"Lulu Is Home Now" Gm Buys

By John Greenwald

General Motors Chairman Roger Smith was beaming with his lights on high last week as he celebrated the biggest and boldest acquisition in his company's history. Two years ago, Smith revealed that the world's largest automaker (1984 sales: $83.9 billion) was courting a mysterious "lulu" of a company, one that would help transform GM from something of a stodgy powerhouse into a high-tech star. Now the Detroit giant was driving off with its prize. After a contest in which it outbid Ford and Boeing, GM agreed to acquire Hughes Aircraft, a major defense contractor (1984 sales: $5.8 billion), for more than $5 billion in cash and stock. The landmark deal is the largest non-oil merger ever. Said Smith: "Lulu is home now."

The purchase gives GM direct access to some of the most advanced technology in American industry. Smith, who interrupted a European trip to return to the U.S. after his company was named the winning bidder, said GM will use Hughes' capabilities to help design and build cars. Added Smith at a news conference: "Electronics, we believe, is going to be the key to the 21st century." Products manufactured by Hughes, which no longer makes aircraft, range from microchips and lasers to communications satellites and air-to-air missiles. The California company is the largest supplier of electronic equipment to the military, and the seventh biggest defense contractor.

The Hughes merger is the latest in a dazzling series of moves that Smith, 59, has undertaken as part of a program to reshape his company. Since he took over the top job in 1981, the sandy-haired chairman has been intent on revamping GM into an agile performer that can compete successfully against the Japanese. To reach that goal, he has been creating more daring deals than any of his predecessors since the 1920s, when Alfred P. Sloan Jr. welded a jumble of companies into the modern GM.

Smith's handiwork can already be seen throughout the corporation. Bent on beating the Japanese, he startled Detroit by deciding first to join them. In addition to importing autos from Japanese manufacturers, Smith has taken the unprecedented step of creating a joint venture with Toyota to build a small car in California. He further shocked the unwary by establishing a separate company to produce the subcompact Saturn, which will bear GM's first new nameplate since the Pontiac was introduced in 1926. Saturns will start rolling off the assembly line in two years.

Barely pausing for breath, Smith has directed a far-reaching corporate reorganization and has been snapping up high-tech companies that make everything from industrial robots to computer software for artificial intelligence. Prior to last week's agreement, GM's boldest acquisition was the $2.55 billion 1984 purchase of Electronic Data Systems, the world's largest data-processing firm.

After returning to Austria last week to resume meetings with GM's European board of advisers, Smith discussed his corporate strategy in an interview with TIME Correspondent William McWhirter in Salzburg. Said Smith: "The U.S. is going through the largest technological revolution in its history, and we're going to be standing right in the middle of it. Our game plan was to have E.D.S., Hughes and GM as the natural base for both growth and diversity. We are now being viewed as a high-tech company, not a medium-tech, mass- production one."

GM's freewheeling changes have shaken the rest of Detroit down to its mufflers and hubcaps. As the industry leader, GM is always watched closely. The company sells four out of every ten cars on U.S. roads, and has 23% of the world market, vs. 20% for runner-up Ford. The second largest American industrial corporation, after Exxon, GM has sales greater than those of U.S. rivals Ford, Chrysler and AMC combined, and is 2 1/2 times the size of Japan's No. 1 automaker, Toyota. With 794,000 employees, GM has by far the largest work force of any American company.

When Smith took over as GM chairman, the corporation was in a skid. Shaken by rising gasoline prices, consumers were spurning Detroit's models in favor of fuel-thrifty Japanese cars. At the same time, U.S. automakers' high labor costs and inefficient manufacturing practices kept expenses high. Seemingly blind to the new realities of the marketplace, GM continued to operate as it had when times were good. The resulting financial pain was sharpest in 1980, when GM lost a record $762.5 million.

To many observers, GM was the very model of an uncompetitive and nearly comatose American company. Decisions were handed down from the executive suite by managers who seemed afraid to take risks. GM's response to the Japanese challenge of the late 1970s was an uninspired line of front-wheel-drive cars like the Chevrolet Cavalier and the Oldsmobile Ciera that failed to win many converts from Toyotas and Datsuns. The problem seemed to lie in the sluggish and bureaucratic nature of the vast corporation. Just two years ago, Chrysler Chairman Lee Iacocca was fond of saying of GM: "Let the elephant sleep. Don't anyone wake the elephant."

