Hughes Corporation's Dramatic Transformation

question 68

Essay

Hughes Corporation's Dramatic Transformation
In one of the most dramatic redirections of corporate strategy in U.S. history, Hughes Corporation transformed itself from a defense industry behemoth into the world's largest digital information and communications company. Once California's largest manufacturing employer, Hughes Corporation built spacecraft, the world's first working laser, communications satellites, radar systems, and military weapons systems. However, by the late 1990s, the firm had undergone substantial gut-wrenching change to reposition the firm in what was viewed as a more attractive growth opportunity. This transformation culminated in the firm being acquired in 2004 by News Corp., a global media empire.
To accomplish this transformation, Hughes divested its communications satellite businesses and its auto electronics operation. The corporate overhaul created a firm focused on direct-to-home satellite broadcasting with its DirecTV service offering. DirecTV's introduction to nearly 12 million U.S. homes was a technology made possible by U.S. military spending during the early 1980s. Although military spending had fueled much of Hughes' growth during the decade of the 1980s, it was becoming increasingly clear by 1988 that the level of defense spending of the Reagan years was coming to a close with the winding down of the cold war.
For the next several years, Hughes attempted to find profitable niches in the rapidly consolidating U.S. defense contracting industry. Hughes acquired General Dynamics' missile business and made 15 smaller defense-related acquisitions. Eventually, Hughes' parent firm, General Motors, lost enthusiasm for additional investment in defense-related businesses. GM decided that, if Hughes could not participate in the shrinking defense industry, there was no reason to retain any interests in the industry at all. In November 1995, Hughes initiated discussions with Raytheon, and two years later, it sold its aerospace and defense business to Raytheon for $9.8 billion. The firm also merged its Delco product line with GM's Delphi automotive systems. What remained was the firm's telecommunications division. Hughes had transformed itself from a $16 billion defense contractor to a svelte $4 billion telecommunications business.
Hughes' telecommunications unit was its smallest operation but, with DirecTV, its fastest growing. The transformation was to exact a huge cultural toll on Hughes' employees, most of whom had spent their careers dealing with the U.S. Department of Defense. Hughes moved to hire people aggressively from the cable and broadcast businesses. By the late 1990s, former Hughes' employees constituted only 15-20 percent of DirecTV's total employees.
Restructuring continued through the end of the 1990s. In 2000, Hughes sold its satellite manufacturing operations to Boeing for $3.75 billion. This eliminated the last component of the old Hughes and cut its workforce in half. In December 2000, Hughes paid about $180 million for Telocity, a firm that provides digital subscriber line service through phone lines. This acquisition allowed Hughes to provide high-speed Internet connections through its existing satellite service, mainly in more remote rural areas, as well as phone lines targeted at city dwellers. Hughes now could market the same combination of high-speed Internet services and video offered by cable providers, Hughes' primary competitor.
In need of cash, GM put Hughes up for sale in late 2000, expressing confidence that there would be a flood of lucrative offers. However, the faltering economy and stock market resulted in GM receiving only one serious bid, from media tycoon Rupert Murdoch of News Corp. in February 2001. But, internal discord within Hughes and GM over the possible buyer of Hughes Electronics caused GM to backpedal and seek alternative bidders. In late October 2001, GM agreed to sell its Hughes Electronics subsidiary and its DirecTV home satellite network to EchoStar Communication for $25.8 billion. However, regulators concerned about the antitrust implications of the deal disallowed this transaction. In early 2004, News Corp., General Motors, and Hughes reached a definitive agreement in which News Corp acquired GM's 19.9 percent stake in Hughes and an additional 14.1 percent of Hughes from public shareholders and GM's pension and other benefit plans. News Corp. paid about $14 per share, making the deal worth about $6.6 billion for 34.1 percent of Hughes. The implied value of 100 percent of Hughes was, at that time, $19.4 billion, about three fourths of EchoStar's valuation three years earlier.
-What risks did Hughes face in moving completely away from its core defense business and into a high-technology commercial business? In your judgment, did Hughes move too quickly or too slowly? Explain your answer.

---

Definitions:

Prices

The amount of money required to purchase goods or services, often determined by factors such as supply and demand.

Maximizing Utility

The process by which individuals allocate their resources to obtain the highest possible satisfaction from their consumption.

Marginal Utility

The change in satisfaction or usefulness obtained by consuming one additional unit of a good or service.

Price

Price is the amount of money required to purchase a good, service, or asset, determined by factors like supply, demand, production cost, and market competition.