Training Set of 80

June 30, 2015 mnaexpert

Becton Dickinson & Co.

June 30, 2015 mnaexpert

Public Company
Founded: 1897
Incorporated: 1906
Employees: 28,277
Sales: $7.16 billion (2008)
Stock Exchanges: New York
Ticker Symbol: BDX

Becton, Dickinson and Company (BD) develops, manufactures, and markets medical supplies and devices, laboratory equipment, and diagnostic systems for use by healthcare professionals, medical research institutions, clinical laboratories, the pharmaceutical industry, and the general public. The company’s operations are arranged into three worldwide business segments: BD Medical, BD Diagnostics, and BD Biosciences. BD Medical is one of the world’s largest suppliers of hypodermic needles and syringes, insulin delivery syringes and pen needles, intravenous (IV) catheters, and prefillable drug delivery systems. Among other products produced by this unit are surgical blades and scalpels, ophthalmic surgical instruments, critical-care monitoring devices, and ACE-brand elastic bandages. BD Diagnostics specializes in products used to safely collect and transport diagnostic specimens for infectious disease testing. BD Biosciences focuses on producing research and clinical tools used in the study of the normal and the disease processes of cells and cell components. These products include fluorescence-activated cell sorters, antibodies for cell analysis, reagent systems, and cell-imaging systems. With operations in the United States and numerous countries around the world, BD derives more than half of its revenue from its international business activities.

FIRST 50 YEARS: STEADY, CONSERVATIVE GROWTH

The company was founded in 1897 by two salesmen, Maxwell W. Becton and Fairleigh S. Dickinson, as a partnership first to sell medical thermometers and syringes (imported from Europe) and then to manufacture them. Expansion into new product lines in the early years came via acquisitions. In 1904 the partnership acquired Philadelphia Surgical Company and Wigmore Company, both of which were makers of surgical, dental, and veterinary instruments. The manufacture of medical bags was added the following year through the purchase of Comstock Bag Company. One year later, Becton, Dickinson and Company was incorporated in New Jersey and built a manufacturing plant in East Rutherford, for the production of thermometers, syringes, and hypodermic needles.

Even with the company’s new plant, Becton, Dickinson continued to rely on European suppliers for some of the products it sold, mainly because of the higher quality of the imports versus those made domestically. Along these lines, the acquisition of New York-based Surgical Supply Import Company in 1913 was completed to gain the company’s network of high-quality foreign suppliers. The purchase also helped broaden Becton, Dickinson’s product line through such Surgical Supply products as the Asepto bulb syringe.

During World War I, Becton, Dickinson’s import supplies were, in large part, cut off, propelling the company deeper into manufacturing its own products. In the midst of the war, the president of Surgical Supply, Oscar O. R. Schwidetzky, who stayed with Becton, Dickinson following the acquisition, developed a new American-made cotton elastic bandage. In 1918 the company conducted a contest among physicians to name the new bandage, out of which emerged the ACE bandage, “ACE” being an acronym for “All Cotton Elastic.” Meantime, the slow but steady growth of Becton, Dickinsonwas evidenced by the company reaching the milestone of $1 million in sales in 1917, two decades after the founding.

Throughout the early decades, the family-run business built a reputation as a maker and marketer of products superior to those of its competitors. Through its product development, and acquisitions, the company kept pace with the latest advances in medical technology and standards. Such was the case with the 1921 purchase of Physicians Specialty Company, which was headed by Andrew W. “Doc” Fleischer, who like Schwidetzky took a position with Becton,Dickinson following the merger. Fleischer had developed the mercurial sphygmomanometer (an instrument for measuring blood pressure) as well as the binaural stethoscope. In 1924 Becton, Dickinson began making syringes designed specifically for insulin injection, marking the company’s first foray into the diabetes care sector. The following year Fairleigh Dickinson received a patent for the Luer-Lok tip, a locking collar that more securely attached a hypodermic needle to a syringe, thereby making injections safer, less painful, and more accurate.

Through the difficult years of the Great Depression, the company’s workers retained their jobs by agreeing to a series of voluntary pay cuts. A key development in the World War II years came in 1943 with the acquisition of Multifit, which had been founded by Joseph J. Kleiner eight years earlier. Kleiner had developed a syringe system with interchangeable barrels and plungers. Kleiner’s product had a number of advantages, including reduced labor costs, reduced breakage because it was made from a very strong kind of glass, and enhanced convenience for its users. Kleiner also brought toBecton, Dickinson another key concept he was developing called the Evacutainer. Patented in 1949, the Evacutainer used a vacuum system, a needle, and a test tube to draw blood from patients. The device was later renamed the Vacutainer tube, and it marked Becton, Dickinson’s entry into the burgeoning field of diagnostic medicine. Also in 1949 the company’s first manufacturing facility located outside New Jersey was established in Columbus, Nebraska. Overall revenues reached $16 million by 1950.

POSTWAR EXPANSION INTO A FORTUNE 500 COMPANY

Throughout its first 50 years Becton, Dickinson was a conservatively managed, family-run business. The enterprise entered the affluent postwar years with a solid market share in medical supplies and was well prepared for a major expansion. The company recognized that its traditional approach to business would not be appropriate for the future. Therefore, in 1948, the sons of the founders, Henry P. Becton and Fairleigh Dickinson Jr., both astute businessmen, assumed managerial control of the company.

With Dickinson as CEO and Becton serving in a variety of other capacities during the 1950s, Becton, Dickinson gradually expanded its product line. By 1964, more than 8,000 products were being manufactured by Becton,Dickinson, including a broad line of medical supplies of superior diagnostic accuracy. The company divided its business into four operating divisions: medical health, laboratory, animal research and testing, and overseas sales. In the course of an acquisition program, Becton, Dickinson purchased Carworth Inc., the leading producer of laboratory mice; Canton, Ohio-based Wilson Rubber Company, maker of rubber gloves for surgical, industrial, and household use (acquired in 1954); the Bard-Parker Company, manufacturer of surgical blades and scalpels (1956); and several specialized research laboratories. Increasingly, Becton, Dickinson’s strongest growth was experienced in the market for disposable items, with the company becoming a leader in this burgeoning area. The 1955 acquisition of Baltimore Biological Laboratories (BBL) was particularly important in this regard as BBL was already making sterile, one-use blood donor kits for the American Red Cross (with Becton, Dickinson acting as distributor). By 1964, such products as disposable syringes and needles accounted for 60 percent of the company’s $70 million in sales.

The new management team also was noted for its attention to international expansion. The first such move came in 1951 with the acquisition of the company’s Canadian distributor to create Becton Dickinson Canada, Ltd., its first wholly owned subsidiary and foreign operation. The following yearBecton, Dickinson acquired the Mexican firm MAPAD, S.A. de C.V., maker of syringes, needles, and clinical thermometers, and established a manufacturing plant in Le Pont-de-Claix, France. The Brazilian market was next on the expansion list, and Becton, Dickinson began supplying Page 72 | Top of Articlesyringes in that country in 1956 and eventually became the number one medical supply company there. In 1963 Becton, Dickinson constructed a disposable syringe plant in Drogheda, Ireland.

