A Work In Progress
January 1 1996 by JP Donlon
Other than General Electric, conglomerates don’t get much respect. Diversified companies are hard to love, perhaps because many are hard to understand. When it comes to Tenneco, or years a diversified natural-gas producer, Wall Street did neither. This was due in part to its reduced common payout to shareholders since the end of 1991. It also was partly clue to its image as an energy company with a porridge of cyclical industrial businesses. The fact that Tenneco’s J.I. Case construction and agricultural equipment unit was losing a torrent of cash at a time when its other units were struggling and its debt had reached a crippling $7 billion didn’t help. To boot, as Tenneco gradually began turning around its ailing businesses, its respected chief executive, Michael H. Walsh, was diagnosed with brain cancer at the end of 1992. Before he died in May 1994, Walsh turned the helm over to the company’s president and COO, Dana Mead. Mead, 59, who came to Tenneco after 14 years with International Paper, continued his predecessor’s strategy of reducing debt, paring costs, and slimming the company to a core group consisting of packaging, automotive equipment, shipbuilding, and natural gas. But he also had a few ideas of his own. A
Although Tenneco transports or sells through its 19,300-mile pipeline system about 16 percent of the natural gas consumed in the
As part of his shift to emphasize value-added process, Mead created a new subsidiary, Tenneco Business Services. It aims to reduce operating costs associated with routine, high-volume transactions. Using new information technology and process redesign, TBS is intended to function as an inside-outsourcer, consolidating such activities as payroll, finance and accounting, and procurement of nonstrategic materials. Ever the quantitative strategist, Mead employs this in conjunction with a matrix management system he devised to identify objectives, assign responsibilities, and track progress. This combined-arms approach should allow for a reduced, highly focused headquarters staff. In April, Tenneco will relocate its headquarters from
Has he delivered results? Wall Street has yet to be convinced (see chart), but some indicators are encouraging. Industrial debt-to-capital ratio was down to 44.2 percent at the end of the third quarter ended Sept. 30, from 69.2 percent in 1991. Since mid-1994, the company has unloaded $2.3 billion in assets; redeployed $2.1 billion in commitments to acquisitions, joint ventures, and internal investments; and invested more than $600 million in repurchases of Tenneco common stock. From a $14 billion diversified conglomerate in ’91, Tenneco has become a $12 billion diversified manufacturer. Mead doesn’t rule out further asset sales, and he seeks acquisitions that would accelerate his goal of 15 percent annual growth. Some question whether Mead’s choice of primary businesses are really growth platforms. “I never said it would be easy,” he says, “but we’ve positioned ourselves internationally to do it.”
When you came on board four years ago, Tenneco was losing $4 to $6 a share. You restructured the company from six businesses to four. What was the strategy behind the transformation and where do you go from here?
We addressed five major challenges during the restructuring. First, we had to save the company from bankruptcy, avoid a junk-bond rating, and generate cash. Then we moved to transform the organization into a macro-operating company that could leverage management and processes across all four businesses. At the same time, we tried to solidify our focus and concentrate on growth while strengthening Tenneco to prevent it from being victimized by the cyclical nature of the economy. Finally, we relied on a strategy of creating value by performance rather than the market in order to bolster the assets we wanted to sell off, such as J.I. Case and Albright & Wilson.
Today, we have paid down nearly $7 billion in debt. Our 1995 earnings were in the $4 range. And the company now has growth prospects in each of its four remaining businesses: automotive parts, packaging, gas, and shipping.
What common factors unite Tenneco’s rather diverse businesses?
Aside from being capital-intensive, each of our businesses is in a mature sector, meaning growth might be steady but not dramatic. In addition, there’s no magic technology that will help us build a product light years ahead of our competitors. Thus, we needed to improve our margins by things we can measure, such as operating cost. This meant we had to cut down machinery/production failure. By our calculations, Tenneco had $2.9 billion in internal failure costs in 1993, more than 20 percent of our revenues.
Are you saying you could cut 20 percent of the cost and still manufacture the same quality products?
You actually end up with better quality in many instances, because you’re preventing failure in the manufacturing process. And that gets added back into the divisional budgets. So we tell the head of Automotive, “This year, your goal is to take $100 million of failure costs out. That will throw $50 million to your operating line, and we’re adding that to your budget for next year. So you can’t make your goal next year—which drives your bonus and merit pay—without accomplishing this.”
By the end of last year, we had taken out $1.8 billion worth of failure costs and added $840 million to our operating line. That’s part of how we increased our income with flat revenues during the recessionary time between 1992 and 1993.
BEYOND “SLASH AND BURN”
It’s one thing to re-engineer a company by “slashing and burning.” Now how do you expand its four relatively slow-growing businesses?
