General Instrument Corporation
General Instrument Corporation
Sales: $1.39 billion
Stock Exchanges: New York
SICs: 3679 Electronic Components, Nee; 3575 Computer Terminals; 3357 Nonferrous Wiredrawing & Insulating; 6719 Holding Companies, Nec
The General Instrument Corporation is the leading American provider of cable television equipment. The company manufactures television set-top converters for cable transmission as well as scrambling devices for cable satellite signals. The company also provides fiber optic cables and coaxial cables for television transmission, as well as semiconductors. After decades as a multi-faceted manufacturer of parts for electronic equipment, primarily televisions, General Instrument began to narrow its focus in the mid-1970s, until, through a series of technological breakthroughs, it came to dominate the cable industry in the 1990s.
General Instrument got its start as an electronics manufacturer based in New York in 1923. It was not until the 1950s, however, that General Instrument embarked upon the series of acquisitions that would help it to become a technology conglomerate. Under the direction of company president Moses Shapiro, General Instrument bought a wide variety of electronics companies, most of them based in the New York area. Through these activities, the company moved into a number of different fields, including silicon transistor and semiconductor manufacturing.
In 1951 General Instrument merged a previous purchase, the F. W. Sickles Company, into General Instrument, making it a subsidiary. Three years later, in 1954, the company formed a Canadian subsidiary when General Instrument-F. W. Sickles of Canada, Limited, was created. This company subsequently purchased Watt Electronic Products, Limited, of Kitchener, Ontario. In 1955 the company returned to its geographic roots, buying the Automatic Manufacturing Corporation of Newark, New Jersey. In the following year Micamold Electronics Manufacturing Corporation of Brooklyn and T. S. Farley, Limited, of Hamilton, Ontario, were added.
In April, 1957, General Instrument bought the Radio Receptor Company, Inc., of Brooklyn, and two years later the company bought the Harris Transducer Corporation. After purchasing these companies, General Instrument left their operations intact and made each a separate division of the company. In 1960 the company added the General Transistor Corporation of Jamaica, New York. One year later, the Pyramid Electric Company was acquired.
In June, 1962, General Instrument made its foray into the overseas market when it completed an agreement with an Italian firm, the Pirelli Group, to form a new company. This enterprise was called the Pirelli Applicazione Elettroniche, S.p.A., and it was set up to manufacture and sell General Instrument products throughout the European common market. General Instrument later bought this joint venture.
In 1963 General Instrument sold off one of its divisions, as the company’s revenues fell by 3.6 percent. With these results, the company reported a loss for the year. In August, 1966, General Instrument acquired Signalite, Inc., and a year later it bought Universal Controls, Inc. By the mid-1960s, General Instrument had become a diversified electronics manufacturer, with an eclectic mix of products and businesses that had been collected by its free-wheeling president, Shapiro. The company’s revenues and profits were highly dependent on demand for television components. Because televisions were luxury goods, their sales dropped during periods of economic downturn, and this in turn depressed General Instrument’s financial results periodically.
In the late 1960s General Instrument made a number of acquisitions that diversified its product base and allowed it to somewhat stabilize its financial returns. In December, 1967, the company bought the Philadelphia-based Jerrold Corporation for $129 million. With this acquisition, General Instrument moved into the cable television equipment business. Also in 1967, General Instrument purchased the American Totalisator Corporation, the world’s largest manufacturer of parimutuel betting machines. Both of these new lines of business would later play an important part in General Instrument’s corporate strategy. Also in that year, General Instrument switched its stock listing to the New York Stock Exchange.
In 1968 General Instrument strengthened its holdings in the cable television industry. The company bought CATV, a cable television system in Texas, and the Telihoras Corporation, which ran cable TV systems in three New York counties. In the following year, the company also bought a half interest in Alpine Cable Television. Despite this strengthening in one area, General Instrument continued its policy of buying a broad variety of other companies. The company invested in three makers of miniature incandescent bulbs in 1969 and bought the Alliance Amusement Company of Chicago for $10 million.
By the early 1970s General Instrument’s scattershot approach to the electronics industry had started to take its toll. The company began laying off employees in April, 1970: 27 percent of its micro-electronics division was let go. Further firings took place in May, August, and November. In January, 1971, the company began to withdraw from its participation in the cable television industry, when its Jerrold subsidiary sold its half-interest in a Florida cable venture. By November, Jerrold had divested itself of all its further cable television companies.