The company’s need for massive amounts of funding to pay for the conversion from reusable products to sterile disposable products led to a 1962 initial public offering (IPO) of stock at $25 per share. The following yearBecton, Dickinson stock began trading on the New York Stock Exchange. By 1970 the company’s rapid rate of growth had landed it on the Fortune 500 list for the first time.

EARLY SEVENTIES: NEW FDA REGULATION AND NEW MANAGEMENT

During the 1970s, Becton, Dickinson continued to make gains in the medical supplies business, despite increasingly difficult market conditions. The world oil crisis of 1973-74 caused a reduction in petrochemical feedstocks, which, in turn, made medical raw materials difficult to obtain. In addition, the Food and Drug Administration (FDA) planned to adopt the same strict certification standards for diagnostic equipment as it had applied to pharmaceuticals. This would delay the commercial introduction of new products and, with technological advances, expose them to higher rates of obsolescence. Although these conditions lessened Wall Street’s interest in companies in the medical industry, Becton, Dickinson remained highly optimistic. With sales figures doubling every five years and with 19 percent of all sales derived overseas, Dickinson declared to shareholders that the company did not fear the impending device regulation, but instead was helping the FDA to formulate its new regulations.

When the FDA’s Medical Device Act was enacted, Becton, Dickinson found, to some dismay, that 85 percent of its products were subject to the new regulation. Wesley J. Howe, who succeeded Dickinson as president and CEO in 1974, was confident that the company’s products would be able to meet all the new FDA requirements; to be sure, he hired a team of legal and technical experts to guarantee standardization.

Despite growing regulation, the early years of Howe’s direction were marked by a continuity of policies; Howe was handpicked by Dickinson and dedicated to the same conservative style of management. To increase efficiency, Howe automated and integrated more of the company’s facilities and reduced his staff by 13 percent. To increase his influence, he also replaced 14 of the company’s 17 division presidents.

Howe’s leadership was proving highly effective. In one area, Becton, Dickinson’s marketing approach was particularly effective: targeting insulin users through doctors, diabetes associations, camps, pharmacies, and pharmacy schools. With control of almost 100 percent of the insulin syringe market, Becton, Dickinson saw its sales increase to $456 million in 1975.

LATE SEVENTIES: BOARDROOM INTRIGUE AND TAKEOVER BIDS

This success, however, was greatly compromised in the boardroom by Fairleigh Dickinson, who, despite having relinquished his posts voluntarily, continued to demand managerial control. At the heart of the matter was a conflict between family members determined to maintain control and board members who favored control by a more professional corporate elite. Although Howe remained above this conflict, several other important managers did not; ultimately, Dickinson would order Howe to fire them. In 1977, four board members resigned. With morale an increasingly serious problem, Howe asserted his position. Four new, “unprejudiced” board members were named to the board, and Dickinson was relegated to the ceremonial post of chairman. The power struggle was not over, however.

Dickinson was asked to approach the Salomon Brothers investment banking firm and initiate a study on a company Howe wanted Becton, Dickinson to acquire. When completed, the study warned of numerous problems with the takeover. Howe maintained that Dickinson had sabotaged the study and, when the situation proved unresolvable, ordered Dickinson removed from the payroll.

Dickinson then resorted to another strategy. With 4.5 percent of the company’s stock, Dickinson authorized Salomon Brothers to line up additional investors to lead a takeover of Becton, Dickinson. A Salomon agent named Kenneth Lipper approached several companies, including Avon, American Home Products, Monsanto, and Squibb, in an effort to set up a takeover. Becton, Dickinson’s attorneys warned Lipper that his action was illegal. Rather than call off the search for buyers, Lipper challenged the attorneys to stop him in court, cognizant that a well-publicized court battle would only gain more attention for his cause.

On January 16, 1978, before Lipper could be stopped, Becton, Dickinsonlearned that the Philadelphia-based Sun Oil Company had acquired 34 percent of its stock. The transaction lasted only 15 minutes and involved 6.5 million shares at a purchase price of $45 each, well above the trading price of $33. Sun created a special subsidiary called LHIW (for “Let’s Hope It Works”) to manage the shares until a controlling majority of shares could be acquired.

The takeover had severe consequences. Like Becton, Dickinson, Sun had just emerged from an important battle against founding family interests. H. Robert Sharbaugh, CEO of Sun, came into strong disagreement over the takeover with the founding Pew family and was eventually forced out of the company. Becton, Dickinson, in the meantime, learned that Sun’s purchase had been conducted off the trading floor, in violation of numerous laws. Finally, three Becton, Dickinson shareholders sued Fairleigh Dickinson, complaining that they had been excluded from Sun’s tender offer.

The New York Stock Exchange refused to file charges against Salomon and instead turned the matter over to the Securities and Exchange Commission (SEC). At this point, Sun decided to dispose of its interest in Becton,Dickinson and offered to indemnify Salomon against any liabilities resulting from court action. The legality of the takeover was no longer in question. Instead, the question concerned the manner in which Sun should dispose of its Becton, Dickinson shares. With Sun no longer in pursuit of Becton,Dickinson, the only clear beneficiaries of the takeover were the lawyers left to pick up the pieces.

Ironically, Sun and Becton, Dickinson had a common interest in the divestiture. If the 34 percent share were placed on the market in one parcel, share prices would plummet and Sun would lose millions. Becton, Dickinson, on the other hand, opposed summary disposal because large blocks of its shares could fall under the control of still other hostile acquisitors. An agreement was finally reached in December 1979, under which Sun would distribute a 25-year debenture convertible into Becton, Dickinson shares. The unprecedented agreement ensured both a gradual spinoff of Becton,Dickinson shares and the maintenance of stable share prices. Although the agreement was said to have cost Sun an extremely large sum of money, Sun was apparently satisfied.

Fairleigh Dickinson continued to seek injunctive relief from the SEC and remained under attack from Becton, Dickinson shareholders demanding the return of the $15 million profit from the original Sun tender offer. Sun’s board at this time was nervously awaiting the response of its shareholders to the costly defense of Salomon Brothers. Around this time, American Home Products made a brief and uncharacteristic hostile bid for 2.5 percent ofBecton, Dickinson—by comparison with Sun, a minor incident. Ironically, Sun’s debenture scheme prevented any company from gaining greater control of Becton, Dickinson.

RESTRUCTURING AND A REFOCUSING ON THE CORE

The first order of business after this debacle, according to Howe, was to position Becton, Dickinson for future growth. With company profits rising, Howe arranged to reinvest cash on hand into new projects. He reorganized the company into 42 units so that each division’s performance could be more accurately scrutinized. Unprofitable operations, such as a computer parts manufacturer, were either sold or closed down. Older products were reassessed and, in some cases, improved; for instance, insulin syringes were redesigned for more accurate dosages. Foreign sales were stepped up, and, despite a negative effect on earnings, an expansion of the product line was carried out. Whereas some new products were added by takeovers, others, such as the balloon catheter, were developed internally.

