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March 13, 1997
On the occasion of the second anniversary of the merger of Lockheed and Martin Marietta, Norman R. Augustine sat down with a group of editors and reporters at The Washington Post. Here is an unedited, full transcript of that conversation:
Q. Iíd like to start by asking you to talk about how itís gone. What the difficulties have been in combining these two companies. Whatís worked out the way you wanted. Whatís still difficult for you? Looking back but also looking forward to whatís next.
A. Let me just kind of talk a little bit about that and if you want to steer the conversation in another direction I hope youíll feel free.
It is the second anniversary actually, I think the day after tomorrow, the 15th in any event. Incredibly fast two years. It would have been two years ago Saturday I guess that we began, Dan Tellep, of course Dan was the CEO of Lockheed and the first CEO of Lockheed Martin and the two of us went up to the New York Stock Exchange and pushed the button to start trading on the floor, including our stock that day. And, as I recall, the stock was selling at about $50 at the time. And since we originally announced our transaction, since we originally announced bringing together Lockheed and Martin Marietta, we created about $14 billion worth of shareholder value. By financial measures itís been incredibly successful, far more so than I think either of us ever dreamed it would be at that point in time.
Weíve learned a lot of lessons and weíve consciously tried to sit down and say what do you do when you try to bring large organizations together like this. Lockheed Martin today, many people donít realize, is not just two companies, itís 17 companies that have come together all fairly much household names. All over the last half dozen years. And when we bought Loral, Loral was just in the process of bringing in -- it wasnít a complete work of art yet. And so we kind of inherited some of that and so itís 17 different companies.
Turns out thereís great strength and diversity. One of the huge payoffs weíve found has been the ability to sit down around a table with people that you would never six years ago have been able to get in one room and be very candid with one another saying this is the way we used to do it and this is what we learned. Itís been very powerful.
The power of that, I think, was indicated last fall when we had a streak, seven or eight major competitions of the kind that you know you normally only have two or three a year. We had about seven or eight in about three months and at the beginning of that period I can remember saying to myself, gee, I wonder how many of these we can win. The law of average would say we probably should have won two or three. But we won íem all. We won every one during that period. And I think part of it was this synergy, the strength of diversities that we got. I guess I should share with you that bringing the companies together proved to be just an awful lot easier. We canít take too much credit. The personalities just came together and thereís very little cultural differences today. You hear a lot about culture in a corporation and so on, as we sit around the room today with each other thereís just almost no consciousness of where people came from or who came from where.
And I think we blundered into that. Although we thought a lot about it and tried to figure out how weíre going to handle this, we learned another thing, somewhat of a surprise, and that is, in some senses itís easier to bring together 17 companies than two. And the reason for that is that thereís nobody at Lockheed Martin who comes from the majority organization. The people from Lockheed are in the minority and the people from Martin Marietta are in the minority and if you sit in a meeting and say well weíll do it this way because thatís the way we always did it, 16 other people at the table will pipe up and say well that isnít the way we always did it. And so you sort of have to defend on the merit what your proposals are.
Bottom line is that it's gone very easily. The hard parts, and there have been some, by far the hardest has been the need to downsize the company. This has been agonizing. Weíve closed 16 million square feet of plants, or excuse me, weíre in the process of closing 16 million square feet of plants and weíre far along unfortunately in doing that. We also, of course, have had just enormous layoffs. People who were really talented people who were contributing but there just wasnít work for them to do. And thatís been painful.
The performance of the business, aside from financially, in terms of our products working better in the last outing but with a few exceptions, notable exceptions, the most notable of which was THAD the air defense missile. And, with that notable exception, the performance has been fairly remarkable. For example, and again I knock on wood, Lockheed Martin has never had a space launch fail. Never. I mean weíve launched as much as probably most will over the last half dozen or seven or eight years.
We have chances to get on your front page about once a week now. When things go well we donít make the front page.
Q. Norm, you had a string of bad luck back before the mergers. What was wrong? The investigation you were launching to figure out what was going on, what was going on?
A. What we did, just for those of you who donít recall when Martin Marietta joined forces with General Electric aerospace, I was quoted as saying the crown jewel in the aerospace business was their spacecraft, commercial spacecraft business. And within some number of months after we had combined the two businesses we had three spacecraft fail, which is just almost unheard of, to have three failures right after the other. And they were really hard to understand. When you and I talked at that time we were still very puzzled. One of the spacecraft had been flying to the planet Mars for almost a year before Jack Welch [Chairman and CEO General Electric] and I had ever talked about combining the companies. The other two had been built, one of them four or five years before had been in storage for launch. And, you know, you say of course many attributed the failures to the fact that we had combined the companies somehow, and maybe took our eye off the ball.
I donít think that was the case. I donít think it was possible because, as I say, these spacecraft were built and one of them had even been flying for a year. As a matter of fact as I recall we had two of them fail one night, about 200 million miles apart. Itís hard to explain, just a little diversion, the THAD that I mentioned, the flight that failed, sixth flight had failed, the seeker didnít work, it fell 300,000 feet from where it was supposed to conduct the intercept to the ground. It dug itself four feet into the earth. We went and dug it up, put power in the seeker and itís been working ever since and we canít get it to fail.
But, I think, to really answer your question as best as I can, we did have an independent review, and of course, we released that review publicly too because weíd had so much attention to the failures. I think what really happened, there was a pattern, and the pattern was that we had lost the recipe for maintaining quality in that factory, in the factory in East Windsor, New Jersey. And also a factory in Valley Forge, Pa., that tend to work together. And there were discipline issues that permeated many programs, and so we put in a crash effort to try to pick that up by the bootstraps and I think we have succeeded in doing that. And at this point weíve had a long series of very successful launches and successful spacecraft and weíre doing okay.
