The Hughes Legacy: The Jewel Bowing Bought

By Robert N. Wold

The high-technology industry that designs and manufactures communications satellites had its beginnings only 40-some years ago. It has already stirred a potpourri of fascinating corporate sagas, which are in turn blended from the ingeniousness, inventiveness, competitiveness and downright colorful emotions of talented human beings.

Consider, for example, the legacy that’s uniquely Hughes. Feast visually from the panoply representing 11 families of communications satellites, all given birth into the Hughes dynasty, on page 48. Their patron, of course, was Howard R. Hughes, and this among his many enterprises was first known 68 years ago as the Hughes Aircraft division of the Hughes Tool Co.

Consider also, from 1963 through April 2000, that 165 Hughes-built communications satellites were launched, including 19 for the U.S. government, plus 21 scientific or weather spacecraft. About 40 percent of the entire world’s operating commercial communications satellites were designed and built by Hughes.

Even today, at Hughes’ satellite factory in El Segundo, CA, there’s a backlog of orders valued at more than $4 billion.

Selling The Family Jewels

Nearly 15 years ago in December 1985, for $5.2 billion, publicly-held General Mo-tors Corp. (GM) acquired lock, stock and barrel, all assets of the privately held Hughes Aircraft Co. that was incorporated in 1953.

Eleven and one-half years later in January 1997, GM began selling off some of its Hughes family jewels when Raytheon Co. acquired Hughes Electronics Corp.’s (HE) defense businesses for $9.5 billion. These businesses in 1996 had produced revenues of approximately $6.3 billion.

In January of this year, GM’s HE decided to also sell the satellite systems businesses–including Hughes Space and Communications–to The Boeing Co. for $3.75 billion. During 1999, the satellite businesses produced revenues of approximately $2.3 billion. (At press time, the transfer to Boeing was expected to finalize by third quarter 2000.)

Thus, GM has so far invested $5.2 billion and gotten back $13.25 billion. What Hughes jewels remain at GM’s HE? The answer: see below.

The Background Story

The Hughes Aircraft division of Houston-based Hughes Tool Co. was formed by Howard Robard Hughes (HH) in 1932 as a shelter for financing his pet aviation projects.

HH loved to design and fly experimental aircraft. In his H-1 Racer, which is still on display at the Smithsonian’s Air and Space Museum, he set numerous world speed records.

As a tall and handsome 18-year old Texan in 1923, HH was the heir to his father’s tool company, which sold patent-protected drilling bits to the petroleum industry. The bit business had struck oil, so to speak, and by 1925 he had married one of Houston’s socialites, Ella Rice. HH and his first Mrs. Hughes soon moved to southern California to explore new frontiers for Howard’s business acumen and hobbies.

HH loved investments, ownership and power. During the ’40s, he acquired both a motion picture studio called RKO, for which he “discovered” ingenues such as Jean Harlow and Jane Russell, and an airline called TWA.

At the fledgling Hughes Aircraft division during World War II, HH tried to compete with established airframe companies such as Douglas, Lockheed and Boeing for military aircraft contracts. Progress was slow until the noted assembly-line shipbuilder, Henry Kaiser, invited HH to partner with him in a government contract to design and construct a giant flying boat to be used for troop transports.

HH designed the H-4 Hercules seaplane, using wood as a principal component. “The Spruce Goose,” as the media called it, was to become the world’s largest aircraft with a wingspan of 319 feet, a tail section rising eight stories and a weight of more than 200 tons. Its missions would be to transport more than 700 troops per flight. When the partners couldn’t complete the project within allotted contract funds, Kaiser quit but Hughes’ pride pushed him to personally finance the project to completion. Also, he was spurred by ridicule from certain members of the U.S. Congress.

The war ended before completion of the giant craft but on November 2, 1947, HH himself piloted it in a flight that lasted only 70 seconds but reached an altitude of 70 feet and was then set down safely in the waters of Long Beach Harbor. It was the only time that airplane ever flew. Today, the “Goose” is in the care of an aviation museum in Oregon.

