jonathan burton

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The Stars That Make Jack Shine

Jack Welch is practically a household name, almost a GE brand unto himself. But he doesn't do it alone. He's fielded a formidable starting line-up and charged his team with ushering GE into the next century.

The House that John Built

When he was hired as chairman and CEO of SPX Corp. in December 1995, John Blystone knew that turning around the troubled Muskegon, MI-based producer of specialty tools and original equipment components to the automotive industry would be no joyride. After building a solid reputation selling specialty tools and diagnostic equipment to auto dealers and mechanics, SPX had faltered, piling on new divisions and several hundred million dollars of high-yield, long-term debt. By mid-1995, the company was looking at yet another loss-ridden year and a stock fallen from $18 a share at the start of 1994 to nearly $10. To restore profitability, Blystone had to convince SPX's 8,300 employees that change was good-though clearly some staff would have to go. Then he had to prove to them and shareholders that he was right.

His background gave him an edge. Blystone, 43, comes from a pool of General Electric talent from the Welch era-Larry Bossidy of Allied-Signal is a prominent alumnu--many of whom parlayed their GE experience into leadership positions at other industrial companies in need of change.

When SPX's board decided to implement an economic value added (EVA) financial management system, Blystone-with a turnaround track record at GE-was selected to lead the charge. Focusing on EVA, the after-tax profits a company retains after deducting its cost of capital, gives management a framework to understand the balance between investment and profitability and to increase shareholder value. The carrot at the end of EVA's stick is linking financial performance to compensation. SPX tied 185 executives to an EVA-based compensation plan in January 1996; a year later, 4,700 employees-nearly two-thirds of SPX's workforce --- were with the program.

"EVA financially rewards our people to act as owners," says Blystone, who notes that division budget increases are also now based on EVA improvement. "When you create your own value, you take a hard look at capital and R&D expenditures and say, What am I going to get for this?' People come back and say, 'We've found creative ways to get done what we needed."

To head SPX, Blystone left a promising career at GE, which he joined in 1978. Except for three years at Tenneco, he learned sales and marketing at the foot of Jack Welch's spinning wheel. "Welch did things back in the early 1980s that people are starting to do now," Blystone asserts. "GE is very hands-on, think outside of the box, recognize that people are a major part of the solution."

He also grew up around manufacturing. His father worked for GE, Rockwell, AMF, and Emerson Electric. Blystone chose the competitive GE Manufacturing Management Program, rising through the aircraft engine division to become general manager of GE

Superabrasives. In 1994, he headed to Italy as CEO of GE's Nuovo Pignone, a $2 billion conglomerate. Blystone didn't learn much Italian in Florence, but he did add a fluency in setting companies on the right foot. SPX attracted him as a "classic turnaround situation," he said in a 1995 shareholder letter, predicting that the restructuring would quickly bear fruit. "We expect to see a significant performance turnaround."

So far, Blystone has delivered on his promises. SPX reported a 1996 operating profit of $24.6 million, or $1.76 a share, on revenues of $1.1 billion, as compared with a 1995 operating gain of $7.7 million or 58 cents a share. Blystone deployed Welch-like moves of selling unprofitable or extraneous units, fixing others, and growing the remaining core business. Cost-saving measures included consolidating divisions and trimming 1,100 jobs.

"He's the most confident CEO I've ever met," says Eric Goldstein of Bankers Trust, who points to Blystone's new team, which includes GE recruits, and predicts acquisitions and expansion ahead. "They've got a lot of dry powder and are ready to go. I don't think [they] left high-paying jobs to work for a billion-dollar auto-parts supplier."

"We're continuing to make major leaps forward," Blystone contends. In March, SPX announced plans to repurchase $128 million of long-term debt, rendering the company virtually debt-free. In operations, SPX is focusing on the higher-margin, high value-added specialty service tool business, a less-cyclical segment that could account for 70 percent of sales in 1997, up from 53 percent in 1996. An agreement with Mac Tools, a division of rival Stanley Works, allows its sales force to distribute SPX products. And SPX is driving toward providing integrated systems, recently partnering with Hewlett-Packard to pair H-P software with SPX equipment, enabling mechanics to process repairs seamlessly from order to invoice.

With its universal scope and cost-saving technology, the H-P alliance could become the foundation for the House that John Builds. But even as he ushers SPX into high gear, Blystone is keeping an eye on the mile markers. "We're just taking it back to, 'We know where we're going,'" he says. "We've got enough people


JOHN BLYSTONE

President and CEO

SPX CORP.

Age: 43

Birthplace: Erie, PA.

Education: BA in mathematics and economics, University of Pittsburgh.

Family: Married; two children.

Travels: 50 percent of the time, to visit customers and company operations.

Drives: 1996 Cadillac; 1996 Ford Explorer.

Most personally rewarding business decision at SPX: Implementing EVA.

Influential figures: Jack Welch, "The best business leader in the world."

Words to live by: "Don't tell me how you wish it was. Tell me how it is and how you want it to change."