Smith hardly seemed like the man to rouse the slumbering beast. A 30-year GM veteran who had climbed through the financial ranks (see box), the new chairman struck many as a gray mediocrity. In an article in the house organ GM Today, Smith preached the virtue of patience. "Don't grab the first thing that comes along," he advised. "Very rarely is that the right answer." Smith did not appear to be much more than a green-eyeshade cost cutter. Among . his initial moves were slashing employment and selling the GM building in New York City. Recalls Smith: "I was probably one of the least popular chairmen ever when I began."

In a 1982 gaffe, Smith announced bonuses for 6,000 GM managers on the same day that the United Auto Workers signed a contract with the company calling for $2.5 billion in wage concessions. Angry workers viewed Smith's announcement as the supreme example of executive arrogance.

But Smith was also beginning to move in creative directions. On March 1, 1982, he sat down to dinner with Toyota Chairman Eiji Toyoda at New York's Links Club and agreed to a joint venture to build compacts at what was then a shut-down GM plant in Fremont, Calif. Though the unique partnership outraged Smith's rivals like Iacocca, who sued to block it, a court ruled that the arrangement violated no law. The first cars from the plant, bearing the Chevrolet Nova nameplate and modeled on the Sprinter, which Toyota sells in Japan, are arriving this week in U.S. showrooms. Sticker price: $7,195.

The ambitious Nova project is only part of Smith's Japanese strategy. To obtain more small cars for the American market, GM in 1981 bought 5% of Suzuki, a Japanese automaker that now produces 100,000 vehicles a year that Chevrolet sells as the Sprint. A year later GM invested an additional $200 million in Isuzu, another Japanese firm, to modernize a plant outside Tokyo. It currently turns out 200,000 autos a year for Chevrolet.

Smith also took a hard look at how GM went about its business. Since the days of Sloan, the company had been divided into five automotive divisions, an arrangement that gave each a large measure of control over its products. During the 1970s, though, the divisional boundaries began to blur. The result was distressingly similar lines of look-alike cars that differed from one another mainly in nameplate and price tag. Smith's solution: a shake-up to restore responsibility to lower management. To do that, he combined GM's venerable divisions into a small-car group for Chevrolet and Pontiac and a large-car one that handles Buick, Oldsmobile and Cadillac. He also closed down the Fisher body division, switching body engineering and production to the new groups.

But Smith's deepest passion has been to upgrade GM's technology. To obtain new skills, he created a special task force to scout acquisitions. "We looked at every electronics company there is," Smith recalls. "If you can name it, we looked at it." The investigators invented code names for prospective targets and kept close watch on which firms were winning Government research contracts. When one of their favorites received a large award, the secretive onlookers were delighted. "They never knew it," says Smith, "but we were as excited as they were."

One promising move was the 50% investment that GM made in Japan's Fujitsu Fanuc, a major producer of industrial robots. The two firms formed a joint venture called GMF Robotics, which supplies the automaker with assembly-line machines. Due mainly to the link with GM, the world's largest user of robots, GMF has become the biggest U.S. robotics firm. Around GM headquarters, it is jokingly known as "Roger's little robot company."

A fierce determination to overtake Japanese carmakers led Smith to launch the Saturn project, GM's most ambitious new auto enterprise in 60 years. Saturn got under way in 1982 after GM engineers concluded that the company could not build a small U.S. car that would be cost competitive with Japanese models. The planners estimated that a vehicle then on GM's drawing board could cost $2,000 more than comparable Japanese autos. Smith told the designers to try again. They did, and determined that the way GM made small cars would have to change radically.

Smith views Saturn, which was formally unveiled last January, as a showcase of automotive innovation. The car, which will be built by a newly created company, is a leading example of "intrapreneurship" -- the practice by which large firms give employees freedom and financial backing to pursue their ideas. Declares Smith: "We expect to achieve tremendous efficiencies in Saturn through the use of leading-edge technologies and new business and management systems so advanced they don't exist anywhere in the world, not even in Japan." The four-cylinder car will be built in preassembled sections on highly automated lines. It will deliver 45 m.p.g. on city streets and be sold through its own dealership network.

The Saturn project has triggered a frantic bidding war among states for the 6,000-worker plant that GM will build to assemble the car. In all, 25 Governors, including Mario Cuomo of New York and James Thompson of Illinois, have made pilgrimages to GM in hopes of getting the facility for their states. The scramble has become a distraction and something of an embarrassment to GM, which hopes to pick a location this summer.