Hughes won another wartime contract, to build 100 Hughes-designed F-11 reconnaissance airplanes, but that contract was cancelled at war’s end. More significantly, his own test flight of the experimental XF-11 in July 1946 ended in a horrific crash in a Beverly Hills residential area adjoining the Los Angeles Country Club. His severe injuries included about 100 broken bones but HH managed to recover with the help–or perhaps, as history suggests, the hindrance–of a vast treasure trove of prescription drugs.

This drug trauma, stirred into his increasingly secretive lifestyle, deeply affected relationships with executives, counselors, customers and friends throughout his remaining 30 years.

The 1953 Insurrection

By the beginning of the ’50s, Hughes had designed and sold electronic fire and navigational control systems for the F-102 Interceptor, described by many as “the backbone of U.S. air defense in the ’50s.” By 1953 however, internal turbulence had begun to maim the ranks at Hughes. It was also the year in which the Hughes Aircraft Co. was incorporated.

Fortune reported in February 1954, “The rise of the Hughes Aircraft Co., of Culver City, CA, was one of the wonders of the post-Korean industrial buildup. Six years ago the company was a putterer on the fringes of the aircraft industry; its gross business was about $2 million–on which it lost $750,000. Three years ago the company had become an important specialist in advanced electronics; sales were $67 million, profits $1.7 million. By early 1953, HAC could be called a major national resource, and sales were running at a clip of about $200 million.”

Then came the modifier: “Last autumn…this brilliant pace setter of the electronics boom seemed suddenly to be on the verge of managerial disintegration.”

Much of the blame was on HH himself, whose unavailability and unpredictable management methods were destroying team morale. His overwhelming dependence on prescription drugs since the near-fatal accident in 1946 had apparently destroyed his normality.

Among many notables in HAC’s electronics research and development laboratory were two scientific giants, Dr. Simon Ramo and Dr. Dean E. Wooldridge. In addition to fire and navigational control systems for the Air Force, their work included development of the Falcon air-to-air guided missile which the Air Force bought in large numbers. (By 1960, the Air Force had bought 30,000 Falcons.)

Fortune reported, “Hughes emerged with a virtual monopoly on the Air Force’s advanced electronic requirements. The rise in deliveries had reached $197 million in 1953, with an estimated earnings of $8 million, and a backlog of more than $600 million.”

During one week in September 1953, however, after their threats to resign were repeatedly ignored by HH, four key people–including Ramo and Wooldridge–walked out.

Air Force Secretary Harold Talbott, according to Fortune, was livid. First he said, “This is a damn peculiar situation–a strike by management against ownership.” When he was able to personally confront HH, Talbott fired a loud cannon. “You have made a hell of a mess of a great property,” he boomed. “By God, so long as I am Secretary of the Air Force, you’re not going to get another dollar of new business.”

Overnight, HH found contrition. To underscore his penitence, he professed a new willingness to stand back and let others make decisions, and he had attorneys create a non- profit Howard Hughes Medical Institute to hold the stock of the new corporation. The drugs, however, were controlling HH’s life and, reportedly, he began to “fall out of touch” while slipping into what the media described as “a slovenly way of life.”

By the late ’50s, the lost brainpower assets at HAC had been replenished but there were new customer problems. The Defense Department was now focused on intercontinental ballistic missiles (ICBMs) as the Sputnik-stirred Cold War with the Soviet Union escalated and the demand for short-range air-to-air missiles, an HAC specialty, quietly diminished.

Not incidentally, Ramo and Wooldridge had moved into the heart of the nation’s ICBM developments. After leaving HAC in 1953, they were soon engaged as the principal consultants to the government’s ultra-secret Air Force ICBM project, which was located in Culver City, very close to HAC’s buildings. In later years, Ramo and Wooldridge became the “R” and “W” of “TRW.”

The Medical Institute action later came back to haunt the Hughes empire when HH died in 1976. The Medical Institute’s control of HAC stock, and the highly publicized absence of a legitimate personal will for HH, produced major court battles that lasted for years until the Internal Revenue Service was finally satisfied.