The expansion had been justified to ensure future viability, but by 1983 bad investments had cost the company $75 million, $23 million alone from a failed immunoassay instrument division. Bad planning caused production stoppages and cost overruns. Howe then came under criticism for failing to invest heavily enough in research and development. With remedial measures in place, the company’s financial condition had improved greatly by 1985. That year the company declared an $88 million profit on sales of $1.44 billion. Much of this turnaround, however, came from nonoperating profits resulting from the sale of unprofitable divisions and a reduction in overhead. Howe instituted a new strategy involving slower growth rates and increased productivity. To balance this more modest business plan, Howe allocated a 5.1 percent share of revenue to research and development, particularly for more cost-effective new products, and purchased a 12 percent share of a company that manufactured equipment for synthesizing DNA.

In the late 1980s, Becton faced increased competition on the domestic front, but continued to maintain its estimated 70 percent to 80 percent share of the needle and syringe market. This period also was marked by the company’s move into a new corporate headquarters in Franklin Lakes, New Jersey, in 1986 and a transition in leadership. In 1987 Raymond V. Gilmartin was named president of the company, then added the CEO title in 1989, with Howe remaining chairman. Gilmartin had joined Becton, Dickinson in 1976 as vice-president of corporate planning.

INTERNATIONAL EXPANSION AND ACQUISITIONS

Sales increased from $1.71 billion in 1988 to $2.47 billion in 1993 as Becton,Dickinson moved into many new global markets and accelerated new proprietary product introductions. The firm focused expansion efforts on Latin America, the Asia-Pacific region, and Europe. By 1993, international sales contributed 44 percent of annual sales. Howe, who was credited by Robert Teitelman of Financial World with reenergizing Becton, Dickinson, retired that year and was supplanted as chairman by Gilmartin.

Becton, Dickinson introduced new drug delivery and blood handling products in the early 1990s that helped reduce healthcare workers’ exposure to acquired immune deficiency syndrome (AIDS) and hepatitis. Some of the company’s newest diagnostic tests helped researchers and physicians determine when to begin drug therapy for cancer and AIDS patients. In 1993 the firm moved its PRECISE brand pregnancy test from the professional to the over-the-counter market. Becton, Dickinson’s investment of 5.6 percent of its 1993 revenues represented a continuing accent on new product introductions.

As criticism of high healthcare costs accelerated in the early 1990s, the wisdom of Howe’s shift to more cost-effective new product introductions became evident. Becton, Dickinson positioned its diagnostic tests as accurate, fast ways to reduce healthcare costs by speeding diagnosis and treatment.

In mid-1994 Gilmartin left the company to take the top position at pharmaceutical giant Merck & Co., Inc. Tapped as his successor was Clateo Castellini, who was head of the company’s medical unit and had joinedBecton, Dickinson in 1978.

Under Castellini, who was born in Italy and had extensive international experience, the company actively expanded its overseas operations in the mid- to late 1990s. Despite the economic turmoil in the region during much of this period, the Asia-Pacific region was the object of much of this growth. In 1995 the company entered into a joint venture in China to produce medical products for the Chinese and other markets. That same year Becton,Dickinson set up a subsidiary in India to construct a manufacturing plant. When it finally opened in 1999, it boasted an annual capacity of more than one billion disposable needles and syringes, making it one of the largest facilities of its kind in Asia. In 1998 Becton Dickinson acquired Boin Medica Co., Ltd., the largest medical supply company in South Korea. The company also began expanding in Latin America, outside of its two strongholds, Mexico and Brazil.

Flush with annual free cash flow of $350 million, Becton, Dickinsonearmarked some of the money to buy back shares of its stock to improve earnings per share. The company also made a number of acquisitions, particularly in the late 1990s, a period of consolidation in healthcare across the board, from hospitals to insurance providers to pharmaceutical firms to medical product makers. In 1997 Becton, Dickinson spent $217.4 million on two major acquisitions: PharMingen Inc., a privately held maker of reagents for biomedical research with annual revenues of $30 million; and Difco Laboratories Incorporated, a manufacturer of media and supplies for microbiology labs with sales of $82 million. Six more acquisitions were completed in 1998, the most significant of which was the purchase of the Medical Devices Division of the BOC Group for about $457 million. Among the ten purchases completed in 1999 were Clontech Laboratories, Inc., maker of genetic tests; Biometric Imaging Inc., producer of cell analysis systems for clinical applications; and Transduction Laboratories, manufacturer of reagents for cell biology research.

In the late 1990s Becton, Dickinson was troubled by a spate of lawsuits arising from healthcare workers who had contracted bloodborne diseases using the company’s conventional, un-guarded needles and syringes. The suits alleged that safer needles had been available for years but Becton,Dickinson had not been promoting their use. For its part, the company said that it had invested more than $100 million into development of safer products, which were available for its customers to purchase, but it was up to the hospitals and medical centers to make the conversion. By decade’s end, a shift to safer needles was clearly underway, in part because of government mandates at the state level.

REORGANIZING AROUND THE BD NAME

The financial results for 1999 were a disappointment, stemming from weaker than expected sales in Europe and emerging markets and from an ailing home healthcare unit, which made such items as ear thermometers and blood pressure monitors. A restructuring was launched in the second half of the year that included the company’s exit from certain product lines within the home healthcare sector (a primary exception being ACE bandages). In addition, the company reorganized its remaining operations into three business segments: BD Medical Systems, BD Biosciences, and BD Preanalytical Solutions (later BD Clinical Laboratory Solutions). Becton,Dickinson also began implementing a global brand strategy in which the “BD” name would appear on all of the company’s products, either alone or alongside such well-known brands as ACE, Vacutainer, and Tru-Fit. Becton,Dickinson ambitiously aimed to have its new “BD” logo “become as universally recognized worldwide as the Red Cross.”

At the beginning of 2000, 20-year company veteran Edward J. Ludwig was named president and CEO of BD, with Castellini remaining chairman. Under Ludwig, the company continued to restructure; in September 2000 it announced the elimination of 1,000 jobs from the company workforce as part of a cost-cutting and profit-boosting drive. At the same time, BD was spending hundreds of millions of dollars on research and development and manufacturing overhauls to produce a new and safer generation of syringes and catheters to meet the requirements of the Needlestick Safety and Prevention Act of 2000, which was designed to prevent the infection of healthcare workers from inadvertent needle jabs. BD Biosciences, which had been built mainly via such late 1990s acquisitions as PharMingen, Clontech Laboratories, Biometric Imaging Inc., and Transduction Laboratories, grew still larger following the January 2001 purchase of Gentest Corporation, a specialist in reagent systems for detecting toxicity in prospective drugs, for $29 million. By 2002 revenues at Becton, Dickinson had surged beyond $4 billion, fueled in part by a 38 percent increase in sales of the new lines of safety-engineered needle-based products.

