Hughes Electronics Corporation
Hughes Electronics Corporation
Public Subsidiary of General Motors Corporation
Incorporated: 1985 as GM Hughes Electronics
Sales: $5.13 billion (1997)
Stock Exchanges: New York
Ticker Symbol: GMH
SICs: 3663 Radio & TV Communications Equipment; 3669 Communications Equipment, Not Elsewhere Classified
Hughes Electronics Corporation is one of the world’s leading satellite and wireless communications companies. It operates four main areas of business. Its Hughes Space & Communications division manufactures satellites and spacecraft. Its customers are businesses across the globe, and U.S. government agencies including the Department of Defense and NASA (National Aeronautics and Space Administration). Hughes Network Systems builds satellite-based wireless telephone systems, as well as manufactures equipment for satellite-based television service and Internet access service. Hughes’s PanAmSat division operates a fleet of 17 satellites, providing service to telecommunications businesses worldwide. Hughes also runs DirectTV, a direct-to-home digital television service offering hundreds of channels. Hughes was formerly a rather different company. Its main areas of business used to be defense electronics, derived from the former Hughes Aircraft, and electronic components for cars, manufactured by its Delco Electronics division. As the satellite and telecommunications areas developed in the 1990s, the company decided to shed its other businesses. Hughes Aircraft and Delco are now owned, respectively, by Raytheon and Delphi.
Early History As Hughes Aircraft
Hughes Electronics was formed in 1985 as GM Hughes Electronics, a company put together by General Motors. The company emerged out of the former Hughes Aircraft, a firm founded by the notorious billionaire recluse Howard Hughes. Howard Hughes inherited control of his father’s affluent tool company at the age of 19, in 1924, and subsequently went to Hollywood for a brief career producing and directing movies. Enamored with airplanes, Hughes learned to fly, and founded Hughes Aircraft in 1932. Hughes’s personal interest was in faster flight. As a pilot, he set several world speed records in the 1930s, and his company focused on building innovative planes. During World War II, the U.S. government contracted Hughes Aircraft to design and build a large cargo plane. This was envisioned as an alternative to cargo ships, which were vulnerable to submarine attack. Hughes Aircraft did not complete its contract until 1947, two years after the end of the war. Its Spruce Goose, a unique wooden plane one-third larger than a jumbo jet, made an extremely short maiden flight before docking forever. During WWII Hughes Aircraft had not produced a successful military or commercial craft.
After the war, Hughes Aircraft became a leader in defense electronics, becoming one of the nation’s largest suppliers of weapons systems, missiles, satellites, and lasers. The company made many technical advances as long as it was run by knowledgeable engineers. However, in the 1950s its founder, Howard Hughes, became active in the company’s management. Hughes’s mental health had begun to deteriorate, and he ran the company as his own fiefdom, arbitrarily making decisions that overrode his directors’ wishes. As a result, many top Hughes Aircraft executives quit, and went on to found other top U.S. defense companies. Hughes created the Howard Hughes Medical Institute in 1953, a nonprofit entity, and donated Hughes Aircraft to it so he could run the company tax free. Hughes disappeared from public life around this time, and Hughes Aircraft was run by a competent engineer. After Hughes’s death in 1976, the company continued to develop and manufacture weapons, under the aegis of the Medical Institute. However, the company’s products were plagued by cost overruns and lack of quality control. Ultimately, the Defense Department refused delivery of Hughes’s missiles in 1984. An Air Force auditor uncovered scores of abuses at Hughes, while the Internal Revenue Service questioned the tax-free status of the company. To appease the IRS, the Medical Institute agreed to put Hughes Aircraft up for sale.
