Harry C. Stonecipher was reading the newspaper at his desk a little more than a year ago when he noticed that ailing Westinghouse Electric Corp. was looking for buyers for some subsidiaries.
He reached for the phone.
”This was off (the strategic) plan,” he recalled. ”Sometimes you can plan yourself to death.”
Stonecipher, chairman, president and chief executive officer of Sundstrand Corp., had spent much of his five-year tenure at the Rockford-based aerospace concern putting out fires and trying to restore company health.
First there was the defense procurement scandal that rocked the company in the 1980s. Then came cutbacks in defense spending, once the company`s bread and butter. Finally, the recession hit, sending the commercial aviation industry into a tailspin.
Stonecipher had responded by revamping the defense division, downsizing the company and looking for acquisitions to reduce Sundstrand`s reliance on two markets, defense and aerospace. He also wanted to increase the company`s international presence.
Defense work, which once accounted for two-thirds of Sundstrand`s aerospace sales, is down to a third. Commercial markets account for the other two-thirds. Industrial products now represent 40 percent of the company`s $1.67 billion in annual sales.
Until the hint of the Westinghouse deal fortuitously appeared on his desk, the meticulously planned diversification consisted mainly of auxiliary electrical generators for airplanes, compressors and industrial pumps.
Stonecipher admits he had nothing particular in mind when he called Richard A. Linder, head of Westinghouse`s electric systems group, to find out what was for sale. When Linder said a division that makes aircraft generators and related electric components was available, Sundstrand quickly plunked down $125 million.
”It was too good to pass up,” Stonecipher said. That purchase added $100 million a year in sales and increased Sundstrand`s dominant market share by 20 percent, corporation officials said.
Now Stonecipher is looking for what he calls a ”third leg” to further diversify and is willing to pay up to $1 billion.
”We keep looking for that big one,” he said. ”We`ve rejected a lot. We know a lot of things it won`t be. It won`t be anything that has to do with Detroit (autos). It won`t be anything in financial services.” Most likely it will be in the industrial product area, something that provides financial balance to Sundstrand`s existing divisions and increases the company`s international presence.
”Thirty-four percent of our sales are now international, and we hope to be at 50 percent by 1995-96,” he said.
That will be quite a leap for Rockford`s best-known company, founded in 1905 to make tools for the manufacture of furniture and which in 1914 branched into adding machines. In 1946, by then a major machine tool manufacturer, it added a line of hydraulic systems for airplanes.
When Stonecipher was hired away from General Electric Co.`s aircraft engine division in 1987 to run Sundstrand, the company was preoccupied with defending itself against charges by the Justice Department that it had committed massive fraud in inflating its costs on defense contracts.
Many executives in the company, its law and accounting firms, and some defense department officials were convinced Sundstrand hadn`t done anything wrong, at least nothing that other defense contractors also weren`t doing. However, the Justice Department had different ideas and had meticulously assembled a case.
Although he hired a GE colleague, Robert J. Smuland, to run the aerospace division in 1988, it became obvious to Stonecipher that he wasn`t going to be able to move the company in different directions until the fraud case was resolved.
”The full resources of management were being absorbed by the legal and accounting work on this,” he said. ”We decided to negotiate a settlement and get the situation behind us.”
The underlying problem was one common to many defense contractors in the 1980s: The Pentagon decided what product it wanted and how many copies it would buy. Then it agreed to pay vendors like Sundstrand their costs plus a percentage above that representing profit. The rub came when the projects were unexpectedly scaled back. Because the vendors had spread their development costs on a per-unit basis over the original order, any reduction meant reduced profits or even red ink.
To end the matter, Sundstrand agreed to pay a record $199 million in criminal and civil penalties and fines and to accept extraordinary government oversight at every step of the process in its remaining defense business.
Stonecipher also had decided to reduce Sundstrand`s reliance on defense work, a decision he said he made not as a result of the scandal but before he walked through the door in Rockford.
So in 1989, Sundstrand executives decided they would not pursue any more fixed-price defense contracts.
That was easier said than done.
”We have had to change from the cost-plus mentality that thrives when you are a military-based company, as opposed to anticipating what the world wants and giving it to them at the lowest cost,” Smuland said.
Fortunately, the decision anticipated by a couple of years the breakup of the Soviet Union and resulting pressure to reduce U.S. defense spending. That gave Sundstrand a head start on many other defense companies looking for commercial niches.
Then came the recession, and commercial aviation plummeted.
As Stonecipher and his team were paring employment by 22 percent to adjust to the defense and aerospace decline, he also was putting together a team of consultants, including former Chairman Don O`Hare, to find
acquisitions.
”When I first came to the company, I wondered why they had all these industrial businesses,” said Stonecipher, referring to such subsidiaries as the Michigan City, Ind.-based Sullair Corp., which makes compressors, and Milwaukee-based Falk Corp., a specialist in industrial gear reduction and coupling equipment. ”Unfortunately my judgment was flawed.
”When I looked into it, I saw the industrial divisions had good market niches. As I looked forward, I saw the greatest opportunity for growth lay in the industrial divisions,” he said.
”I went to the various divisions and asked everyone how they could double their business in five years,” he added.
One of the answers was the international market. So in 1989, as the nation was beginning to slide into recession, Sundstrand formed a joint venture with the French company Labinal to make auxiliary power units
(generators that can be operated when the engines are shut off) for airplanes.
Shortly thereafter, Sundstrand acquired control of Maco-Meudon, a French manufacturer of compressors, to give its Sullair Corp. access to overseas markets.
Meanwhile, O`Hare`s committee reported that there was an available entry to the pump industry. Sundstrand plunked down $145.3 million in early 1991 for Milton Roy Co., a hydraulic pump and meter manufacturer. That added $140 million to Sundstrand`s annual revenues.