During the following fiscal year, two of the company’s three main units were renamed: BD Medical Systems to BD Medical and BD Clinical Laboratory Solutions to BD Diagnostics. Also that year, BD introduced a glucose-monitoring device for diabetics as it ventured into new territory hoping to capture 10 percent of the $6 billion worldwide market for such devices within five years. Three years later, however, the company was forced to exit from this highly competitive arena after achieving disappointing annual sales of only a little more than $100 million. In the meantime, in July 2004 BD paid $100 million to rival needle-maker Retractable Technologies, Inc., to settle a six-year-old case brought by the Texas firm accusing BD of conspiring to block it from the market. A little more than a year later, BD sold genetic test maker Clontech for $62 million to enable BD Biosciences to concentrate more of its resources on producing clinical and research tools used in the discovery of pharmaceutical drugs. Becton, Dickinson for fiscal 2005 reported record net income of $722.2 million on record revenues of $5.41 billion.

While BD’s growth continued to be driven primarily by internally developed products, the company remained open to targeted acquisitions. In February 2006 BD Diagnostics was bolstered with the purchase of San Diego-based GeneOhm Sciences, Inc., for $232.5 million. GeneOhm, founded in 2001, was a pioneer in the development of rapid diagnostic tests for the detection of so-called healthcare-associated infections. Such infections, which were a growing problem around the world, were typically passed between hospital patients via open abrasions, cuts, and incisions. In early 2008 the FDA granted approval for a GeneOhm test for a particularly virulent form of staph infection. Analysts believed this and other GeneOhm offerings had the potential to generate hundreds of millions in annual revenue as more hospitals adopted the tests. In the meantime, BD Diagnostics expanded again in December 2006 by purchasing TriPath Imaging, Inc., for $361.9 million. Based in Burlington, North Carolina, TriPath specialized in the development of molecular tools for cancer screening, diagnosis, prognosis, and therapy monitoring.

Because many of Becton, Dickinson’s core products were healthcare staples, the firm was relatively insulated from economic downturns. Its performance during the fiscal year ending in September 2008, as the global economic crisis commenced, supported this contention. Record results were again achieved, including $1.13 billion in net income and $7.16 billion in revenues, with these figures up 27 percent and 12.5 percent from the previous year, respectively. Strong cash flow enabled BD to increase its dividend for the 36th consecutive year and to return another $450 million to shareholders in the form of share repurchases. The company also spent nearly $1 billion on research and development and in capital investments, including the $42.9 million purchase of Cytopeia, Inc., in May 2008. As a producer of advanced flow-cytometry cell-sorting instruments, Cytopeia strengthened BD Biosciences’ position in key areas of cell-based research such as cell therapy research, stem cell research, and drug discovery and development. Overall, backed by its production of essential healthcare products, its strong cash flow, and a healthy balance sheet, Becton, Dickinson was confident of emerging from the economic crisis even stronger than when it began.

Key Dates

1897:: Maxwell W. Becton and Fairleigh S. Dickinson form partnership.
1904:: Philadelphia Surgical Company and Wigmore Company are acquired.
1906:: Partnership is incorporated as Becton, Dickinson and Company; factory is built in East Rutherford, New Jersey.
1913:: Surgical Supply Import Company is acquired.
1917:: Sales reach $1 million.
1918:: Company introduces the ACE bandage.
1921:: Company acquires Physicians Specialty Company.
1924:: Company begins making syringes designed specifically for insulin injection.
1925:: Fairleigh Dickinson receives a patent for the Luer-Lok tip.
1943:: Multifit, maker of a syringe with interchangeable parts, is acquired.
1948:: Henry P. Becton and Fairleigh Dickinson Jr., sons of the founders, assume managerial control of the company.
1949:: Company enters diagnostic medicine sector with the patenting of the Evacutainer blood collection device.
1951:: International expansion begins with the formation of a Canadian subsidiary.
1955:: Baltimore Biological Laboratories is acquired, enlarging the firm’s presence in the burgeoning market for disposable medical products.
1962:: Company goes public.
1974:: Wesley J. Howe is named president and CEO.
1978:: Sun Oil Company acquires a 34 percent stake in the company.
1979:: Becton, Dickinson and Sun reach agreement on the eventual disposal of Sun’s stake.
1980s:: Restructuring and disposal of noncore operations.
1986:: Headquarters are shifted to Franklin Lakes, New Jersey.
1989:: Raymond V. Gilmartin is named CEO.
1994:: Clateo Castellini is named chairman, CEO, and president.
1997:: PharMingen Inc. and Difco Laboratories Incorporated are acquired.
1998:: The Medical Devices Division of the BOC Group is acquired.
1999:: Company reorganizes its operations into three business segments: BD Medical Systems (later BD Medical), BD Biosciences, and BD Preanalytical Solutions (later BD Diagnostics); company launches a global brand strategy focusing on the “BD” name.
2000:: Edward J. Ludwig succeeds Castellini as CEO.
2006:: BD Diagnostics is bolstered with the purchases of TriPath Imaging, Inc., and GeneOhm Sciences, Inc.

Nicor Inc.

June 30, 2015 mnaexpert

Public Company
Incorporated: 1953
Employees: 3,700
Sales: $2.7 billion (2006)
Stock Exchanges: New York
Ticker Symbol: GAS
NAIC: 221210 Natural Gas Distribution

Nicor Inc. is a Naperville, Illinois-based holding company for one of the United States’ largest gas distribution companies, Nicor Gas, and several other subsidiaries. Nicor Gas is a regulated gas distribution utility serving about 2.2 million residential, commercial, and industrial customers in northern Illinois, but not including the city of Chicago. Nicor’s second largest unit is Florida-based Tropical Shipping. Operating a fleet of ten company-owned and 8 chartered vessels, it is one of the largest containerized cargo carriers serving the Caribbean and the Bahamas, shipping building materials, food, and items used by the area’s tourist industry from ports along the East Coast of the United States and Canada. Nicor is also involved in a number of other energy ventures, including heating and cooling solutions and billing options for residential customers, wholesale natural gas marketing, and engineering consulting services for gas transmission systems and pipelines.

NORTHERN ILLINOIS GAS FORMED: 1953

Nicor’s history begins in the early 1950s when the Commonwealth Edison Company, then a diversified Illinois utility, began the process of divesting its natural gas distribution business. In 1953 Commonwealth Edison formed Nicor’s predecessor, Northern Illinois Gas, to operate its gas utility properties. Ni-Gas became operational the following year and in 1955 was spun off to Commonwealth Edison stockholders. At its start, Ni-Gas was the 13th largest gas distributor in the country and the second largest gas company in Illinois.

Five goals established for Ni-Gas by president Marvin Chandler, who took office in November 1954, were Separation, Symbolism, Supply, Sales, and Service. Separation entailed taking over functions handled by Commonwealth Edison, such as meter reading, customer service, and the selling of appliances. At the heart of Symbolism was a branding effort to distinguish Ni-Gas from both Commonwealth Edison and its former gas business in the area, Public Service. Increasing the supply of natural gas was especially important because some 100,000 homes were on a waiting list for gas heating, a situation that was complicated by regulatory red tape. Because Ni-Gas was competing against its former corporate parent for industrial business as well as in the sale of stoves, water heaters, clothes dryers, and other household appliances, Chandler also emphasized the company’s sales capacity. Finally, solid service was important to keeping customers satisfied and a key to continued growth. Expansion was not one of Chandler’s expressed goals, but he seized an opportunity to grow the business through acquisition when the owner of Union Gas & Electric Co. of Bloomington, Illinois, approached Ni-Gas about buying him out. An agreement was reached and the deal was completed in June 1955, adding nearly 12,500 new customers to Ni-Gas’s customer base of 500,000. More importantly, the Bloomington area was home to Illinois State University and a number of industries, and increasing in population, providing Ni-Gas with a source of increasing sales.

