Edition: U.S. / Global

3 Decades Building Loral, Now Trying to Save It

Published: July 28, 2003


Unfortunately for Mr. Schwartz, the main challenge may be preventing Loral from disappearing as it tries to reorganize under Chapter 11 bankruptcy protection. Many analysts say his prospects look shaky no matter how impressive Mr. Schwartz and his management skills may be.

If he succeeds in pulling Loral out of this crisis, he will provide a bravura end to a long career as one of the most unconventional and, until recently, most successful executives in the politically charged world of the military and aerospace industries.

''If you look at the world of satellites, it's a really dismal picture,'' Philip Finnegan, director of corporate analysis for the Teal Group, a consulting and research firm in Fairfax, Va., said. ''There's massive overcapacity.''

Mr. Schwartz's recovery plan for Loral includes selling its most valuable asset -- a fleet of satellites providing communications services to North America. He must also persuade creditors to support Loral's two remaining businesses: a satellite manufacturing group, currently living off a shrinking backlog of orders as it tries to weather the deepest slump in the industry's history, and a small group of satellites providing video broadcasting and communications services to developing countries.

Mr. Schwartz is hoping that industry analysts are right when they say that orders for nonmilitary satellites are likely to pick up next year. And he argues that Loral's satellites serving developing countries will become more profitable and serve as a springboard for expansion. ''I think the future is very attractive for us,'' Mr. Schwartz said. But investors seem wary.

Loral's senior unsecured bonds traded last week at less than 25 cents on the dollar and unsecured debt due in 2005 traded at 2 cents on the dollar, according to J. Armand Musey, a consultant for institutional investors in the satellite industry. ''I think the next step is liquidation,'' Mr. Musey said.

Mr. Schwartz grew up in Bensonhurst, Brooklyn. He began his career as an accountant after graduating from City College and eventually moved into management with Saul Steinberg, a family acquaintance who was in the process of turning a small computer-leasing company into a financial conglomerate. His financial skills led to an invitation to help turn around Loral, which he joined in 1972 as chairman and chief executive.

The company, a small military electronics business, was named for William Lorenz and Leon Alpert, who founded it in 1948. It had branched into plastic bottles, cable wire, meters and even toy soldiers with disastrous results. Mr. Schwartz salvaged the company by returning it to its core business. And sensing an opportunity to grow in military-related industries, he hired a Columbia University graduate student to tutor him in the physics and engineering underlying the key technologies.

''I was going to industry meetings where I was recognized as an alien, but soon I started to be able to use the jargon,'' Mr. Schwartz said in a recent interview in the company's New York offices. ''I never presumed to be an expert, but at least they no longer knew when they could fool me.''

Mr. Schwartz stood out in the armaments industry for his abiding loyalty to New York City as a base of operations, his liberal views (he opposed the Vietnam War), and for quirks like his Mickey Mouse tie clip (Mickey became Loral's internal symbol for loyal, can-do behavior).

He received the most notice for his uncanny ability to identify and acquire small companies with products that dovetailed with Loral's, as well as military or aerospace divisions languishing in larger companies. Starting in 1974 with Conic, a privately held mobile communications company, Mr. Schwartz acquired military and aerospace businesses from, among others, Xerox, Ford, Goodyear, LTV and I.B.M.

With a small team of executives, Mr. Schwartz would swoop in, offer generous stock options and performance incentives for managers and set aggressive growth targets. Business usually picked up quickly.

The acquisitions made quarter-to-quarter comparisons difficult for analysts, particularly since Mr. Schwartz kept tight control over Loral's interactions with Wall Street. But the company's impressive growth pleased investors.

When Mr. Schwartz sold the bulk of the company to Lockheed Martin for $9.1 billion in 1996, keeping only the space business for Loral, the decision disappointed some of his managers, but it solidified Mr. Schwartz's sterling reputation on Wall Street. As a reward to employees, he put $21 million into a fund that paid a bonus of more than a year's salary to everyone at Loral headquarters and those senior division executives whose jobs were at risk in the merger.

