years as conglomerates sold their defense holdings in the wake of Pentagon cutbacks.

Loral and 11 other partners (including France Telecom, Daimler-Benz Aerospace, Hyundai, and AirTouch Communications) established holding company Globalstar Telecommunications and subsidiary Globalstar L.P. in order to enter the global satellite phone market. However, reported Forbes, investors were skeptical of the proposition. The sale of Loral’s defense business would help finance the development of Globalstar.

Big Changes in 1996

Lockheed Martin bought most of Loral—43 separate companies—in April 1996 for $9.1 billion. (A year later, Lockheed would spin off most of these businesses as L-3 Communications.) Loral Chairman Bernard Schwartz gave half of his $36 million bonus for agreeing to the sale to a group of 40 Loral employees who were likely to be affected by the merger.

As part of Lockheed’s purchase of Loral, Loral shareholders were issued shares in Loral Space & Communications, Ltd., a new entity encompassing Loral’s satellite business. The “new” Loral started off life with $700 million in the bank. At its helm was Loral’s old chairman, Bernard Schwartz, who viewed the satellite business as a choice growth prospect. Loral owned 51 percent of Space Systems/Loral and 34 percent of Globalstar. A 23 percent shareholding in K&F Industries, which made aircraft brakes, rounded out its portfolio.

Stock in Globalstar, the Loral-led satellite phone consortium, doubled after the Lockheed acquisition. Loral had invested $125 million for its 34 percent share; its original partners had anted up another $705 million. A 1995 initial public offering provided $200 million. Globalstar aimed to undercut its competitors by employing a simple system that accomplished switching on the ground. Inmarsat, the only global phone company at the time, charged $15,000 for a briefcase-sized phone and $4 a minute for usage fees. To gain market share quickly, Loral set up Globalstar as a wholesaler, giving the world’s existing phone monopolies a commission to offer the service. To become profitable, stated Schwartz, Globalstar needed to sign up 200,000 subscribers for $.70 a minute calls on $750 pocket-sized phones. (Motorola’s Iridium consortium was planning to charge $3 a minute for its service.)

However, Loral was not betting entirely on Globalstar. The company bought AT&T’s Skynet satellite business on March 14, 1997. The disappearance several weeks earlier of one of Skynet’s two satellites knocked the price down by $234 million to $478 million.

Earlier in the year, the company had bought out its manufacturing division partners. “What we want to do,” Schwartz told Crain’s New York Business, referring to Loral’s leading satellite manufacturing line, “is expand further up the food chain.” In 1996, a nine-month fiscal year for the company, Loral earned just $9 million on sales of $950 million.

Also in development was the CyberStar system for broadband communications. Rather than compete directly with the cable and telephone companies in various countries, Loral planned to arrange Globalstar-style marketing agreements with them.

Due to questions of cost and availability, a number of U.S. companies contracted to have their satellites launched on Chinese rockets. One of these, a “Long March” rocket carrying a $200 million Loral satellite, failed upon launch in February 1996. After the failure, Loral and Hughes allegedly provided the Chinese with satellite launch data.

This aroused the interest of the U.S. Justice Department and U.S. Customs Service, since such data could also be applied to intercontinental ballistic missiles and therefore seemed subject to a federal export ban for national security reasons. Loral countered that it did not give guidance information, but only confirmed a Chinese report blaming the incident on defective wiring.

Schwartz and his counterpart at Hughes both lobbied President Clinton to relax sanctions against China; in fact, Schwartz was the Democratic Party’s largest personal contributor in 1997, according to the New York Times. Schwartz explained that the timing was a coincidence, that his contributions had gone up at the same time as his personal wealth. Schwartz had long been a staunch supporter of the Democrats, which made him a rarity among defense executives.

During the investigation, in February 1998, Clinton signed a waiver allowing Loral to launch another satellite on a Chinese rocket. Both Clinton and his predecessor, George Bush, had authorized several of these launches before. In cases like these, there was also typically pressure from the venture’s Western insurers to get at the root of the crash.

