LTV Corporation

views updated

LTV Corporation

2001 Ross Avenue
P.O. Box 225003
Dallas, Texas 75265
U.S.A.
(214) 979-7711

Public Company
Incorporated: May 11, 1956 as Ling Electronics, Inc.
Employees: 37,300
Sales: $8.199 billion
Market Value: $847 million
Stock Index: New York

The man who built LTV from a small electronics firm into one of America’s largest corporations was named James J. Ling. Through a process of acquisition and merger Ling created a modern corporate conglomerate. Prior to the 1930’s a company such as Ling’s would have been regarded as a monopoly.

In 1947 Jimmy Ling invested $2000 in order to establish an electrical construction and engineering firm in Dallas. In 1956, after several successful years in business, the Ling Electric Company merged with L.M. Electronics of California and the name of the company was changed to Ling Electronics. A subsequent merger with Altec Electronics in 1959 changed the name of the company to Ling-Altec. A year later Ling-Altec merged with the Temco Electronics and Missile Company of Dallas. The new company, Ling-Temco, became one of the first major defense companies to be founded after World War II.

In 1961 Ling-Temco merged with the Chance Vought Aircraft Company. Vought was founded in 1917 and became part of the Boeing United Aircraft conglomerate in 1929. After that organization was forced to break up in 1934, Vought became a division of United Aircraft (later United Technologies). A conflict of interest in manufacturing led to United Aircraft’s sale of Vought in 1954. Seven years later Ling initiated a difficult takeover of Vought which resulted in his temporary (but voluntary) loss of control over the company and all but 11 shares of company stock. Upon completion of the takeover on August 16, the company’s name was again changed to Ling-Temco-Vought.

Ling’s notion of what constituted a successful conglomerate was based on the idea that no division should account for more than 30% of the company’s sales. In addition, concentration of the company’s business in related fields was to be avoided at all costs. It was for that reason that Ling-Temco-Vought became interested in Wilson Foods in 1966. Wilson’s primary product was fresh meats, but it also operated two other businesses dependent upon animal by-products including sporting goods and pharmaceuticals. The sporting goods division made (among other things) footballs from pigskin and tennis rackets from animal guts, and the pharmaceuticals division derived hormones, steroids and other drugs from animal organs. Wilson’s president Roscoe Haynie knew nothing of Ling’s takeover effort until two weeks before it was completed. By January 5, 1967 Ling-Temco-Vought had acquired control of Wilson, and Haynie agreed to move to Dallas and work for Ling. That same year Ling-Temco-Vought was listed number 14 in the Fortune 500 ranking with annual sales of over $1 billion.

Ling divided Wilson into three operating divisions: Wilson & Company (meat), Wilson Sporting Goods, and Wilson Pharmaceutical & Chemical, and shares of stock in the three divisions were sold to the public. On Wall Street the share offerings were greeted with some skepticism. Despite this skepticism, Ling believed the parts of the company were worth more separately than together, and in time he was proved correct. Before long Ling-Temco-Vought’s remaining share of the three Wilson companies was worth more than its initial investment.

Ling-Temco-Vought’s growth in the five years from 1965 to 1969 was impressive. In 1965 the company had total sales of $36 million. In 1969 that figure had grown by more than 100 times to $3.8 billion. This growth was made possible through “redeployment,” Ling’s term for offering a minority share of an Ling-Temco-Vought division’s stock to the public. Under favorable market conditions, private investors would drive up the price of the stock. This provided Ling-Temco-Vought with more collateral to support larger bank loans which were, in turn, used to finance more takeovers.

In 1968 Ling-Temco-Vought acquired the Greatamerica Corporation from Dallas investor Troy Post in return for $95 million in debentures. Greatamerica was the parent company for Braniff Airways, National Car Rental, and a number of insurance companies. Later that same year the company purchased a majority interest in the Jones & Laughlin Steel Corporation of Pittsburgh. Ling-Temco-Vought’s numerous acquisitions led the U.S. Justice Department to initiate an antitrust investigation. Ling managed to avoid a federal lawsuit by agreeing to sell Braniff and the Okonite division, which was acquired in 1965. Despite the legal battles, Ling’s strategy of redeployment had been successful.

Unfortunately, redeployment had an even more serious detrimental effect under unfavourable market conditions. When the economy began to decline in 1969 Ling-Temco-Vought’s growth abruptly halted. The company was forced to divest itself of several divisions in order to generate enough cash to compensate for its growing debt. Wilson Sporting Goods was sold for $8.7 million and Wilson Pharmaceuticals was sold to American Can for $16 million. Investors subsequently lost confidence in Ling-Temco-Vought. The same stock that traded for $167 in 1967 was now worth $11.