In the early 1960s, Ni-Gas grew rapidly. On July 12, 1961, it acquired the municipal gas system of Watseka, Illinois, and on December 31, 1963, it purchased the outstanding stock of the Allied Gas Company of Paxton, Illinois. By 1962 it had more than 800,000 customers. Between 1960 and 1965 per share earnings doubled. During this period Chandler launched an exploration effort so that Ni-Gas could become familiar with the drilling process should a time come when the company might face a supply shortage.

Ni-Gas began drilling and found a small amount of gas in Oklahoma, but it had no expectations of satisfying a major share of customer demand through the drill bit. In the second half of the decade, Ni-Gas continued to take advantage of opportunities that arose to expand its operations by acquiring gas companies in adjoining territories. In 1965, for example, the company extended service to 35 additional communities, bringing the number of communities served to more than 400 and the number of customers to more than 900,000. At the end of the year it purchased the properties and business of Princeton Gas Service Company of Princeton, Illinois, and the following year acquired the gas utility business of Hicksgas Gifford, Inc., of Gifford, Illinois.

NEW PRESIDENT: 1969

In 1969 C. J. Gauthier succeeded Chandler as Ni-Gas president. Chandler stayed on as chairman and CEO for another two years. During that time Ni-Gas completed a major acquisition, picking up the Mid-Illinois Gas Company of Rockford, Illinois. It was the company’s largest-ever gas company acquisition, adding about 80,000 customers in the Rockford-Freeport area.

The natural gas crunch of the early 1970s was the dominant event of Gauthier’s early administration after Chandler’s departure. Pipeline companies with firm delivery commitments curtailed Ni-Gas’s supplies, severely limiting the utility’s ability to pursue new customers. In 1973 Gauthier told Forbes what happened: “One bright sunshiny day in 1970, the Natural Gas Pipeline Co., which [supplied] about 75 percent of our gas came to us and said, ‘We’re going to abrogate your 20-year supply contract.’ After all, it had only 19 years to run. And we found that under the Natural Gas Act they could do it. And they did.”

In 1971 and 1972 Natural Gas Pipeline cut its deliveries to Ni-Gas by 10 percent, with deliveries falling a further 15 percent in 1973. As a result Ni-Gas had to scour the market for new supplies and put prospective industrial customers on a waiting list.

Gauthier sought to drill for new reserves but after a 1972 ruling in which the Illinois Commerce Commission turned down the company’s request for a price surcharge to cover its drilling costs, he could not obtain financing. It was a frustrating situation. “We [were] at the mercy of third parties,” he later toldForbes. “When the gas shortage developed, we, unlike some other companies, didn’t have the backlog of interruptibles to upgrade and we really had to scurry around to get supplies.”

The company was not totally impotent, however, in terms of obtaining new supplies. It built a $55 million synthetic natural gas plant in Morris, Illinois, which by 1976 accounted for 10 percent of total supply. Gas from the Morris plant was substantially more expensive than gas drilled from the ground but supplies were at least reliable. Gauthier also stepped up drilling in Elk City, Oklahoma, participated in offshore Louisiana exploration programs with Mobil Oil, and in 1974 signed an agreement with then-Illinois Governor Dan Walker to seek development of an Illinois-based $250 million coal liquification plant.

Supply was not the only problem of the early 1970s. The gas crunch also put pressure on profits. Though the Illinois Commerce Commission allowed the company to pass along wholesale price increases, it was not as sympathetic to the general rise in costs caused by inflation. As a result, earnings rose only 5 percent between 1970 and 1973 while return on equity fell to 11.9 percent in 1972 from 13.5 percent in 1970.

The situation changed dramatically in 1974 when the commission granted Ni-Gas its first general rate increase in 20 years. This, combined with a Gauthier-led program of efficiency, automation, and cost-cutting, made Ni-Gas one of the industry’s top moneymakers by the mid-1970s. Return on total capital averaged 7.1 percent between 1971 and 1976; among gas utilities, only Oklahoma Natural Gas did better in the same time period.

Because Ni-Gas was so dependent on regulatory decisions, which often led to lower-than-expected rates of return, Gauthier had long wanted to diversify. To do this, however, he needed holding-company status, which would give new nonutility subsidiaries financial flexibility and shield them from the Illinois Commerce Commission’s regulatory power. In 1976 the company was granted such holding-company status; and that same year, it reorganized asNicor with Ni-Gas as its principal subsidiary. Gauthier was elected chairman and president of Nicor and Owen D. Bekkum became president of Ni-Gas.

Over the next decade, Nicor invested extensively in a variety of energy-related nonutility businesses. In 1978 it acquired National Marine Service of St. Louis, a barge company whose primary business was moving petroleum products on 14,000 miles of inland waterways but which also operated maintenance-repair facilities serving other companies’ fleets.

Other investments included $28 million in recoverable coal reserves, a contract drilling company, and a variety of expensive but possibly important oil leases. Gauthier was confident about these long-term investments. “We have about $110 million in leases,” Gauthier told Business Week in 1980, “and it’s tough to have that much money sterile for seven years, but you have to bite the bullet on leases and get positions in pioneering areas. … Those leases are our earning power of the future.”

While Gauthier and other Nicor executives were building a diversified conglomerate, Ni-Gas—still by far Nicor’s largest subsidiary—was earning record profits. Between 1974 and 1977, while other distributors were struggling to serve the customers they already had, Ni-Gas with its underground storage capabilities was able to add customers and maintain service without interruption. In 1979 it recorded its tenth straight year of record profits, earning $87.4 million on sales of $1.6 billion and boasting a 15.1 percent return on equity, a figure well above the average 12.8 percent return on equity for large utilities.

In 1980 Nicor spent $133 million on exploration and participated in the comeback of coal by developing mines in Illinois and Colorado. In December of that same year it acquired Arcadian Marine Service, Inc., which owned vessels serving the offshore drilling industry in Nigeria, Mexico, and the Gulf of Mexico, as well as ships serving the Navy in Bermuda.

Gauthier’s investment strategy went beyond acquiring other businesses. He recapitalized them and expanded their operations. In 1980 he announced a five-year $1 billion capital spending program aimed at Nicor’s rapidly expanding oil and gas explorations, coal mining operations, and contract drilling and marine transportation businesses. As Gauthier saw it, investment in nonutility businesses was the only way Nicor could satisfy its stockholders’ demands for growth. According to his plan, nonutility business would eventually increase to 50 percent of earnings, compared to 10 percent of earnings in 1979. “Our customer base is not increasing fast enough,” he toldBusiness Week, “and the regulators who set our rates are more interested in politics and less and less in economics. We’re simply facing the fact that we don’t have the growth potential in distribution that we had in the past.”

