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Washington Post Staff Writer Sunday, March 6, 1994; Page H01 The titans of the U.S. aerospace business have tended to be conservative Republicans from the Midwest or California -- men who excelled in the military and then climbed the corporate engineering ranks to the top job. And then there is Bernard L. Schwartz. The chairman and chief executive of Loral Corp., which is fast becoming one of the nation's largest Pentagon contractors, is a liberal Democrat who opposed the Vietnam War. He is a proud New Yorker who spent World War II as a lowly corporal in the U.S. Army Air Forces. An accountant and Wall Street businessman, he cared nothing about the military business before 1971, when -- at a rushed lunch to advise a friend on Loral's board how to salvage the failing firm -- he stumbled into the job. Known as "the Lone Ranger" by some in the defense business, Schwartz expanded Loral over the past two decades by buying other people's companies. Now, Schwartz has bought himself a big role in Washington's local economy. Last week, Loral acquired IBM's Bethesda-based Federal Systems Co. division for $1.5 billion, making Schwartz one of the area's biggest employers, with a work force of 7,100. It was Loral's biggest purchase ever. Loral has enjoyed an amazing 89 consecutive quarters of increased earnings. But here's a word of advice to Schwartz's new employees at Federal Systems: People who know him believe he'll be very displeased with whichever Loral unit ends that streak. In this age of unease in the arms business, with many traditional defense firms shrinking or liquidating, Schwartz is easily its most audacious acquirer. In his 22 years at Loral, he has bought 15 defense firms. Many were the defense divisions of the industrial giants of another generation, which tired of the uncertainty of Pentagon work -- International Business Machines Corp., Ford Motor Co., Xerox Corp., Honeywell Inc., LTV Corp. and Goodyear Tire & Rubber Co. In conversations with employees, Schwartz has called them "the dinosaurs." Market analysts generally say his purchases have been canny, and that he has done a superb job running Loral divisions in the face of defense cuts. When Federal Systems is included, the company's sales have grown 800 percent since 1986, to $6 billion. Profits also have grown yearly, to $159 million in 1993. Schwartz's formula, industry analysts say, is to buy other people's mature military programs, already funded by the Pentagon, where the risk is limited and the return healthy. Many contracts are for little-known but lucrative weapons components, such as missile sensors and aircraft radar. They are cash cows he milks for the next purchase. Also boosting Loral's earnings is the fact that most of its core businesses -- defense electronics, reconnaissance, computer software and communications -- are not declining as fast as other parts of the Pentagon budget. Loral is still not a household name (some people confuse it with cosmetic maker L'Oreal S.A.). But some market analysts expect that if military budgets head up again in a new arms race, Loral could become one of the nation's industrial giants. That's quite a journey for Schwartz, who honed his business skills in the 1960s working with highflying Wall Street investor Saul Steinberg. Getting a 'Crown Jewel' Federal Systems -- with big facilities in Gaithersburg and Manassas, as well as in Texas, California and New York state -- also specializes in areas that are relatively cushioned from the defense cuts, such as military electronics and software. Elliott Rogers, an analyst with Cowen & Co., calls it "a crown jewel." But Federal Systems's problems are now Loral's. Its biggest contract, to modernize the Federal Aviation Administration's air traffic control computers, has been troubled for years. Last week, the FAA announced a new crackdown after concluding it is 31 months further behind schedule and $1.4 billion more over budget than previously estimated. Schwartz says confidently he's not surprised by any of the contract's snags. He says Loral can unsnarl them, and points to its now-celebrated turnaround of an equally bollixed-up contract -- to make weather satellites, inherited in its 1990 purchase of Ford Aerospace Corp. Schwartz's confidence will soon be on display for Federal Systems employees. But some Schwartz-watchers see beneath the bravado a kind of aloofness. "I don't feel I'm a member of the establishment club in the defense business," Schwartz said in a recent interview in his 36th-floor Manhattan office overlooking the East River. "I don't fit the profile ... CEOs, when they're in New York, don't normally call me for lunch. ... I don't think a lot of people in industry are comfortable with me. Maybe I'm not comfortable with them. ... {But} we don't get contracts because we're good golfers." Pettifoggers and Plodders Schwartz thinks of competitors and analysts who criticize him as pettifoggers and plodders who don't grasp his business innovations. "We have a simple strategy, and it amazes me people don't understand it," Schwartz said. "I think I'm a very good businessman. No one doubts I'm a thoughtful, deliberate, strategic person. ... We're very confident of who we are." "This is not an impresario show," Schwartz said. "People around me are not