Preparing For The ’60s

In November 1954, soon after the company’s insurrection, Lawrence A. “Pat” Hyland came from Bendix Corp. to be HAC’s new vice president and general manager. Heading the extensive list of projects undertaken in the Hyland era was the development of satellite communications technology, based on work that began in 1958-59 in Hughes’ radar department under the leadership of Dr. Harold A. Rosen, Dr. Donald D. Williams and Thomas Hudspeth. Together, these three are credited with designing and constructing the series of Syncom satellites, under a contract with NASA. In 1963-64, Syncom 2 became the world’s first geosynchronous satellite, and Syncom 3, the world’s first geostationary satellite. These gentlemen and their successors have enabled their company to be a dominating leader in the worldwide communications satellite industry.

“Hughes Aircraft Up For Grabs”

During the ’60s and ’70s, HAC boomed. By 1982, its annual payroll alone exceeded $1.6 billion. By 1983, two years before its acquisition by GM, HAC had 1,500 ongoing pro-jects and 12,000 separate products, services and functions.

On December 12, 1983, Fortune headlined, “HUGHES AIRCRAFT UP FOR GRABS.” The subhead added, “In a lifetime of misspent opportunities, Howard Hughes built one lasting monument– a high-technology company so superlative at what it does that the Pentagon considers it an important national resource. Now, because of the workings of an obscure court case in Delaware, Hughes Aircraft, the second-largest privately held company in the United States (after Mars, the candymaker), may soon be up for sale.”

The article detailed a myriad of complex tax problems with the IRS. “The court fight,” Fortune reported, “is for control, not of Hughes Aircraft, but of its sole owner, a charitable outfit called the Howard Hughes Medical Institute.”

What Jewels Remain?

One year after the IRS had settled its claims on the Hughes estate, General Motors com-pleted its acquisition. GM Chairman Roger Smith, with considerable enthusiasm, pre-dicted the technological synergies of GM and HAC would be very beneficial for GM’s future automobiles. (Strangely enough, outspoken GM Director Ross Perot said he was not convinced.)

Smith, on the other hand, told colleagues that “getting Hughes was like getting Cal Tech and MIT combined.” No one argued with that.

Following Raytheon’s acquisition of the HE defense businesses–which had been using the mantle of HAC–the Lexington, MA-based company had 127,000 employees.

As to Washington-headquartered Boeing, its Space and Communications (S&C) business is at Seal Beach, CA, a suburb of both Los Angeles and Long Beach. In 1999, Boeing S&C had revenues of $7 billion, while Hughes’ S&C businesses had revenues of $2.3 billion. Boeing S&C, pre-merger, has 37,100 employees, about half of them in southern California.

So, what jewels remain at Hughes Electronics?

HE is now focusing on “high-value, high-growth entertainment and business communications services” through its remaining DirecTV, Panamsat and Hughes Network Systems (HNS) units, which not incidentally will be major customers for Boeing Satellite Systems. The backlog of satellite orders brought to the merger by Hughes S&C includes several for DirecTV and Panamsat, as well as the futuristic Spaceway broadband project of HNS.

All three of these HE units are leaders in their respective markets. Collectively, they generated revenues of nearly $1.7 billion during this year’s first quarter alone, thus suggesting a collective revenue achievement in excess of $7 billion for the full year 2000.

And oh yes, there’s one more unsold jewel: the venerable Hughes name, including that of the original Hughes Aircraft division of Hughes Tool. For years, the marques of Hughes satellites have included “HS”–obviously for “Hughes Satellite.” For the future, however, there will be no more HS 601s or Hughes 702s. The new marques will read ‘Boeing,’ and Boeing Satellite Systems will be headquartered in El Segundo under the leadership of Tig Krekel, currently the president of Hughes S&C. HH would probably be very proud.

California-based contributing writer Robert N. Wold may be reached by e-mail to [email protected].