Long associated with Apollo missions and B-1 bombers, Rockwell has put away its lab coat in favor of electronics, automation systems, and vehicle parts. With $4 billion in cash in the corporate coffers, CEO Don Beall doesn’t rule out an acquisition or two to achieve his long-term goal of remaking the company.
December 1 1996 by JP Donlon
Don Beall, 57, wants you to know that Rockwell International isn’t a space and defense company anymore. Perhaps best known for its link with the Apollo missions, the space shuttle, and the B113 bomber, the Seal Beach, CA-based company isn’t playing in that sandbox anymore. The sale last August of its space and defense businesses-valued at $3.2 billion-to Boeing marks the culmination of a strategy Beall introduced when he became CEO in 1988. During the late 1980s, while other aerospace and defense companies such as Lockheed, Martin Marietta, and Loral consolidated or diversified, Rockwell held tight. The company used its strong cash flows to acquire and develop four diverse commercial business divisions centering on electronics and telecommunications. In 1985, Rockwell picked-up Allen-Bradley Co., a
The combination now comprises a formidable $4 billion business. Rockwell’s $1 billion-plus semiconductor systems division dominates world markets for facsimiles and data modems and now aims to grab a piece of international wireless communications and PC multimedia markets. The company holds a $3 billion automotive and light-vehicle systems business, for which analysts report strong growth potential through the end of the decade, although some on Wall Street speculate it may ultimately be sold off.
The new Rockwell, with fiscal 1996 revenues of $10.4 ‘billion and net income of $676 million, more closely resembles companies such as General Electric, ABB, Allied-Signal, Emerson Electric, Eaton, and Hewlett-Packard. Beall intends to play in the major leagues of technology-driven conglomerates. He also hopes investors reward the company with a price-earnings multiple in keeping with its new peer group.
Beall’s challenge is remaking the new Rockwell into a growth company. Now that Rockwell is debt-free, he anticipates increasing returns on equity from its present 14 percent to at least 20 percent and reaching an average internal revenue growth of 6 percent to 8 percent. Total turnover for 2000 is targeted at $18 billion. But can he deliver? After all, the new Rockwell is seven times smaller than GE and up against-by Beall’s own reckoning-”cutthroat global competition of a level never experienced before.” Still, the. Boeing deal does provide $4 billion in what to expand. During his rise to the top, Beall earned a reputation for focusing on Rockwell’s technical and operations side. He also is credited with building its industrial automation business with the help of Don Davis, president and COO. Beall, a lean, square-jawed California-born metallurgical engineer, is described by associates as being tough but fair and possessing an acute memory for detail. A former Ford executive remembers Beall as having a quick mind-”not what you expect from a bean counter”-when he headed the budget department of what became Ford Aerospace. He left Ford to join Rockwell in 1968 and soon became an executive VP of its electronics group, then president of the company’s Collins Radio Co. in 1974, and, in 1976, corporate VP. Beall served as president and COO from 1979 to 1988 and was heir apparent to Robert Anderson, who was CEO from 1974 to 1988.
According to PaineWebber analyst Jack Modzelewski, the new Rockwell compares well to its new peer group. He reckons its recent P/E of 13.9 is still cheap compared with GE’s 17.6 or Allied-Signal’s 16.1. The primary issue is how Beall will use his relatively clean balance sheet-not to mention where he intends to aim his financial firepower. Recently, CE caught up with Beall during a trip to
REMAKING A CONGLOMERATE
What was the strategy behind redefining Rockwell’s core businesses at this point in the company’s history?
The sale to Boeing of our aerospace defense businesses might be viewed as the culmination of a deconglomeration process that we have been moving toward for a long time. Over the last 12 years, we have been developing the platform for what will now become the new Rockwell as we move forward. We put about $4 billion toward acquiring about 30 businesses, the largest of which are Reliance and Allen-Bradley. We divested businesses that generated $2 billion in resources, but which were small relative to Rockwell overall and not strategically related to the company’s major activities. In effect we sought to increase our focus and to get more resources to put behind our growth businesses.