Reaction to Gauthier’s plans was mixed. One analyst told Business Week,“It’s going to be a lot more risky than reading meters and sending out the monthly bills.” An executive at a rival midwestern distributor, however, had kinder words: “Nicor has always had one of the strongest managements in the utility business. They’re smart enough to get the people they need to make good business decisions outside the utility… . They’re sticking to energy-related moves, where they at least know the lay of the land.”

Initial results from diversification were good. While gas distribution earnings stalled in a regulatory tangle, nonutility income soared, rising to $27 million in fiscal Page 306 | Top of Article1980 from $7.7 million in fiscal 1979. Chairman Gauthier was more than optimistic. “We originally projected about 30–35 percent non-utility by 1985, but we’re producing more oil and gas than we expected,” he told Barron’s,“and our contract drilling unit has grown faster than we expected.”

Nicor continued to grow. In February 1981 officials announced a plan to spend $100 million to add 20 more rigs to its 35-rig contract drilling operation. In June of that year the Wall Street Transcript quoted Chairman Gauthier describing Nicor as “more than two dozen companies with operations all across the United States, on foreign soil and in foreign waters.” The following year, Nicor acquired Birdsall, Inc., a shipper of general commodities that, through its Tropical Shipping & Construction Ltd. subsidiary, transported cargo, primarily foodstuffs, to Caribbean ports.

Gauthier had made his plans when high energy prices made the drilling business very profitable. In the mid-1980s, however, energy prices plunged and threw a spanner in the works. Deregulation led to increased drilling, which in turn led to a glut of oil and gas on the market. Drilling operations, which had been profitable in an environment of scarcity, became money losers. Rigs in the company’s contract drilling operation fell into disuse or were rented out at prices below the breakeven point. Nicor’s 1982 earnings fell 34 percent to $86.8 million, or $3.30 a share on revenue of $2.17 billion. Gauthier’s annual stockholder letter was gloomy at best: “We have no signs the energy industry’s economic situation will turn around fast enough to expect 1983 to be much better than 1982.” In the wake of lower earnings the company indicated that it planned to cut 1983 capital spending to $240 million from $350 million in 1982. “Like others in the energy business,” Gauthier wrote, “we need to ‘pull in our horns a bit’ until the oil and gas ‘glut’ is worked down and the energy regulation and price situation stabilize.” Despite pulling in its horns, Nicor’s earnings dropped to $50 million in 1983 while its contract drilling operation lost $35 million.

The energy glut continued to have a profound effect in the mid-1980s. In 1984 the company lost $225 million on revenues of $2.4 billion. Combined 1984–85 losses totaled $350 million. Under pressure from red ink on the balance sheet, Nicor cut its common stock dividend from $3.04 to $1.80 in 1986, divested itself of unprofitable contract drilling, river barge, and mining and mineral subsidiaries, and worked to become a leaner and more focused organization.

On January 1, 1986, Richard G. Cline, a Nicor board member and former chairman and president of Jewel Companies, succeeded Gauthier as Nicorpresident and chief operating officer. Cline completed the nonutility divestments and ministered to what was left. Cline saw nonutility businesses as complementing Ni-Gas rather than equaling or surpassing utility earnings: “Through our diversified non-utility businesses,” he wrote in the company’s 1988 annual report, “we intend to provide earnings growth that complements the stability of Ni-Gas.” In 1988 the company hired former Tenneco executive and conglomerate specialist Larry Garberding as president. Cline assigned him to oversee Nicor’s nonutility business and help map corporate strategy. Despite Garberding’s hiring, Nicor soon decided to again narrow its focus, and in the fall of 1989 sold its marine supply unit, which operated a fleet of 40 vessels. With the diversification effort essentially scrapped, Garberding resigned in early 1990. “It was mutually agreed that Larry’s moving on might be the best thing,” a Nicor spokesman told the Chicago Tribune. “A lot of Larry’s work isn’t needed anymore.”

DIVESTMENTS IN 1993

Nicor cast off its drilling operation, a coal-mining business, and a shipping company that operated on the Mississippi River. What remained was Ni-Gas, Tropical Shipping, and the company’s oil and gas development and production operations. When the oil and gas assets struggled because of a dip in gas prices in 1992, they too were divested in June 1993.

After Cline resigned in May 1995, Thomas L. Fisher became chairman, president, and CEO. Fisher began his career at Nicor in 1967 after earning a degree at Purdue University. He took the helm at a time when utilities were looking to become involved in providing unregulated energy services. As a result, Nicor established a subsidiary to offer gas marketing services to consumers. Looking to take advantage of deregulation of electricity in a number of markets, in 1997 the company formed a joint venture, NicorEnergy LLC, with Houston’s Dynergy Inc., a major gas and electric marketing company, to take advantage of the situation. The unit was established to offer a range of energy-related products to industrial, commercial, and residential customers in Illinois, with the goal of eventually expanding to other markets in the Midwest. Because Nicor was fashioning itself as more of a consumer products company than a utility, it also began to tout the Nicor name as its primary brand. In keeping with this idea, Ni-Gas took the name Nicor Gas. In 1998 the holding company formed another nonregulated business, NicorEnerchange, a wholesale natural gas marketing company.

Although Nicor Gas and Tropical Shipping remained the core businesses,Nicor was pleased with the launch of Nicor Energy and the other energy services ventures, Overall, the early years of Fisher’s tenure appeared promising, but his administration was beset with problems at the start of the new century. The company’s attempt to replace old mercury-filled gas regulators in the interior of homes with new exterior units turned into a fiasco. Nicor’s subcontractors botched the job, spilling mercury and contaminating the inside of thousands of homes. Not only did the company have to pay a reported $130 million to inspect and clean up the homes, the adverse publicity harmed the Nicor brand the company had hoped to nurture.

Matters grew worse in 2002 when an anonymous whistle-blower faxed a document to a utility watchdog group, Chicago-based Citizen’s Utility Board, outlining how Nicor Gas had overcharged customers when natural gas prices had spiked in the winter of 2000–2001 by manipulating gas inventories. The information was passed on to the Illinois Commerce Commission, which in 2003 accused Nicor Gas of willfully withholding documents and providing inaccurate testimony during rate hearings. The company maintained that the overcharging was an accounting oversight. While this matter was adjudicated,Nicor Energy experienced its own accounting problems. In December 2003 U.S. Attorney Patrick J. Fitzgerald and the Securities and Exchange Commission filed separate charges against three top executives of the subsidiary and their legal counsel, alleging a wire fraud scheme in 2001 to inflate revenues in order to obtain $400,000 in bonuses as well as other benefits. All but the legal counsel would plead guilty to the charges, and the company was ultimately shut down.

In September 2006 Nicor agreed to pay a $10 million fine as part of a settlement over the deceptive accounting practices at Nicor Gas. The company had already paid about $42 million to settle a shareholder suit and class-action suit, and was still on the hook for tens of millions of dollars in restitution to customers. By this time Fisher had left the company, having abruptly announced his retirement in March 2005. Charged with repairing the damage was Russ M. Strobel, who had joined the company in 2000 as general counsel. He became president of Nicor two years later, and then succeeded Fisher as CEO in 2003. With Fisher’s departure he assumed the chairmanship as well.