Growth Under GM in the 1980s
Though the company was obviously troubled, several large corporations were interested in acquiring Hughes. Close to a dozen companies came forward as potential buyers. Finally, five finalists—Allied Corp., Signal Companies, Ford Motor Company, Boeing, and General Motors—entered sealed bids for Hughes. One problem with the process was that aspects of Hughes’s finances were secret, because of its defense business. What was supposed to be a simple auction devolved into three weeks of intensive bargaining. GM emerged the winner, shelling out $5 billion in combined cash and stock for Hughes. GM funded the deal through a complex maneuver where it issued some of its common stock as Class H (for Hughes). Holders of GM Class H stock were entitled to a percentage of the company’s earnings from its new subsidiary. GM had done the same thing a year earlier when it bought Electronic Data Systems (EDS) and offered Class E stock. GM aimed to offset its slowing auto market with Hughes’s defense electronics business, and so it vowed to leave the company essentially intact. It created GM Hughes Electronics as an umbrella over Hughes Aircraft, headquartered in El Segundo, California, and an automotive electronics subsidiary it owned, called Delco Electronics. Delco had originally been a manufacturer of car radios, and also made military navigation equipment and automobile gad-getry such as dashboard computers.
Owning Hughes was supposed to get GM into the lucrative defense business, as well as give it access to breaking technology that might make its cars more competitive. GM’s CEO Roger Smith envisioned using Hughes’s know-how to make “smart” cars with automatic collision sensors and route-finders. The acquisition of Hughes was key to GM’s plans to make “the car of the future” and to bring the company proudly into the 21st century.
Some of these automotive advances did come to pass. Hughes’s engineers revamped GM’s anti-lock brake system, and the company’s advanced computer simulation technology proved useful to its parent in studying things like road-tire interface. Hughes also set to work on the wiring of GM cars, simplifying the number of wires needed with a method called multiplexing. Multiplexing derived from military electronics, and it saved weight, space, and assembly time in GM cars. This was exactly the kind of improvement GM had hoped to get in its cars by linking up with Hughes. Hughes was also a leader in infrared night vision technology, which it had developed for military pilots. In 1987 GM was hopeful that night vision systems could soon be installed in its cars, allowing drivers to see through dark, smoke, fog, and haze. Hughes’s partner Delco was also involved in developing a collision-avoidance system and a satellite-based Global Positioning System that would help drivers plot routes.
Despite high hopes, troubles still dogged Hughes. Its satellite business had grown enormously, and by 1988 it was producing over half the communications satellites built in the United States. But that year Hughes’s chief executive, Albert Wheelon, resigned after being served with a subpoena from the Justice Department regarding illegal payments to a shell company operated by one of its best satellite customers, Intelsat. Intelsat was a 114-nation satellite consortium that was expected to give Hughes billions of dollars in business. Hughes was suspected of making monthly payments to an Intelsat director, in exchange for access to the satellite company’s internal documents. The complicated legal investigation cast a cloud over Hughes.
The company’s stock price was going nowhere, and in 1989 General Motors had to work out a new deal with the Howard Hughes Medical Institute about the GM Class H shares the Institute had received when it sold Hughes. GM had guaranteed the Institute a certain price on the stock for a limited time, but it became clear that if the Institute sold its shares after the guarantee was up, the stock price would take a dive as the shares flooded an indifferent market. The two companies restructured their original deal so that each side was happy, but regular shareholders did not seem to be getting much value for the H stock.
Changes in the 1990s
Meanwhile, earnings declined at GM Hughes, falling almost 20 percent in 1989. Though revenue climbed to just over $3 billion, from $2.67 billion the previous year, profits did not keep pace, and the company seemed stagnant. The company needed a new direction, but it was not sure where it should go. Hughes gradually cut its reliance on defense business. This accounted for nearly 70 percent of its sales shortly after GM bought the company, and declined to less than 50 percent by 1991. In 1992 Hughes announced that it would further cut its defense business, and concentrate on automotive electronics and telecommunications. Even while stating this new goal, the company spent $450 million to acquire the missile business of General Dynamics. The impetus behind this purchase was said to come from Michael Smith, vice-chairman of Hughes Aircraft, who was the brother of GM’s new CEO Jack Smith. By the end of 1992, GM Hughes was deeply in the red, mostly because of charges associated with laying off thousands of workers and closing facilities.
Hughes Electronics stands on a threshold of vast telecommunications opportunities around the world Everywhere we look, we see strong demand for low-cost advanced communications—for networks of telephones, televisions and computers that will handle the boundless flows of conversation, entertainment, information and business data fundamental to modern existence. To tap these global possibilities, we are leveraging the company’s leadership in designing and building satellites and wireless systems into delivering innovative communications services to buildings and homes. We are using our rich store of technologies, talents and other assets to lead global markets, build our business and create new value for shareholders.