While the Saturn project was being planned, Smith's high-tech talent scouts were continuing their hunt for acquisitions. Hughes Aircraft was an early favorite. Considered a rival to Bell Laboratories as an electronics developer, Hughes was precisely the type of company that Smith sought. "They are a storehouse of technology," he says. "Hughes' single biggest asset is its brainpower and teamwork." But Hughes coveted its independence and initially spurned GM. The rebuff turned the automaker toward Electronic Data Systems, a Dallas-based computer-services firm that Founder H. Ross Perot had built into the largest company in its field. Smith sees E.D.S. as the key to upgrading GM's worldwide computing operations. Under the Texas firm's guidance, GM machines performing tasks as varied as running payrolls and controlling robots will be forged into a unified network. As a first step, GM made 10,000 of its data-processing workers employees of E.D.S.

Smith concedes that he would have been deeply disappointed if Perot had rejected GM. "We were seriously discussing buying a defunct college in Iowa, hiring scientific talent and teaching our people about data processing and electronics," Smith recalls. "With E.D.S., we weren't just buying a bumper and a fender. We were getting a running Indianapolis 500 racer at the starting line, already preparing to run away from the pack."

Meanwhile, trustees of the Howard Hughes Medical Institute decided last August to offer Hughes Aircraft to the highest bidder because of various seemingly insoluble tax and legal problems. It turned to the Wall Street firm of Morgan Stanley to handle the auction. "The Russians would have been happy to make the highest bid," quipped Joseph Perella, a managing director of First Boston, a Hughes adviser. From the outset, GM seemed the most likely buyer. Detroit's recovery had left the largest U.S. automaker with some $9 billion to spend, even after the E.D.S. acquisition, and Smith badly wanted Hughes.

The bidding resembled a game of high-stakes poker. Ten major companies expressed interest to Robert Greenhill, the Morgan Stanley partner who oversaw the deal. By last month, all but GM, Ford and Boeing had dropped out. Two of the bidders, Allied Corp. and the Signal Cos., decided to merge with each other rather than continue to pursue Hughes. On May 16, the three finalists submitted their initial sealed bids. In private, around-the-clock sessions with Morgan Stanley, which stands to earn up to $20 million for conducting the sale, the contenders refined their offers. Last Tuesday Medical Institute trustees met in Manhattan to pick a winner.

The nine trustees, who include Irving Shapiro, a retired Du Pont chairman, gathered at 9 a.m. around the 30-ft.-long oak desk in Morgan Stanley's boardroom. Surrounded by shelves holding pigskin-bound volumes of Morgan's previous deals, the trustees heard first from Hughes Aircraft Chairman Allen Puckett. He said that any of the three bidders would be an acceptable parent. The trustees then examined the complex offers, and debated them until late afternoon. At around 5 p.m., they decided on GM. One of the determining factors, in addition to price, was GM's commitment to operate Hughes as an independent company rather than a tightly controlled subsidiary. That arrangement should help Hughes maintain its technological leadership.

Just what does the automaker want with Hughes? In Salzburg, Smith was enthusiastic about the possibilities. "I'm certain that the values in motorcars that are going to be introduced and expanded fastest will come from electronics more than anywhere else." The GM chairman envisions cars equipped with collision-avoidance systems and integrated fuel and speed controls. "You're still going to be the driver," Smith says, "but it will be more fun, easier, safer and certainly more economical to drive." An added payoff: the merger will provide Hughes-made satellites to link GM's global computer operations.

Some experts doubt that Hughes will fit in all that smoothly with GM. Says a top executive of a rival car company: "Hughes is into Star Wars. How that relates to vehicles that move along the ground is difficult to fathom. Improvements in cars will be evolutionary, not revolutionary." Concurs a like-minded analyst: "The Hughes deal is a diversification, pure and simple. It has absolutely nothing to do with the vehicle industry."

Critics also argue that Smith may be moving too quickly in too many directions. "The company is in a state of disruption," claims the rival car executive. "You cannot take an organization that big, shake it, and not make the employees sick from all the dizziness." Indeed, signs of confusion are visible. "I don't know who reports to me," complains a senior GM manager whose duties were changed in the corporate reorganization that began in January 1984.

Nonetheless, Smith remains unruffled and as eager as ever for change. Reviewing his tenure as GM chairman, Smith contends that the company was actually helped by the big financial loss it suffered before he took office. Says he: "The worst years made it more acceptable to understand that something had to be done. But once we sold that, it was then our turn to say, 'Let's not just go two steps, let's go into the 21st century.' You don't just stumble into the future. You create your own future."

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With reporting by Paul A. Witteman/Detroit and Frederick Ungeheuer/New York