In May of 1970 Ling-Temco-Vought’s board of directors voted to remove Ling from the chairmanship. Robert Stewart was named interim chairman until a permanent replacement for Ling could be found. Ling was demoted to president, a position where he had no control over company policy. Six weeks later Ling resigned from the corporation. The board elected W. Paul Thayer of Ling-Temco-Vought’s Aerospace division to become the company’s new president, and a few months later, its chairman.

Thayer’s first objective was to dispose of Ling-Temco-Vought’s unprofitable divisions and remove all the others from public trading. Ling-Temco-Vought, which had until this time been more of an investment portfolio than a holding company, was to be converted into an operating company directly involved with its subsidiaries. This reorganization allowed one of the company’s divisions to help another financially, something which was not possible under Ling.

Ling-Temco-Vought’s debt was restructured and a campaign to acquire the privately-held shares of the company’s divisions was launched. On May 5, 1971 Ling-Temco-Vought became the LTV Corporation. Later that month the company acquired the remaining shares of Vought Aircraft from private investors. The investors received $3.2 million and two former Ling-Temco-Vought subsidiaries, LTV Ling Altec (the Altec Corporation) and LTV Electrosystems (now called E-Systems). By November of 1974 LTV had also acquired the minority interests of Wilson & Company and Jones & Laughlin Steel.

LTV’s Vought division was subcontracted to manufacture tail sections for a number of aircraft, including Boeing’s 747 and McDonnell Douglas’ DC-10 and KC-10. Vought also manufactured the A-7 Corsair II fighter and the S-3A antisubmarine airplane. In the mid-1970’s, however, Vought’s ability to generate a consistent profit was undermined by the Pentagon when it eliminated Vought from several lucrative defense contracts. Vought then attempted to enter civilian markets when it engineered a $34 million “Airtrans” ground transportation system for the Dallas/Ft. Worth Airport. The project was mired in controversy from its inception and a series of problems led Vought to declare a $22.6 million loss on the project. Subsequent orders for the A-7 from the Defense department and the governments of Greece and Pakistan, as well as a contract to produce Lance surface-to-surface missiles, helped to keep Vought in business.

By 1977 LTV was reduced to three principal lines of business: steel (Jones & Laughlin), meat packing (Wilson), and aerospace (Vought). All three lines of business were cyclical (that is, they experience alternating periods of good and then bad market conditions). In 1977 all three of LTV’s divisions were suffering from the adverse conditions in their respective markets. LTV lost $39 million on sales of $4.7 billion.

At this time Paul Thayer made a move more characteristic of something Ling would have done. He announced LTV’s intention to purchase the Lykes Corporation of New Orleans. Lykes was the parent company of Continental-Emsco, a petroleum equipment supply and service company; the Lykes Brothers Steamship Company, a cargo shipping company; and Youngstown Sheet & Tube, a financially troubled steel finishing plant. As part of the merger agreement LTV (which was already $1 billion in debt) would also become responsible for Lykes’ debt of $659 million.

Upon closer inspection, however, the proposed merger was regarded as quite promising. The Youngstown mill could produce steel less expensively with raw steel from the Jones & Laughlin plant in Aliquippa, Pennsylvania. In addition, transportation costs could be reduced and Jones & Laughlin could transfer its backlogged orders to Youngstown’s underutilized plants at Indiana Harbor.

The Justice Department had suspected the merger on antitrust grounds until Attorney General Griffin Bell interceded. Bell held a thorough investigation and later declared that Lykes had no chance of surviving without the merger. Despite considerable opposition from Senator Edward Kennedy (who questioned Bell’s authority in the matter), Bell overruled the Justice Department and approved the merger, which was completed on December 5, 1978. The new division was renamed J&L Steel.

In 1981 LTV attempted to perform a similar expansion of its aerospace division. This time the takeover target was the Grumman Corporation. However, opposition from Grumman was considerable. The Federal Trade Commission arranged for an injunction on further purchases of Grumman stock by LTV on the grounds that a merger of the two companies would be anticompetitive in the carrier-based aircraft field. In addition, Grumman’s pension fund and an employee investment group (who already held 35% of the company’s stock) began buying large amounts of Grumman stock and refused to tender them for an LTV bid. This invited the interest of the U.S. Labor Department which was concerned about fiduciary improprieties. Even the company’s founder, 86-year old Leroy Grumman, came out of retirement to campaign for his company’s independence. What LTV may have underestimated most was the fierce loyalty of Grumman’s employees to their company. Yet it was a U.S. Court of Appeals which prevented LTV’s bid from being successful when it ruled against the takeover on antitrust grounds.

Without the additional resources of Grumman, LTV’s Vought division was forced to re-equip itself with new equipment in order to meet its 15-year $4 billion contract to produce a Multiple Launch Rocket System for the Defense department. It was a very costly investment which left LTV with liquidity problems at a very bad time.