That kind of largesse attracted less attention than Mr. Schwartz's growing philanthropy and political contributions. The political donations went overwhelmingly to the Democratic Party and Democratic candidates. In 1996, President Bill Clinton played host at the White House to Mr. Schwartz's birthday celebration. Whether it was being invited on trade missions to China or White House dinners with visiting heads of state, Mr. Schwartz and Loral had clearly arrived as a military supplier in the 1990's.

''It was a great ride,'' said Frank C. Lanza, Loral's president and chief operating officer in its years of expansion and now chief executive of L3 Communications.

The aggressive culture that Mr. Schwartz stamped on Loral was not immune to missteps. In the 1980's, Loral was caught up in Operation Ill Wind, an investigation of military contractors that bribed Pentagon officials. In 1997, a former Loral employee told the government that Loral's Goodyear Aerospace unit had inflated costs in its flight-training programs for the F-15 fighter. In January, Lockheed Martin, as Loral's successor, agreed to pay $1.4 million to settle the case. Such legal wrangles have never led to charges of any sort against Mr. Schwartz.

His most serious troubles with the government grew out of reports concerning the American satellite industry's dealings with the Chinese space agency, which began launching American-made satellites into orbit with the approval of the first Bush administration. When a rocket exploded during a launching in 1996, Loral joined an accident review team. A Pentagon report later suggested that the review provided China with sensitive information about rocket guidance systems. Loral maintained that although an employee had mistakenly sent a report to the Chinese without United States government approval, the report did not contain harmful material.

A federal investigation began in 1997. Loral's involvement ended last year, when it agreed to pay $14 million in civil penalties and spend $6 million more on new controls over how it reports its activities to the government. The company neither admitted nor denied the charges.

While the China affair ended without a devastating financial penalty, Loral was not so lucky with its most ambitious venture of the 1990's. At the beginning of the decade, Mr. Schwartz was among the crowd of entrepreneurs and companies who thought that a new communications frontier could be opened by launching fleets of mobile satellites. These satellites would travel in lower orbits than geostationary satellites, making it possible for customers with handheld phones to transmit and receive calls and data. Mr. Schwartz made Loral the biggest investor in one such system called Globalstar.

''The formula for growing Loral was not a gamble, but Globalstar was a departure,'' Mr. Schwartz said. ''It was a start-up, it was a consumer product, and it was a technology that had not been proven in the marketplace.''

When Globalstar went bankrupt last year, it saddled Loral with roughly $2 billion in losses.

To gain some maneuvering room, Mr. Schwartz began discussing asset sales. This month, Intelsat, a recently privatized satellite company originally created by governments around the world to provide international service, agreed to buy Loral's satellites serving North America for as much as $1.1 billion. But as part of the deal, Intelsat insisted that Loral enter bankruptcy to block attempts by creditors to claim a stake in the satellites. Intelsat also agreed to order a new satellite, Loral's first new order in 18 months.

Speculation is now swirling about the remaining divisions of Loral. Most analysts think it makes sense for the satellite manufacturing operation to be merged into Lockheed's. The satellites that serve the overseas markets, analysts say, might seek a productive partnership with New Skies or Eutelsat, both of which are based in Europe.

''Bernard could be a big player in the industry's consolidation,'' said Timothy J. Logue, a space and telecommunications analyst for the law firm of Coudert Brothers. Whether any of the survivors will be a company named Loral and run by Mr. Schwartz seems less likely.

Photos: Bernard L. Schwartz, Loral's chairman and chief executive, in his office in Manhattan last week, with a model of a communications satellite behind him. (Photo by Don Hogan Charles/The New York Times)(pg. C1); Bernard L. Schwartz in 1980 at Loral Electronic Systems in the Bronx. (Photo by Joyce Dopkeen/The New York Times)(pg. C2)