If I come back to Lockheed Martin today, some of the key things that are happening right now, a couple of events, one is that, er, I just came from a meeting today where, for the first time in years, we now have underway a major campaign to hire young people right out of college. Our industry hadnít hired anybody in so long we hardly can find our way to a campus
And, we are going to use a totally new approach to hiring for Lockheed Martin. We just talked this morning, and what weíve done instead of sending recruiters out to several hundred schools, we have picked 42 schools to focus on, to build long-term relationships with, where we will hopefully exchange faculty members who will spend summers with us, where our people will be adjunct faculty members, where we will do joint research projects and where we will focus our hiring. It wonít be exclusive to those 42 schools, obviously we look for talent everywhere. But this is going to be a new approach to hiring, focus the long-term relationships and weíve designated for each school one of our most senior people, vice president and president, mostly to be our interface with a key member of the faculty at those universities. Weíll hire over 2,000 engineers this year which just is fantastic for us.
I might add, I think I saw 36 percent of them will be computer-oriented, another 30 percent are electronics-oriented which sort of speaks to the time and also to the change in our company. Whereas you know 15 or 20 years ago they all would have been aeronautical engineers or structural engineers.
Q. Are any of those schools local?
A. Yeah, they are. Iíd have to go check but Maryland is one and Iíd have to check, but Maryland is one and weíve also sought to have diversity in schools too. I could give you the whole list if you wanted, Iíd be happy to do that.
Q. Why are you doing it?
A. Our industry has not really hired anybody, as you know, out of college to speak of, itís so hard to hire young people even though you know you need to when youíre laying 30-year employees off. And so we just havenít hired anybody. And so we now have the task of replenishing our company and our industry with young people. And even though 2,000 is a lot of engineers and thereíll be others too, accountants and lawyers and so on, we donít want to make any mistakes, we want to use every slot. Basically weíre rebuilding, creating a new industry today that would be our industry 25 or 30 years from now, and so out of these couple of thousand slots this year, and hopefully more next year, we really have to find the people who will make our company what it will be long term. So thatís one piece of news.
Another is that, weíll announce this afternoon that, the new display system for the FAA was accepted yesterday ahead of schedule, and that, as you recall had gotten a lot of attention three or four years ago. Itís performing well, it did well in all the tests and yesterday the FAA formally accepted it and that was a big milestone for us, and that was like a billion dollar program. It came through Loral, yes. And it had an IBM heritage before Loral. And the first unit has been undergoing tests in Seattle. Itís a very essential part of the new air traffic control system for the country. Candidly, it was a troubled program some years ago.
Q. That was no secret.
A. Okay. Not candidly! But going well. I guess the other thing is, as you also know, the Air Force and ourselves have restructured the F22 program. We have taken steps that will offset the increase in inflation in that program which, because of the length of the program and the size of the program, totaled about $8 million. That was just the increase in inflation in the economy. Weíve offset that, plus other growth, the program now is targeted and our best estimate is that itíll come in under our original contract cost value. The program is currently ahead of schedule, weíll fly the airplane, weíll roll it out in about three weeks and weíll fly it by May 29, and itís meeting or exceeding every single performance parameter. So thatís a program I think is a success story. And, just quickly looking into the future, our industryís shakeout, I take it weíre at the two minute drill at this point. It looks like weíre going to wind up with sort of a Noahís ark industry where itís two of everything. Combat aircraft will be Boeing and ourselves, and defense electronics will be Raytheon and ourselves. Commercial aircraft will be Boeing and Airbus. And so on. I think the integration is basically close to done. Lockheed Martin had the benefit of, if I can be so bold to say, of going first, which had several benefits. One, weíve done with all this integration. Our competitors now face it. Secondly, when we were buying companies, we were - in general, not entirely paying like 40 to 60 cents to buy a dollarís worth of sales in another company. Today their going rate is about $1.40 to $1.50. So we were paying about a third of what people are paying today.
I think the next interesting question is looking at the European industry and see what happens there. Boy, thatís a whole story in its own right, that makes what we did look easy. And I imagine there will be a lot of headlines yet to come from how Europe shakes its defense industry up, its aerospace industry. Then I suppose I should mention, and then Iíll quit. Return to the questions, but we are diversifying. Our diversification enforcement law, weíre doing it very deliberately, and weíre focusing on high-tech electronic areas, information systems, space telecommunications, simulation and training, a whole variety of things. Video games to major systems. So, thatís kind of a snapshot of where we are and whatís happened.
Q. What video games?
A. You know, thatís kind of an exciting one. We have an agreement with Sega from Japan. In fact, I was over there and had lunch last week. And while we were having lunch, an earthquake struck, which I hope wasnít an omen. But we develop the imagery for the scenes that they display for their arcade games. And in fact, the best selling arcade games in the world today, not widely realised, but most of them have Lockheed Martin electronics in them.
Q. I donít know if thatís a buy sign or a sell sign.
A. Well, what it is, what you said the kids, the grandkids at the arcade will all have lots of quarters, is what you want to do.
Q. How did you get into that business? Is that a spinoff from military training?
Q. The virtual reality thing?
A. Exactly. Itís simulators we built to teach pilots to fly and tank drivers to drive and so on. And we have now gotten into the arcade market. We also have an agreement with Intel for their next chip that weíre providing the 3D images for Intelís next chip, which will go under your PC and so on. These images, the new ones are spectacular. I mean, unbelievable. You may have seen some demonstrated. And then thereís, you know, we talk about spinoff, thereís a spin-on here because weíve taken what weíve developed for the commercial world, and itís a whole step beyond what we have in the military world. Now putting it back into the next generation of military trainers, which will cost only a fraction of what it did.
Q. What an amazing reversal of the historical relationship. Thatís great.