III. The Breaking Up Years
In the mid 1990s two forces were to lead to the dismantling of the Hughes Aircraft Company. First, Hughes and SCG were increasingly successful. The stock market was viewing HCI and DirecTV as growth businesses in a “dot com” era. At the same time GM was struggling, burdened with high labor and benefit costs in a very competitive market. A point was reached when the market value of the GMH stock exceeded that of the much larger GM Company stock. The following events occurred leading up to the breaking up and selling off of Hughes.
Hughes Telecommunications and Space Mike Armstrong became the new CEO of Hughes replacing Mal Currie who had replaced Wheelon. Mike , the first Hughes CEO to be recruited from the outside (IBM) and not a scientist, proceeded to reorganize the company into “Sectors” and the Hughes Telecommunications and Space (HTS) Sector was created. HTS consisted of HCI, HNS, DirecTV and the Hughes Space and Communications Company (HSC) which was the satellite manufacturing unit; effectively the old SCG prior to the formation of the services units. The Aerospace and Defense business of Hughes was formed into a unit and renamed Hughes Aircraft Company and the overall company was renamed and recapitalized as Hughes Electronics. Armstrong wanted to grow Hughes Electronics and take advantage of the consolidation underway in the defense industry and acquire defense companies. GM, with its own troubles had a different idea. They wanted to be a seller rather than a buyer. Consequently the Hughes Aircraft Company unit was put up for sale and purchased by Raytheon for $9.5B. All that remained of Hughes Electronics was HTS.
PanAmSat PAS was a privately owned start up satellite communication company which successfully challenged the Intelsat monopoly for international communications and was a major HSC customer for the HS-601 satellite. When the founder of the company died it became available as a perfect opportunity for HCI to expand its US domestic market success with the Galaxy system into to the international arena. PAS and the Galaxy portion of HCI were merged and became a publicly traded company, PanAmSat , with Hughes an 81% owner. PAS soon reached 18 satellites in orbit providing global coverage. Subsequently PAS was purchased and taken private by a private equity company and then sold to Intelsat which itself had been privatized and was no longer owned by government controlled telephone companies as it had when it was founded in 1964. Intelsat is now the world’s largest satellite communications company with over 50 satellites, a long trip from the 1965 Intelsat I launch.
Hughes Space and Communications HSC continued to grow but not without some significant challenges. A contract to deliver, in orbit, 10 medium earth orbit satellites for $1.2B with start up company ICO was negated by ICO’s bankruptcy leaving HSC with the satellites and a large amount of money owed.
Two HSC satellites failed to reach orbit when the Chinese Long March launch vehicle failed, both at about a minute after liftoff. The subsequent launch failure investigation raised concern in the US government that improper technical transfer was occurring, exacerbating concerns that lingered from Ronald Reagan’s decision to permit the Chinese to launch US made satellites. An extensive investigation indicated that Hughes had done nothing improper but the damage was done as the US tightened restrictions on exports not only to China but all foreign countries, a controversy that continues to this day.
The excellent SCG reliability record suffered a setback when a subtle phenomena called “tin whiskers” caused in orbit failures of several HS-601 satellites. This metallic growth of tin coating in digital electronics is sustainable only in the vacuum of space and so went undiscovered during the usual ground testing. The resulting failures perturbed Hughes and its customers including PAS and HNS causing disruption in important satellite services such as TV distribution and private networks. The resulting loss of service made headlines across the nation and reminded the country of how dependant it had become on satellite communications and reliable satellites. The problem was limited to a few satellites and fixed for those HS-601s yet to be launched.
Despite these troubles HSC continued double digit growth in sales and earnings, reaching sales approaching $2.7B in 1999, launching a satellite a month and employing 8,000 people— significant growth from SCG’s humble origins in 1961.
In 2000 the then Hughes management found it desirable to sell HSC and separate it from the PAS, DirecTV and HNS units which had grown to be sizeable businesses. Hughes found a willing buyer in The Boeing Company that purchased HSC for $3.75B and folded it into their space operations as Boeing Satellite Systems (BSS).
The End of Hughes and SCG Rupert Murdoch had wanted to get into the direct broadcast business for many years and he coveted DirecTV as a shortcut to that objective. After a long complex and high profile process Murdoch had his way and purchased DirecTV through his News Corporation Company for an equivalent price of $6.6B. DirecTV was formed as a separately traded company controlled by Murdoch. Subsequently, control was won by John Malone, another high profile investor, also had been interested in direct broadcast That status continues today. DirecTV is now a mature company with 20 million US subscribers and 7 Million Latin American subscribers.
During this process HNS was spun off as a separately traded company and then was purchased by Charley Ergin’s Echostar which is the major competitor of DirecTV. HNS is subsidiary of the organization and is the last entity of Hughes Aircraft Company bearing the Hughes name.
The company that GM purchased for about $5B in 1985 was sold off in pieces for about $20B. The strategic synergy GM had hoped for was never fully realized but their investment was very profitable.
Authors Note: I wrote this in response to a suggestion from Jack Fisher. The intent was to have a short history of SCG as a framework for others to add to and embellish. As you can see I was brevity challenged but for a good reason. As I got into it I was reminded about how much we had done over forty years and how hard it is to summarize. Each sentence of this short history could be expanded into another multi-page story. For example I state that we rescued four Hughes satellites using the shuttle. Each one of those rescues is an interesting story all of its own. The same is true for many of the other summary statements. We hope our colleagues will join in by documenting what is their part of the dramatic story of the Space and Communications Group of Hughes and also rectify any oversights and errors that might have been caused by a faulty memory.
We were fortunate to be part of incredibly talented team that, over four decades, changed the world and made it a better place. It was quite a journey, and is worth documenting.
A tremendous summary – well written and comprehensive – could be expanded into a book !