The company tried to slim down, and in 1994 it announced a significant reorganization. The number of employees had already fallen from 82,000 in 1986 to just 51,000 worldwide in 1994, but Hughes decided to close many of its defense business facilities and lay off more workers. GM Hughes also split into seven different divisions. It put all its defense activities under the heading Hughes Aerospace and Electronics Co., with new headquarters in Washington, D.C. Delco, the automotive electronics division, continued as it was, and the company divided further into a Commercial Sector, for new start-up technologies, a Telecommunications and Space Sector, for its satellite business, and four smaller groups for radar and communications, electro-optical systems, weapons systems, and information systems.
After all these changes had been put in place, things began to look up for GM Hughes. Its fastest-growing division was its satellite and telecommunications business, which had sales of over $2 billion in 1993. Hughes owned the world’s largest fleet of satellites used for television broadcast, and had a large share of the business communications network market. Large companies such as chain stores that had far-flung operations used Hughes’s network technology to transmit daily business data, and revenues in this area had been growing by 30 percent a year since 1987. Hughes also developed a new kind of satellite, its HS 601, which had huge potential. It was known as a body-stabilized satellite. Other satellites had to spin like a gyroscope in order to maintain their stability in space, and their solar panels, from which they derived energy, spun with the whole machine. Hughes’s HS 601 contained a spinning core within a central box, and its solar arrays remained fixed in an optimum position. The HS 601 was thus more energy efficient and had a lot more broadcast power. In 1993 Hughes put together new digital compression technology with its satellite capabilities and launched DirecTV. This venture used two high-powered satellites to broadcast 150 channels of video programming to customers fitted with a small, inexpensive satellite dish. The DirecTV dish was only 18 inches in diameter, and sold for around $700, so it was far cheaper and less conspicuous than the prevailing dish, which cost upwards of $3,000. DirecTV was totally digital, and so offered a pristine picture and CD-quality sound. Hughes signed up several cable channels to broadcast on DirecTV, and planned to offer pay-per-view movies on 50 or 60 channels. Six months after Hughes began signing up DirecTV customers, it had nearly half a million subscribers. In three years, DirecTV had over three million subscribers in the United States, making it comparable in size to the nation’s fifth largest cable company. Hughes called DirecTV the most successful consumer electronic product launch in U.S. history, noting that it had taken the entire cable television industry 20 years to sign up three million customers. In partnership with a Latin American consortium, DirecTV was a leading cable provider in Latin America and the Caribbean by 1997. Hughes joined eight Japanese companies in launching DirecTV in Japan, which was a potential market of 42 million TV households. U.S. subscribers were paying $44 a month for DirecTV in 1997, plus shelling out for the satellite dish and decoder box. Consequently, Hughes’s profits took off. Sales were up to almost $15 billion in 1995, and profits had more than doubled since 1991, up to $1.67 billion.
Much of the recent success of Hughes was credited to CEO Michael Armstrong, who took over in 1992. Armstrong set clear goals for the company, demanding that it be either number one or number two in any market it entered. He slashed jobs, backed DirecTV, and focused the company on lucrative commercial business. In 1995, the company changed its name from GM Hughes Electronics to simply Hughes Electronics. Soon after, industry analysts began to speculate that GM might be ready to sell the company. The advances in automotive electronics that GM had hoped for when it bought Hughes in 1985 still had not come to fruition, and there seemed to be little reason for the auto giant to hold on to the company. GM filed a document allowing it to divest Hughes in March 1996. Then in January 1997 news broke that GM was selling the defense portion of Hughes to Raytheon. GM next consolidated the Delco portion of Hughes with another of its automotive electronics companies, Delphi.
What remained of Hughes was only its satellite and telecommunications businesses. These areas were the company’s most promising markets. The new structure gave Hughes more focus, and let it use all its resources on the potentially booming telecommunications world of the next century. The company continued to develop new products, working on integrated circuit and electronic memory protection devices, as well as pushing for small, high-speed antennas that could link homes and small businesses with satellites.
Hughes Space and Communications Co.; Hughes Network Systems, Inc.; Hughes Communications, Inc.; DirecTV, Inc.; Pan-AmSat Corporation (71.5%).
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