In September 1998, 12 Globalstar satellites aboard a Ukrainian rocket were destroyed in another disastrous launch in Kazakhstan. Though the company was insured, the loss pushed back deployment of the Globalstar system at least a year. One satellite that did make it into orbit was SatMex-5, a Mexican venture 49 percent owned by Loral. Loral was also operating the Telstar 6 satellite and had plans for three more. Other joint ventures included SkyBridge and Europe*Star, both with Alcatel Space Industries of France.

Loral produced a modest net income of $14 million in 1997; nonetheless, a loss of $185 million followed the next year, even as revenues rose slightly to $1.7 billion. Promising ventures were underway, however. By early 1999, Loral’s Skynet Telstar 5 satellite was offering broadband, multimedia capacity in the established Ku band. Loral’s CyberStar was developing a service to use this satellite to distribute feature movies electronically to theaters across the country. A six-gigabyte film file took a few hours to transmit to an unlimited number of sites, and saved studios the cost of shipping physical film prints (costing around $3,000 apiece) to each individual theater.

Globalstar Online in 2000

Iridium, Globalstar’s rival satellite phone consortium headed by Motorola, went bankrupt in 1999 but was allowed to continue operating in a scaled-down form. Globalstar was also in trouble. In February 2001, Loral announced it would not be investing any more money in Globalstar and was planning to write down most of its investment in the consortium, which had recently suspended payment of $400 million of debts. Around the same time, the company dropped plans to deploy a two-way broadband satellite system, preferring to focus on building and operating satellites and related equipment. “Data delivery directly to the consumer... is better left to others, many of whom are our customers,” said Schwartz.

Globalstar began running in March 2000, a year behind schedule, and was unable to sign up subscribers quickly enough to avoid defaulting on $3 billion in debt in January 2001. Only 35,000 people had registered for the service by that time; the project needed an estimated 200,000 users in order to turn a profit. By this time, Loral had invested $1.3 billion in Globalstar. Schwartz remained optimistic about Globalstar eventually turning around. Loral’s partners shared at least some of his hope; none of them had yet abandoned the project.

Several factors conspired against Globalstar’s success. The large foreign télécoms that Globalstar relied upon to handle customer interaction did not place a high priority on the service. The cost of putting the system in place—more than $3 billion—proved twice as high as expected. It had also become rather easy to place international calls from regular mobile phones. Consequently, Globalstar filed for Chapter 11 bankruptcy protection in 2002. The fate of it and Loral—which reported a net loss of $1.4 billion the same year—remained open to question.

Principal Subsidiaries

Europe*Star (U.K.; 49%); Globalstar, L.P. (39%); LGP (Bermuda) Ltd.; Loral CyberStar Ltd.; Loral Global Services N.V. (Netherlands Antilles); Loral Holdings Ltd. (Bermuda); Loral Licensing Ltd. (Bermuda); Loral Satmex Ltd. (Bermuda); Loral Satellite Ltd. (Bermuda); Loral Skynet; Loral Space Licensing Ltd. (Cyprus); Loral Space & Communications Corporation; Loral/DASA Globalstar, L.P. (73.4%); Satélites Mexicanos, S.A. de C.V. (Mexico; 75%); Space Systems/Loral, Inc.

Principal Divisions

Loral Electro-Optical Systems; Loral American Beryllium; Loral Conic; Loral International; Loral Randtron Systems; Loral Rolm Mil-Spec Computers; Loral Space Information Systems; Loral Systems Company; Loral Systems Manufacturing Company; Space Systems/Loral.

Principal Operating Units

Satellite Manufacturing and Technology; Fixed Satellite Services; Broadband Data Services; Global Telephone Services.

Principal Competitors

The Boeing Company; European Aeronautics Defense & Space Company EADS N.V.; Hughes Electronics Corporation; Orbital Sciences Corporation; PanAmSat Corporation.