We also went through a steady recapitalization, putting $2.7 billion toward repurchasing stock. At that time, we were not experiencing a lot of top-line growth, so we used repurchasing as a shareowner enhancement strategy to lower our per-share basis and increase our return on equity.
As to the timing of the aerospace sale, we had been looking at all the possibilities for years. We didn’t feel compelled to join in the consolidation fray in the early stages, and it was important that we waited. We needed to first demonstrate that the factory automation strategy and the semiconductor strategy really were going to provide the value and results that they are, in fact, now providing.
The general recognition of Rockwell has been through its aerospace heritage. But that image didn’t reflect reality in terms of the total picture. We have worked hard at communicating that true picture. With this transaction behind us, it will be a heck of a lot easier.
The new Rockwell trades at a P/E of 13.9 as compared with GE’s 17.6 and Allied-Signal’s 16.1. Does Rockwell have some catching up to do?
Without question. We expect the new Rockwell to see revenue growth, on average, of at least 8 percent and earnings per share growth in the 15 percent range. If we perform at those levels, and I’m confident we will, we should be trading at the multiples of the companies you mentioned. We are focused on measuring ourselves against the best of our peer companies, whether in terms of shareowner value or market performance. We have a set of metrics that include companies such as Motorola, Emerson, GE, Hewlett-Packard, and ABB. We use both our primary competitors and companies with tremendous long-term performance, such as Hewlett-Packard.
Our long-term goal is to create enduring shareowner value and a global leadership franchise. Rockwell has already earned a value higher than it’s being accorded. As we roll out this new company and throw in a few quarters and year-after-year performance, I believe the market will take care of itself.
The aerospace transaction, which will leave Rockwell shareowners with roughly 3 percent ownership in Boeing, also will relieve the company of all its debt. So we end up with a lot of resources to put toward growing the new Rockwell. And I think that, with Boeing, our aerospace and defense customers will have the best combination possible. This is the best example of a big deal that is a win-win for everybody concerned that I have ever been associated with.
Regarding the Boeing transaction, how do you respond to critics who feel that $3.2 billion was on the low side for a division with sales of $3.4 billion?
Most professional commentary on the transaction has been favorable. If you compare the sale to other transactions of its type, you’ll find it’s mid-range as far as pure aerospace transactions go. The defense electronics transactions tended to go for a slightly higher multiple, but I think we got a fair price.
The transaction leaves Rockwell with a $4 billion war chest. What are your plans for that capital?
There are any number of attractive acquisitions or partnerships or alliances that would enhance all our businesses, particularly semiconductors, automation, and avionics. We know who they are, they know who we are, and we’re talking all the time. You never know when things might happen. But it’s not as if we have to do something to demonstrate our credibility and visibility.
Rockwell is a first-division player in automation. We are No. 1 in
This company is not a piker, and we have already demonstrated that. We will do something, but we don’t have to do anything right away. We have to be mindful of the fact that we want to have the company properly financed. So, unless we see very intelligent acquisitions that will enhance these businesses, we have other ways to use those resources to recapitalize the company. One definite thing we’ve said is that we’re going to take $1 billion and initiate a further repurchase program.
What are your plans for the four core divisions-semiconductor systems, automation, avionics and communication, and automotive-going forward?
We are a $10 billion enterprise going forward with strong leadership franchises that are poised for further good performance. Our semiconductor business is providing every other Rockwell business with various components and subsystems. Over the years, it has become increasingly clear that the commercial electronics businesses will be the driving force behind the company’s growth. Within that arena, we are moving into providing digital cordless telephone solutions. We’ve set up a division called the wireless communications division. And, of course, we’ve just announced the acquisition of Brooktree Corp., a leading designer and manufacturer of high-performance digital and mixed signal integrated circuits for computer graphics, multimedia, imaging, and communications applications. Brooktree’s technologies will enhance our communications capabilities by allowing higher bandwidths in data rates and accessing the Internet.