KEY DATES

1953:: Northern Illinois Gas is formed.
1971:: C. J. Gauthier succeeds Marvin Chandler as CEO and chairman.
1980:: Nicor expands oil and gas exploration efforts.
1993:: Oil and gas assets are sold.
1997:: Nicor Energy LLC is formed.
2003:: Nicor Gas accused of accounting irregularities.
2006:: Nicor agrees to $10 million fine.

Navient Corp.

June 30, 2015 mnaexpert

(Not on the Directory.)

Wikipedia: https://en.wikipedia.org/wiki/Navient

Eli Lilly & Company

June 30, 2015 mnaexpert

Public Company
Founded: 1876
Incorporated: 1881
Employees: 40,500
Sales: $20.37 billion (2008)
Stock Exchanges: New York Boston Cincinnati NASDAQ Philadelphia Basel Geneva Zurich Tokyo London
Ticker Symbol: LLY
NAICS: 325411 Medicinal and Botanical Manufacturing; 325412 Pharmaceutical Preparation Manufacturing; 334517 Irradiation Apparatus Manufacturing; 339112 Surgical and Medical Instrument Manufacturing; 424210 Drugs and Druggists’ Sundries Merchant Wholesalers; 541712 Research and Development in the Physical, Engineering, and Life Sciences (Except Biotechnology)

Eli Lilly and Company (Lilly) is the 10th-largest pharmaceutical company in the world. It discovers, develops, manufactures, and markets ethical drugs (those requiring a doctor’s prescription) for a wide variety of human ailments. Lilly has a worldwide presence. The company conducts research in more than 50 countries, maintains research and development (R&D) facilities in 8 countries, has manufacturing plants in 13 countries, and markets its products in 143 countries.

Lilly introduced the world’s first commercial insulin in the 1920s and in 2002 was the leading producer of products for people with diabetes. Its best-selling antidepressant, Prozac, continues to be a controversial drug, even though its U.S. patent protection expired in 2001. The company’s Elanco Animal Health subsidiary sells animal health products in over 100 countries. Like many other large corporations, Lilly has numerous collaborations or joint ventures with other firms. As a major player in the pharmaceutical industry, Lilly has faced controversies such as the high cost of prescription drugs, advertising and marketing policies, and the handling of potential side effects.

Despite its huge domestic and international operations, Lilly continues to maintain a close allegiance to the U.S. Midwest and wields significant influence in its native city, Indianapolis, Indiana. Much of this community loyalty stems from Lilly’s long history of paternalism and generosity.

LILLY’S LATE 19TH-CENTURY ORIGINS AND COMMUNITY COMMITMENTS

In 1876 Colonel Eli Lilly, a Civil War veteran, built a laboratory in Indianapolis and began to manufacture ethical drugs. The business established itself successfully with the innovation of high-quality gelatin-coated capsules, and it was not long before Colonel Lilly was able to contribute to Indianapolis in a variety of ways. He served as president of the Commercial Club to help in the development of the city and chaired a committee to help the indigent during the financial panic of 1893. He also donated his own personal funds to build a children’s hospital in memory of his 13-year-old daughter who died of diphtheria.

This civic consciousness was passed on to the second and third generations of Lilly management. During the Great Depression, the colonel’s grandson, also named Eli Lilly, refused to lay off any employees. Instead, he had them help with general maintenance of the facility until they could return to their normal jobs.

In 1937 the Lilly family established the Lilly Endowment to provide financial support for educational, cultural, and religious institutions. The family donated $5 million worth of rare books to Indiana University, and later the Smithsonian Institution acquired a family coin collection worth $5.5 million. The endowment also funded new buildings, music schools, student centers, and laboratories in most colleges and universities in Indiana and in several other states.

Lilly also laid the foundation for its reputation for marketing ingenuity in those early years. After the 1906 San Francisco earthquake, the company sent as much of its stock as it could to the disaster area at the request of sales personnel and wholesalers. From that point on the ready availability of Lilly’s products was central to its marketing strategy. With aggressive advertising campaigns and a large, eager sales force, this availability has been key to Lilly’s marketing success. Its sales marketing department was formally established around 1922.

DEVELOPER OF IMPORTANT DRUGS: TWENTIES THROUGH SIXTIES

Besides being a pioneer in pharmaceutical marketing, Lilly was known for its development of many important drugs. In the 1920s Lilly began selling the world’s first commercially available insulin, Iletin, which would benefit millions of people with diabetes. In subsequent years it remained the leading manufacturer of insulin, commanding at least 75 percent of the U.S. market in the early 1990s.

In the 1920s the company produced a liver extract for the treatment of pernicious anemia. In the 1930s Lilly laboratories synthesized barbituric acids, essential to the production of drugs used in surgery and obstetrics. In 1955 Lilly manufactured 60 percent of the Salk polio vaccine. Nevertheless, the company’s greatest contribution to human health was in the production of penicillins and other antibiotics that revolutionized the treatment of disease.

Throughout this era of innovation and expansion and up until the late 1980s, Lilly’s management remained a constant. Every president and almost every member of the board of directors was either a direct descendant of Colonel Lilly or a native of the Midwest, if not of Indiana. After the colonel’s death in 1898, his son Josiah Lilly ran the company for the next 34 years. Josiah was succeeded by son Eli and later by Josiah Jr. During the 16-year presidency of the younger Eli Lilly, sales rose from $13 million in 1932 to $117 million in 1948. After Eli relinquished his executive powers to his brother, he became the titular chairperson of the company. Upon his death at age 91, he had lived to see the company reach $1 billion in sales.

Josiah Jr.’s presidency marked the last reign of a direct family descendant, followed by presidents Eugene N. Beesley, Burton E. Beck, and Thomas H. Lake. Richard Wood, who advanced to the chief executive officer (CEO) position in 1973, was, of course, born and raised in Indiana and was a longtime Lilly employee.

In 1971 members and descendants of the Lilly family owned $1 billion of the $4 billion in company stock, while the Lilly Endowment (controlled by the family) owned another $900 million. Furthermore, the Endowment resisted making large disbursements, and it was not until the 1969 Tax Reform Act that the Endowment was forced to loosen its 25 percent hold on stock. Nonetheless, in 1979 the Endowment continued to hold 18.6 percent of company shares.

Lilly’s conservative management paralleled the outspoken ideology of the Lilly Endowment, although the company and the Endowment were separate and distinct organizations. During the 1960s, the Lilly Endowment professed a specific political mission. It supported anticommunism, free enterprise, and limited government. Despite what some have called an anachronistic approach to business, no one can dispute Lilly’s financial success.

THE BOOMING SEVENTIES

While the rest of the drug industry in the 1970s was depressed, Lilly doubled in size. When the pharmaceutical business was hit hard by competition from generic drugs that flooded the marketplace after the expiration of patents for drugs discovered in the 1950s and 1960s, Lilly diversified into agricultural chemicals, animal health products, medical instruments, and beauty care products.