Out Of The Woods

For most of his nearly 30 years in the investment business, Stephen B. Timbers concerned himself with identifying and buying growth stocks at what he considers a reasonable price. Now he is committed to one of the riskier bets of his long career: revamping the stale Kemper family of mutual funds into a fresh contender. The Kemper funds' chief executive knows that without a powerful makeover, Kemper's asset base and market share will suffer. And change must come soon; this rapidly consolidating business is becoming a place where only the strong or the specialized survive.

In investment parlance, Kemper is a value play-a known brand with a venerable history that in recent years has fallen out of favor. Kemper funds have been in disarray since 1994 after two abortive takeover attempts of its parent, Kemper Corp., first by General Electric and then by insurer Conseco. During the turbulence, Kemper lost talented fund managers and staff, and the uncertainty crippled recruiting efforts. Finally, in January 1996, Swiss insurance giant Zurich Insurance Group bought Kemper's financial-services business, since renamed Zurich Kemper Investments.

Just closing this difficult chapter has brought a measure of stability to Kemper. A new parent gives the Chicago firm the muscle to lure top fund managers and to aggressively push marketing and distribution. With $80 billion under management, including $41 billion in mutual funds and $34 billion of institutional and pension assets, Kemper is a clear force. The firm's strength-and most of its mutual fund assets-have been on the fixed-income side of the investment spectrum. Kemper's equity offerings-where the real money has been for mutual fund companies-generally have lacked the superior stock-picking performance that inspires investor loyalty. Tellingly, just $12 billion or so of Kemper's mutual fund assets are in equities; Timbers would like to triple this number by 2000, when he hopes to have at least $125 billion under management, targeting $80 billion in mutual funds and $45 billion of institutional money.

Only an improved track record will help Kemper regain the confidence of stockbrokers and financial planners who recommend funds to their clients. But Timbers is one of those rare investment professionals who has lived through a bear market, a sobering experience that offers some cushion against the tough times at Kemper. He understands that markets eventually recognize good value in a beaten security and bid up its price. This is his goal: to fashion Kemper into one of the growth vehicles he knows so well.

"You have to have excellent investment performance," says Timbers, 52, a soft-spoken native of Madison, WI, who left New York and Chemical Bank to become chief investment officer of Kemper Financial Services in 1987. "If you don't, it's hard to do everything else right. But if that's all you do, I don't think you'll succeed."

Timbers has identified four additional building blocks to Kemper's success: popular brand recognition; a broad product line; effective distribution; and excellent support services, such as telephone help and readable monthly statements. "If you look at who is winning in the business, you'll see they are doing those five things well." He rattles off examples: Fidelity, Vanguard, Putnam, Franklin, American Funds, and AIM, each with a better track record than Kemper.

The fund industry repeatedly claims that past performance is no guarantee of future returns. But past performance, in fact, is both the top and the bottom line for Kemper and every other fund company. Equity funds that sell today, for better or worse, have received three-year rankings of four or five stars from fund-rating service Morningstar Inc. Without this endorsement, a fund is not likely to see a cascade of cash inflows; it may even see net redemption of assets. Since a fund company's income is linked to a percentage of assets under management, the more it controls the more it makes. So fund families clamor for super funds and star managers.

Kemper has three five-star equity funds, and nine five-star fixed-income funds. Timbers claims that performance has improved in recent years, a feat not yet reflected in Morningstar's data. In an effort to spice up Kemper's equity menu, he is acquiring investment management companies and building from within. Deciding that Kemper needed a value player to complement its growth-stock orientation, he snared New Jersey-based Dreman Value Advisors and the talents of contrarian fund manager David Dreman, who has a reputation for venturing into market situations where others fear to tread. It proved a wise choice that won new investors.

"They didn't have a value component, and they purchased our firm," says Dreman, whose disciplined approach to underappreciated stocks has generated above-market long-term returns.

"Steve's a good executive, astute in knowing talents of various people and taking an organization and broadening it."

Toward that end, Timbers plans to launch an aggressive growth fund and put greater emphasis on international equities. There is also a never-ending quest for talent. "You find people with good reputations and great records and bring them in," he says. "They not only help you in terms of running the fund, they help you in terms of sales." Timbers also intends to make Kemper a familiar name in retail funds from Europe to Asia. For example, as France, Germany, and Italy move slowly toward self-directed retirement plans and privatized social security, Timbers wants Kemper in the forefront with investment products and advice.

These are challenging tasks, to be sure. But Timbers has already experienced personal challenge of an excruciating nature.

While he was grappling with the Zurich acquisition and restoring Kemper, Timbers and his wife were trying to save their two young boys from a rare, crippling genetic disease called Lesch-Nyhan Syndrome. Timbers knew how to restore a company he was achieving that with Kemper. But it was up to a team of highly specialized doctors to bring his sons back to health. They weren't successful. In November 1995, three-year-old Christopher died. Two-year-old Brendan passed away in February 1996. Timbers and his wife have since created a foundation to fund research into the disease and to educate parents whose children are afflicted.