In avionics, we’re adding a lot of new product, including collision avoidance systems and satellite communication systems that will provide airline passengers with the bandwidth necessary to operate personal computers and electronics. Internationally, we are also very active in developing new aircraft in
In terms of automation, we are making big investments in software and moving from being a hardware provider to a solutions provider. In service, our global technical group is a big growth area, as we provide value to our customers by offering employee training, technical support, and aid in the groundwork involved in building a new overseas factory.
In automotive, the primary growth will come from the heavy side of the business and the application of electronics to transmissions and electronic, braking, as well as international alliances. We have formed a joint venture with Wabco, the leading brake manufacturer in
ENGINES OF GLOBAL GROWTH
What role will international markets play in the company’s future growth?
Non-U.S. sales currently account for 43 percent of the new Rockwell’s revenues. We want to bring that up to at least 50 percent. The biggest single factor that will drive us there is the continuation of the non-U.S. business development in automation. When we acquired Allen-Bradley, I think 10 percent or so of its sales were outside of the
You have said that parts of the automotive business are not integral to Rock well’s business. Is this franchise a candidate for divestiture?
We are carefully looking at all our options all the time. We sold the plastics part of automotive-about a $100 million business-because it just didn’t fit our business. For the market position that we enjoy in automotive, it has not performed up to our level of financial expectation. We have terrific people running those businesses, and I have every confidence that they will get there, but that’s an area where we still have some important performance to demonstrate.
What is the common thread that runs through all the divisions that constitute the new Rockwell?
Clearly all our businesses have a strong technology foundation. Our
Rockwell businesses also are characterized by being among the leaders in the application of progressive management. I like to think that as time goes on, we are becoming a much more market-driven, customer-driven organization that understands sales, logistics, service, channel management, and so forth. These are all defining characteristics of the company as a whole.
What is your management philosophy in spearheading an organizational change of this scale?
We’ve run this place with what I call a small-business mentality for years. In every business of the company, we insist that everybody understands who their customers are, who their competitors are, and feels a personal accountability for the success of the overall business. These ideas are fundamental to how we have managed for years.
There’s no sea change here. We’re talking about taking demonstrated performance and making it better. So this does not require radical change. I think all of our people see that, and yet feel greater accountability to make whatever part of our business they are in successful. We no longer have the cushion of tremendously good financial performance, if not growth, out of the aerospace business. We’re all working together now to demonstrate that our businesses in these four primary areas perform to the best level possible.
Do you have an established process to foster communication internally between divisions or different parts of the same division?
There are several vehicles we use. For about 10 years, we have had a management process task force with representatives from every business in the company. Periodically, the members change and the leader changes. Their job is to tear apart, in a constructive way, anything we’re doing in the company. They pinpoint key issues that go across multiple businesses, where we can do things better. We also have our own internal leadership training program, as well as councils across the businesses and technical areas that we use as vehicles to share good ideas.
In the last few months, we’ve set up a New Growth Council. We bring leaders from all the businesses and our staffs together to focus on internally derived growth through technology and the evolution of altogether new businesses.
FROM DEFENSE TO OFFENSE
How would you describe your own role at Rockwell?
Going forward, I am focused on developing this new Rockwell to its full level of potential. I feel an intense accountability-and this doesn’t take away from the accountability of any of our executives-for each of these businesses and for the company overall operating at the best levels of performance. And, therefore, I’m destined to be constantly dissatisfied.
You brought an engineering education to the post of Rockwell CEO. In taking the company forward, what sort of characteristics should your successor have?
It could be someone quite different than me. I think it will be somebody very comfortable with the technologies and market of the next century. A lot of what will define Rockwell over the next 20 years will be the exciting information, communication, and computer technologies that are all coming together to form altogether new markets. So it will be somebody who has a real feel for those, is comfortable with leading others in those kinds of endeavors, and has an intense personal accountability for being the best.
A technical background is helpful, but it’s not absolutely mandatory at all. We have some great managers who do not have technical backgrounds but are doing terrific. They may not know in detail how to design the board or create the software. Yet they are inquisitive enough and intelligent enough to know how the customer is going to use the product, even though it may be a very high-tech product. They know what goes into the product and what comes out, and they understand the value equation for customers.