After these cost-cutting measures, General Instrument resumed its string of acquisitions, buying five more companies before 1975. At this time, the company remained a $500-million-a-year producer of a wide variety of electrical components, which left its bottom line vulnerable to recession. In addition, as a result of its rapid string of purchases, General Instrument was deep in debt. Its core business, supplying electronic components to manufacturers of consumer goods, was unlikely to help the company earn its way out of debt, since it showed little room for growth.
In 1975 General Instrument’s president Shapiro retired and was replaced by Frank G. Hickey, the company’s new chairman. Hickey brought a different management philosophy to General Instrument, and under his direction the company began to change its identity. Hickey embarked on a program to sell off General Instrument’s poorly performing subsidiaries and to manage its cash flow. In addition, he strengthened the company’s presence in two growth industries, cable television and gaming. By 1977, these efforts had begun to show fruit. In that year, General Instrument liquidated eight of its money-losing divisions. Instead, gaming machines accounted for 25 percent of the company’s operating margins. Profits were up by 47 percent to $24 million, and the company’s debt was reduced by 30 percent.
These trends continued in 1978, as first quarter earnings rose by a third. American Totalisator, the company’s betting subsidiary, produced 40 percent of these returns. Long-term debt had been reduced to 36 percent of equity. In an unexpected stroke of luck, General Instrument also found that the fad for video games, such as Atari and Intellivision, drove demand for its specialized semi-conductor chips.
In October, 1979, General Instrument opened Teletrack, an $8 million closed-circuit television betting theater constructed in New Haven, Connecticut. With a giant 32-by-24-foot screen, patrons could watch live races at various local horse tracks and place legal bets on their outcomes. General Instrument received four to five percent of the revenues from this operation, which made up only a small part of its gaming activities. The company also supplied 80 percent of the on-track betting systems used in North America, 90 percent of the off-track wagering machines, and held a sizable chunk of the state lottery business. Overall, wagering systems accounted for 35 percent of General Instrument’s 1979 profits of $50 million, up fivefold from $10 million in 1975.
By 1980, General Instrument had shed 11 business and facilities in areas around the world, and the company’s debt level had shrunk from 100 percent of equity to about 20 percent. In addition to the growth of its wagering business, General Instrument saw its cable television operations explode. The company’s growing dominance of this market drove its sales, earnings, and margins upward, while the price of its stock tripled.
By 1981, General Instrument’s revenues were nearing the $1 billion mark, and its debt had been reduced to 9.3 percent of capital. Sixty-one percent of the company’s earnings were contributed by cable equipment. General Instrument had come to dominate the market for head-end equipment, which transmitted cable programming; the company also came to hold half of the market for black-box converters. These devices, which sat on top of a customer’s television set, decoded signals from the coaxial cable and put them on the television screen.
The increase in General Instrument’s cable business came just as its strength in gaming was waning. Competitors such as Datatrol and Control Data had started to push down American Totalisator’s profits in the early 1980s. To make sure that the company’s cable dominance did not suffer the same fate, General Instrument took steps to remain on the technological cutting edge of this field. In February, 1982, the company formed United Satellite Television, a joint venture with the Allstar Satellite Network and Pop Satellite, that planned to offer direct satellite to home broadcasting via affordable 6-foot-wide satellite dishes. Through its exclusive contract with this service, General Instrument hoped to sell $1.5 billion worth of equipment to customers in remote areas. General Instrument was also exploring the potential of local-area networks, used to connect computers within an office, and interactive cable TV systems for the home. With these efforts, the company hoped to decrease its reliance on conventional cable gear.
General Instrument continued its strong returns throughout 1982. In October the company won a contract to supply $100 million worth of cable equipment to Telecommunication, Inc., a consortium of 300 cable systems. General Instrument increased its holdings in the cable television industry in December, 1983, when it bought Tocom, Inc., for $28 million. This company manufactured cable television converters and security systems.
By the spring of 1984, however, General Instrument’s financial results had hit a snag, as the company posted a year and a half of flat or declining earnings, which ended with a 64.7 percent drop in profits for the year ended in February, 1984. Doubts plagued the company’s joint satellite venture, and General Instrument suspended deliveries of equipment to this company in March because of questions about its finances.
General Instrument’s financial difficulties continued in 1985 as the company reported revenues down 15.4 percent, to $848 million, and a $66.5 million loss. The company began to sell off a number of its units, including its money-losing semiconductor operations, and in February, 1986, General Instrument reorganized is upper management structure. This shuffle was the company’s second difficult restructuring attempt in two years.