namby-pamby." But what to make of the board member who sent Schwartz a news article gently criticizing him, with a note, "Even Moses had his doubters"? Loyal aides say he is "visionary," but not on the record, because no one -- no one -- at Loral speaks to reporters or Wall Street analysts except Schwartz. It is an oddity for a firm its size, but analysts' access to him after 5 p.m. may be one reason many are upbeat about Loral. "It's good discipline internally," Schwartz said of his one-spokesman rule. "I don't see any reason to change it." "He's very, very tough to work for," said one former employee who likes but fears him. He is known to tell secretaries tardy in delivering phone messages, and vice presidents with sliding sales, "You'll have to do better for me." Some people in industry worry that the one-man-band act discourages the emergence of a successor. Schwartz -- who is a trim, vigorous 68 -- says he and Loral's board are addressing the issue. He hints the next in line is company President Frank C. Lanza, who runs Loral day to day and is widely described as highly capable -- though shy. A Schwartz friend doubts he is grooming anyone. "He's not going to sit on a beach," the friend said. "His vision is, they're going to carry him out." Defense executives believe his impulsiveness could injure Loral if he buys unwisely. Said a ranking Pentagon official: "He makes up his mind what to buy, then finds out what he's bought." But nobody has made money betting against Schwartz yet. "Everyone sits around waiting for Bernard to crash," an industry executive said. "He doesn't." Schwartz's chutzpah was on parade last fall, when he beat several competitors in IBM's auction of Federal Systems. He had studied the unit for years, so when new IBM Chairman Louis V. Gerstner Jr. put it on the block, Schwartz and six top Loral aides -- no outside investment bankers -- fashioned a winning bid in 12 days. Schwartz inked the deal while other bidders were scheduling flights for their dozens of advisers to examine IBM's books. Northrop Corp. offered $150 million more, but IBM chose Loral's bid because Schwartz made the deal unconditional, and immediate. He did the same thing when he bought LTV's missile division in 1992, assembling the deal in 72 hours. The $244 million price was a steal. Recently, the unit won a $700 million contract for an Army missile, and another of its missiles is expected to beat out Raytheon Co.'s Patriot for a $1 billion contract. "Confidence is a powerful enabler," Schwartz said. "We're able to move fast, decisively. Sellers know that about Loral." Lean and Loose Loral also is less formal than most defense firms, which mimic their Pentagon customers by maintaining layers of bureaucracy and a tradition of communication by written record. At Loral, "it's a verbal culture, and it's action-oriented," one ex-employee said. "You have a 30-second conference in the hall, then you do it." Loral's Manhattan headquarters is lean, with only 90 people. It resembles a holding company, with a thin crust of managers in "corporate" atop 40 virtually free-standing divisions. That's many more divisions than at much larger competitors. Schwartz calls having so many divisions "a pain" (he visits each at least once a quarter). Moreover, Loral's practice of letting units do their own research, purchasing and marketing, and arrange their own health care, misses out on economies of scale. Schwartz doesn't try to instill a "Loral culture." Each division keeps its own name, but with "Loral" in front of it. Schwartz is sometimes wrongly cast as a terminator who lays people off upon buying a facility. Friends and critics agree he's more likely to give local managers Loral stock options, set their sales goals and let them decide how to reach them, they said. "You're given your targets and you damn well better make them," one ex-employee said. "Corporate will help you. It's not setting you up for failure." "Every president feels they own their own company," Schwartz said. Stock options "tie them into shareholder value." But Loral is not above firing managers and slashing jobs. That's what happened after Schwartz bought IBM's Rolm Mil-Spec Computers division in 1985. It lost a key market when the Pentagon canceled orders for its "ruggedized" computers, and Loral has cleaned house three times since 1985. When a Loral division flounders, Loral's strategy is often to assemble crisis teams from headquarters and other divisions. Schwartz has already formed such teams to deal with the vexing FAA contract. Loral officials have said its troubles stem from "management problems" at FAA and IBM, and one said, "I doubt if the IBM chairman sat in on the reviews." IBM was wedded to using IBM equipment. Under the contract the only way to guarantee that, it turned out, was to work on several phases of the project at once. Loral is expected to attack them sequentially and jettison some IBM gear, company officials said. "We don't have the pride of authorship that sometimes got in the way," Schwartz said. Schwartz has already told analysts he's trolling for acquisitions again. "As long as the marketplace continues to devalue these defense assets, I'm going to buy them," he said. "It's as good as chocolate ice cream."
© Copyright 1994 The Washington Post Company
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