LTV sold its Wilson subsidiary in June of 1981 (before the Grumman bid) in order to generate cash. The Wilson division’s share of revenue was quickly replaced, however, by the newly reorganized Continental-Emsco subsidiary. LTV officials claim to have known in advance that the profitable Continental-Emsco division was about to experience a period of adverse market conditions. However, according to LTV’s president Ray Hay, “the business came down so fast we didn’t have time to shut off our subcontractors.” As a result, Continental-Emsco was left with a year’s inventory and was forced to report a substantial operating loss.

Ray Hay came to LTV in 1975 from the Xerox Corporation. He left Xerox out frustration at being passed over for that company’s presidency. At the time, Paul Thayer was looking for a man of Hay’s talent and ability to be LTV’s next president. Hay accepted Thayer’s invitation, and when Thayer left LTV in January of 1983 to serve as Deputy Defense Secretary, Hay was elected ceo and chairman of the board.

Thayer’s tenure of the Defense department was shortened in 1985 when he and a Dallas stockbroker named Billy Bob Harris were convicted of obstructing a federal investigation into the illegal use of privileged information. The “insider trading” scheme involved LTV and two other companies on whose boards Thayer served during 1981 and 1982.

In 1983 LTV sold the Lykes Steamship division and reorganized the remaining subsidiaries into three product-oriented divisions. The Vought Corporation was combined with a number of smaller divisions and renamed the LTV Aerospace & Defense Company. In addition, Continental-Emsco became the LTV Energy Products Company.

The following year LTV initiated a takeover of Republic Steel. The company was pleased with the relative success of its Jones & Laughlin/Youngstown merger and believed that by absorbing Republic it could achieve similar results. The Justice department, however, withheld its approval of the merger because the combined company would control 50% of the sheet steel market. In addition, the department was concerned about an impending merger between US Steel and National Steel. If both mergers were allowed the two companies would control nearly half of America’s steelmaking capacity. However, a month later US Steel cancelled its merger with National and Jones & Laughlin was given permission to merge with Republic on the condition that it sell two of its sheet steel plants. On July 29, 1984 the $770 million takeover was completed with the creation of a new combined subsidiary called the LTV Steel Company.

As a condition to the merger, Republic’s chairman Bradley Jones was named ceo of LTV. Furthermore, LTV was forced to offer costly retirement settlements to Republic personnel. The compensation was so attractive that Jones himself decided to take early retirement. He was replaced by LTV’s former ceo David Hoag.

During this time the American steel market was inundated with inexpensive imported steel from modern plants in Japan, Europe and Canada. In 1985 foreign producers controlled 30% of the domestic market. This had the effect of closing American steel plants and reducing production capacity to between 50 and 60%.

Attempts to modernize LTV Steel and raise productivity had limited success. At the Aliquippa Works manhours per ton of steel went from eight in 1981 to 3.8 in 1985. And while the company’s investments in modernized facilities were generating an annual return of three percent, the debt cost 15% per year to service. In effect, the investments were generating a net loss of 12% annually. In 1985 steel production at Aliquippa was idled and all but 700 workers (out of 9700 in 1981) were laid off. In addition, 3000 white collar jobs were eliminated.

The company’s pension fund was turned over to a federal pension insurance agency to which LTV was obligated to make contributions. When LTV requested permission to skip a $175 million payment to the fund, the Pension Benefit Guaranty Corporation asked for and later received a claim on LTV Aerospace for collateral. LTV initiated a $500 million divestiture of most of the non-steel assets it acquired from Republic. In early 1986 the Gulf States Steel and LTV Specialty Products divisions were sold.

LTV was unable to maintain liquidity and on July 17, 1986 applied for protection under Chapter 11 of the bankruptcy code. According to chairman Ray Hay, “We just could not generate cash flow.” Under Chapter 11 LTV was temporarily relieved of its annual $319 million debt service and $350 million pension contributions. LTV began to consider either selling its energy division or closing additional steel plants.

There has been a general consensus among industry experts that LTV has been managed very poorly. Many of them have different explanations for LTV’s misfortune. Jim Ling, however, is still alive to say “I told you so.” Ling, who was paralyzed by Guillain-Barre syndrome in 1981, pointed out that LTV should never have violated the unwritten rule of allowing any one division to account for more than 30% of the company’s sales. Steel accounted for 65% in 1985. Most industry analysts believe that if LTV were not so deeply involved in manufacturing products with cyclical and declining markets, it would not be bankrupt.

LTV is using the period of time under bankruptcy protection to implement a massive reorganization program. In the past the bankruptcy laws under Chapter 11 have allowed many companies the opportunity to realign their operations so that they may re-enter the market and perform successfully. What LTV does during its bankruptcy protection remains to be seen.