In the fall of 1986, searching for a new line of business that would help the company to rebuild, General Instrument paid $220 million for the cable television equipment operations of M/A-COM, a General Instrument competitor based in Massachusetts. This company’s San Diego-based VideoCipher division had spent $20 million developing a scrambling and decoding device for use by satellite television operations. This company’s VideoCipher II product was not only the industry standard, it had a monopoly on the production of these devices. By the end of 1986, however, these changes had not managed to stem the tide of General Instrument’s losses, as the company reported a $80 million deficit on $788 million in sales.
In 1987 General Instrument continued to sell businesses in an effort to shore up its bottom line. In April, 1987, the company divested its interest in Sytek, its local area network partner, along with its optoelectronics division, its lamp division, an antenna manufacturing operation, and factories in Tucson, Arizona, and Post Falls, Idaho.
By the spring of 1987, however, General Instrument had finally started to get some good news. Demand for its VideoCipher II product was outstripping supply by 50 percent, and the company opened a second plant in Mexico to produce more than 50,000 units a month. Although it only cost $200 to make the devices, General Instrument was able to sell them for $325, reaping a hefty profit. Driven by the success of this product, General Instrument saw its revenues grow, posting sales of $1.16 billion at the end of 1987. In 1988 the company also began to increase its share of the market for addressable subscriber systems, which let cable operators control which pay channels and other services a viewer received in his home.
By the end of the 1980s, however, General Instrument was once again losing money. In the spring of 1990, the company began to seek a buyer. In August, 1990, General Instrument was purchased in a friendly leveraged buyout of $1.6 billion by the FLGI Holding Company, created for this purpose by Forst-mann, Little & Company, a New York investment banking house. In October, 1990, General Instrument’s new owners appointed Donald Rumsfeld, a longtime Washington insider, to head the company. Rumsfeld cut the company’s costs by selling off peripheral businesses with annual sales of nearly $400 million.
In January, 1991, General Instrument announced that it would join with its chief contender in the race to develop high-definition television (HDTV), the next generation of television transmission. This teamwork paid off in June, 1991, when the company announced a breakthrough in its HDTV effort. This effort relied on digital compression technology to allow hundreds of channels to enter a viewer’s home. With General Instrument manufacturing the equipment to compress signals for transmission, and then to decompress them for viewing, the company would have a lock on the next generation of cable equipment.
By August, 1991, however, General Instrument’s revenues had dropped 14 percent, as cable companies cut their spending. Rather than cut funding to its promising research activities, the company cut its overhead to the bone in order to make its loan payments. Two-thirds of General Instrument’s headquarters staff was let go, leaving a skeleton crew of 23 people, at a savings of $65 million a year. In addition, the company reduced inventories and instituted quality-control programs in its factories in an effort to increase productivity.
By the start of 1992, General Instrument’s sales had started to revive, and in March the company gave a broadcast demonstration of its new all-digital HDTV technology. Shortly thereafter, the company won a contract for 100,000 HDTV compression devices from Tele-Communications, Inc., of Denver, the company’s largest cable provider. This deal later provoked the scrutiny of the U.S. Justice Department, which launched an investigation to determine whether the company’s dominance of the cable set-top industry constituted a stranglehold on competition.
In June, 1992, in an effort to reduce General Instrument’s debt from its purchase, the company once again sold stock to the public, raising $307 million through the sale of 22 million shares. With this money, General Instrument restructured its balance sheet to reduce its interest payments. At the end of 1992, General Instrument reported an increase in sales of nearly 16 percent, to $ 1.07 billion, which nevertheless yielded a loss of $53 million.
In an effort to gain future sales, General Instrument announced in April, 1993, that it had joined with two other companies, Microsoft and Itel, to develop a cable box that combined the functions of a cable converter and a computer, allowing for interactive television. In July, 1993, General Instrument further strengthened its financial standing when it paid off the last $100 million of its debt to Forstmann, Little.
At the end of 1993, General Instrument merged its Jerrold Communications and its VideoCipher units into one division, GI Communications. The company reported year-end revenues of $1.39 billion, and a profit of $91 million. With these strong results, and General Instrument’s central involvement in a number of the key communications technologies of the future, the company appeared well situated to thrive in the coming years.
General Semiconductor Ireland.
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