Day-to-day management is easy by comparison. Timbers is a consensus-builder with close contact to the firm's fund managers and support staff. Having an established franchise to market also helps, although he is saddled with a stable of funds that carry up-front fees, or loads, when the trend favors no front- or back-end charges. Timbers contemplates relaxing Kemper's load structure, but won't divulge details except to say, "You have to wonder whether the industry is going to migrate so there's little distinction between loads and no-loads."

Though the jury is still out on Kemper, there is apparently a good deal of confidence in Timbers. "I wouldn't bet against him," contends Don Phillips, Morningstar's president. "He's a smart man in a good industry who has some powerful things going for him, not the least of which is a deep-pocketed parent and a good brand name. I think you'll see some pretty exciting things out of Kemper funds in the next several years. I think he'll get the ship turned around."


STEPHEN B . TIMBERS

Chairman and Chief Executive

KEMPER

Born: Madison, WI.

Age: 52.

Education: B.A., Yale; M.B.A., Harvard University.

Family: Married; teenage son, Alexander; lost two sons, Christopher, 3, and Brendan, 2, to genetic disease, Lesch-Nyhan Syndrome.

Best investment decision: Buying fast-growing technology company Cisco Systems.

Important investment lessons:

1)"Trees don't grow to the sky. There are very few Cisco Systems out there."

2)"Being contrarian just for the sake of it is probably a bad strategy, but leaning against the wind is probably a good strategy."

Most admired investors: Growth-stock icon Claude Rosenberg of Rosenberg Capital Management, who established high ethical standards. And economist and author Peter Bernstein, who translates academic investment research and theories for the lay reader. Predictions: Investors will conclude that inflation is under control, and U.S. interest rates will fall. "If I'm right, the stock market is relatively cheap."

Interests: Golf-his handicap is 12-and reading history and fiction.

Peter Sontag

When Peter Sontag travels, he often hits the road on his Harley-Davidson motorcycle. But customers of his company, USTravel, the third-largest travel agency in the U.S., usually ride in higher style-the pampered beneficiaries of Sontag's customized approach to travel.

Want pizza for an in-flight meal? Need an immediate visa for a last-minute trip to China? No problem. A USTravel customer can call an emergency number from anywhere at any time, and the sole job of 50 USTravel employees-the company's elite guard-is to make sure the agency's 7,000 accounts remain happy.

"I'd like to create the perfect service delivery system," explains Sontag, 50, who co-founded USTravel in 1986 and serves as chairman and CEO. "I enable you to do business elsewhere in person. The objective is for you to be able to do it flawlessly." Notes Laura West, the manager of a USTravel office in New York, "We are trained to exhaust all possibilities."

Times are tough in the travel industry. Commercial airlines, for example, have lost $10 billion since 1990-more than they made since the beginning of commercial flight. The Gulf War and sporadic terrorism have kept Americans close to home, and the recession has encouraged executives to curtail travel. Moreover, videoconferencing is on the rise: Some analysts estimate it could replace up to 25 percent of corporate travel within the decade.

Fighting such currents, Sontag has made considerable progress. USTravel, a subsidiary of San Diego-based PS Group, has 2,300 agents at more than 900 offices in the U.S. and overseas. Between 1986 and 1992, the company's sales soared nearly tenfold to $2.3 billion from $265 million. The only larger U.S. travel companies are American Express, with 1992 sales of $6.9 billion, and Carlson Travel Group, with $3.4 billion in sales.

Sontag says he would consider pairing with smaller competitors or even with American Express or Carlson. That's practical thinking, not just contingency planning: Consolidation in the industry has been brisk, and many U.S. companies are forming alliances with companies overseas. As a result, the big are getting bigger: Ten years ago, the top 10 U.S. travel agencies accounted for just 5 percent of the industry's sales. Ten years from now, Sontag reckons, the 10 leaders could control half of the market.

With increased size comes tremendous clout: USTravel now issues 12,000 airplane tickets every day, and Sontag boasts that the airlines do "virtually anything we ask them to." For a traveler, this can mean a free upgrade or money back on a non-refundable ticket. For Sontag, each ticket is another 10 percent commission from the airline.

Sontag is part new-age executive, part old-fashioned marketer. He believes in

motivating and empowering employees, and he leads by example. Each weekday, no matter where he is, Sontag sends a computer message to his entire work force. Dubbed "Petergrams," these brief missives generally involve inspiration, praise for an employee, company news, or a personal anecdote. A recent Petergram discussed creativity and innovation: "Ideas are useless unless they are used." Another praised a USTravel agent who drove a client to the airport to catch a flight.

"It's important that everybody is on board and understands what we're trying to accomplish," the CEO says.

Sontag spent 186 nights on the road last year, but he's happy to hop off the global treadmill. His perfect vacation spot? Steubenville, OH, a small town near the West Virginia border. As a teenager in his native Vienna, Sontag gave a visiting American businessman a tour of the city. The grateful traveler, a plumbing supply salesman from Steubenville, invited 17-year-old Sontag to live with his family. Sontag made the move in 1960, graduated high school, and paid for college by working summers in a West Virginia steel mill. He owns a house in Steubenville and likes to shoot pool with his old mill pals.

If Sontag realizes a dream of becoming a U.S. ambassador, rest assured the embassy will be one of the most colorful spots in town.

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