You can build relatively mature companies in several ways. One is acquisitions. This can be a dicey proposition, particularly for us, since making acquisitions was not seen as our strong suit. Thus, we set explicit acquisition criteria. First, it had to be a strategic fit that we understood and could manage, meaning we would not buy a broadcast company, for instance. Next, it had to have growth potential that would fit our vision of growing this company 15 percent a year. Finally, it couldn’t bring a lot of dilution, and it had to build shareholder value.
Another way to build companies is through international growth. Most of our businesses are not growing as fast domestically as they are internationally. So, we’ve made a strategy of growing in international markets where we could take advantage of our core competencies in auto parts, for example. In addition to establishing ourselves in the major car markets in
There’s another opportunity in the replacement-parts market for cars, motorcycles, and other vehicles. For instance, we just formalized an agreement with
The global arena clearly also presents Tenneco with opportunities in the shipbuilding industry. It seems many emerging countries such as
No, but they can’t all be right either. Many of these countries look upon shipbuilding as a national resource, because as long as they’re building relatively unsophisticated ships, they can stay in the market with low labor costs. But the trend is heading toward much more sophisticated vessels for safety and cost reasons. If you can engineer a low-priced product that will not induce additional cost during the ship’s life cycle, you will be competitive. Therefore, we’re putting $70 million into our shipyard to make it state of the art.
Much of the investment is for a computer-integrated steel-cutting and fabrication project that uses robots instead of people to cut materials and punch holes. When the project is finished, Tenneco will have cut its labor hours per ton by 50 percent.
How much of Tenneco’s shipbuilding business is going to be commercial versus defense?
Right now, our shipbuilding revenues are about 5 percent commercial and 95 percent defense. Over time, the commercial is expected to increase to perhaps 30 percent of revenues.
How will the drastic defense budget cuts affect your long-term business?
The Navy’s plan is to maintain a 12aircraft-carrier force. Tenneco is building two right now and should begin another sometimes in the late ’90s or early 2000s. There is significant additional business associated with nuclear refuelings and overhauls of some major ships.
Tenneco also has mounted a major effort with its allies in Congress to allow it to compete for construction of the Navy’s next class of submarines, known as the New Attack Submarine. This has the potential for $50 billion to $60 billion in revenues over the next 20 years.
Do you foresee Tenneco splitting up into different operating units a la AT&T?
I’ve never said I wouldn’t do that. But that’s a potential end game, and we’re too early into the transformation process. We still need to build enough value into these companies that they could stand on their own if we split. We’re not quite there yet.
WALL STREET SKEPTICS
When you became chairman, Tenneco stock was about $46-plus, and it recently closed around $43. Why hasn’t Wall Street given you the benefit of the doubt?
It is giving us a fair amount of benefit, but there is skepticism about many things, one of which is the fact that conglomerates are completely out of style. If I announced this morning that I was going to break up this company, the stock would jump 10 points. And when we finished, we wouldn’t have any more than what we have; in fact, we’d probably have a lot less.
In addition, acquisitions are not particularly popular right now, except for consolidations. The only reason Tenneco stock has decreased is that investors were concerned about dilution if we bought Gates Rubber in
ON THE MOVE
You are moving Tenneco’s headquarters from
The die was cast for me in 1988, when Tenneco sold its oil business, and we were no longer predominantly an energy company. If energy is only a minor part of your business, you don’t want to operate out of
When I began considering the headquarters move, I knew I didn’t want to pull hundreds of jobs out of
The headquarters move will pay for itself in a year or so, because it allows me to take two airplanes out of the fleet, along with a maintenance facility and major hangar; cuts down travel; and gives us a better hub for travel to and from
You’re becoming a virtual CEO.
I’m trying to. That way, I’m free to get out with the troops a lot more than I do now. Some people say, “If you have all these electronics, why do you have to be out in the field?” My answer: “Do you want me to make a billion-dollar acquisition and not see the whites of the eyes of the person I’m dealing with? I don’t think so.”
You have a reputation of being something of a curmudgeon about the Information Superhighway.
I think I’m a realist. In this so-called “knowledge economy,” most CEOs are frustrated by their inability to realize the benefits as fast as we thought we could. Perhaps we misled ourselves. Or perhaps we oversold the benefits of all this high-tech stuff in industrial
You have a different kind of background than many CEOs, in that you served in the military and don’t have an MBA. Is that an advantage, disadvantage, or unimportant?
I don’t think it makes much difference. As a CEO, I provide leadership and direction, make midcourse corrections, formulate strategy, and build the company’s credibility.
Should more CEOs come from
I think we have enough of them. Leadership comes in all kinds of packages and from all different walks of life. Leadership ability, not background, is the key.