Meanwhile, Lilly increased its expenditure on R&D of pharmaceuticals, spending $235 million in those areas in 1981 alone. The immediate result was three new drugs: Ceclor, an oral cephalosporin antibiotic; Dobutrex, a heart-failure treatment; and Mandol, an injectable cephalosporin effective against a broad spectrum of hospital-acquired infections. The release of the new cephalosporins represented a significant step for Lilly. The company had always been dominant in the antibiotic market, but competition from Merck, Smith Kline, and foreign drug companies threatened Lilly’s supremacy. With the new drugs, the company was able to recapture hegemony of the cephalosporin market; of the $3.27 billion in company sales in 1985, $1.05 billion was from the sale of antibiotics.

A similar success story resulted after the company bought Elizabeth Arden for $38 million in 1971. At first glance, the purchase of the beauty care company seemed an unwise move. Elizabeth Arden had been a money loser and continued to lose money for five years after Lilly acquired it. Lilly management seemed to have no idea of the intense competition in the beauty industry. In an unusual move, however, Lilly hired outsiders to fill its subsidiary’s top executive positions and by 1982 Elizabeth Arden’s sales were up 90 percent from 1978, with profits doubling to nearly $30 million.

The introduction of several new drugs in the late 1970s and early 1980s increased Lilly’s sales and challenged the market boundaries of competing products. Page 179 | Top of ArticleLilly released Nalfon, an anti-inflammatory drug, to compete with Merck’s top-selling Indocin. In addition, the company introduced Cinobac, an antibacterial agent used to treat urinary-tract infections; Eldisine, a treatment for childhood leukemia; Moxam, a potent antibiotic licensed from Shionogi & Co., Ltd., a Japanese drug company; and Benoxaprofen, an antiarthritic introduced in the United Kingdom. Moreover, the company introduced Humulin in 1982, the first healthcare product made from recombinant DNA technology (genetic engineering). This breakthrough promised to protect Lilly’s majority share of the insulin market.

During this time, the initial flurry over the possible hazardous side effects of a popular analgesic called Darvon seemed to have subsided. Critics had charged that the drug introduced in 1957 was ineffective and had a dangerous potential for abuse, but Lilly mounted an educational campaign on proper use of the drug and continued to hold 80 percent of the prescription analgesic market. Darvon generated annual sales of $100 million.

With a 19 percent increase in sales in 1978, a 24 percent return on equity, and impressive results from Wood’s foreign-market campaign, Lilly’s prospects seemed excellent. Shortly thereafter, however, company growth began to fall short of projected figures. In 1982 a miscalculation of inventory and expected sales caused Lilly to produce far more Treflan (a soybean herbicide) than it could sell. With the patents expiring on Treflan and two animal products, and with the overproduction of Treflan, income from agricultural products suddenly did not look as promising as it once had. Furthermore, profits from Moxam had to be shared with Shionogi, the Japanese partner in the joint venture. In addition, the patent on Keflin, an injectable cephalosporin that had been generating $100 million in sales, expired in November 1982.

Lilly’s diversification into medical instruments through the 1977 acquisition of IVAC Corporation, a manufacturer of systems that monitored vital signs and equipment for intravenous fluid infusion, and Cardiac Pacemakers Inc., a manufacturer of heart pacemakers, acquired in 1978, cost Lilly $286 million in stock, a significant investment with an unknown potential for profits. In addition, the combined assets of its medical instrument subsidiaries and Elizabeth Arden represented only 20 percent of the entire company’s assets. Therefore, projected profits from the two were not expected to have a substantial effect on company profits as a whole. Elizabeth Arden was sold to Fabergé, Inc., for $657 million in 1987.

NEW DRUG CONTROVERSIES

Of more concern, however, was the reemerging specter of Darvon’s addictive qualities. Ralph Nader’s consumer-advocacy group demanded a ban on Darvon because of its alleged associations with suicides, overdoses, and abuse by addicts. Joseph Califano, the U.S. secretary of the Department of Health, Education, and Welfare, harshly criticized the sincerity of Lilly’s educational campaign and went so far as to recommend that Darvon and other propoxyphene products not be prescribed unless there was really no alternative, and then only with care. The U.S. Food and Drug Administration (FDA) charged that Lilly’s educational campaign actually amounted to ingenious marketing in that Lilly sales representatives not only gave doctors educational material that emphasized the drug’s positive attributes but also conveniently left samples. This litigation did not remove Darvon from the market, and it was found by the FDA to be safe and effective when used as directed.

To the company’s dismay, Darvon was not the only drug to cause a controversy. Oraflex, the U.S. version of Benoxaprofen, was withdrawn from the market in August 1982. Only one month after the FDA had approved Oraflex, a British medical journal documented five cases of death due to jaundice in patients taking the drug. The FDA accused Lilly of suppressing unfavorable research findings. Initial warnings about the possibility of side effects were later amended to include the threat of jaundice, but only after the company had already applied for FDA approval. Package inserts were amended to recommend a reduced dosage for elderly patients.

At a time when drug regulation reform would have allowed companies to interpret the results of their own lab tests, the Oraflex controversy represented a major disaster. Furthermore, publicity for the drug, which was projected to be a $100 million seller (prescriptions for Oraflex increased by 194,000 in just one month), had been unwittingly distorted. Reports from outside the company had falsely claimed that the drug could cure arthritis.

On August 21, 1985, the Oraflex controversy culminated in the U.S. Department of Justice filing criminal charges against Lilly and Dr. William Ian H. Shedden, the former vice president and chief medical officer of Lilly Research Laboratories. The Justice Department accused the defendants of failing to inform the government about four deaths and six illnesses related to Oraflex. Lilly pleaded guilty to 25 criminal counts, which resulted in a $25,000 fine. Shedden pleaded no contest to 15 criminal counts and was fined $15,000. All 40 counts were misdemeanors; there was no charge of intentional deception against Lilly.

Page 180 | Top of Article

Lilly was cited as a defendant in a lawsuit filed against drug manufacturers and distributors of diethylstilbestrol (DES). The drug, which was prescribed to pregnant women during the 1940s and 1950s to prevent miscarriages, caused vaginal cancer and related problems in the children of the patients. Lilly was the first and largest manufacturer of DES, and it was estimated that 40 percent of the drug came from Lilly production facilities. In 1981 a court ordered the company to pay $500,000 in damages to one plaintiff, and in 1985 Lilly was ordered to pay $400,000 to the first male seeking damages in a DES-related case. Other claims asked for damages totaling in the billions of dollars.

ACQUISITIONS

In the early 1980s Lilly continued acquiring manufacturers of medical devices and diagnostic equipment. Lilly added both Physio-Control Corp. in 1980 and Advanced Cardiovascular Systems Inc. in 1984 through share exchanges. Hybritech, a California diagnostic products company, was purchased for $350 million in 1986. Lilly added Devices for Vascular Intervention, Inc., in 1989 and Pacific Biotech, Inc., the next year. These companies (along with Origin Medsystems, a 1992 acquisition) constituted Lilly’s Medical Devices and Diagnostics Division, which contributed about 20 percent of the pharmaceutical corporation’s annual revenues in the early 1990s. Heart Rhythm Technologies, Inc., was acquired in 1992. Nonetheless, even this new business interest had its problems, not the least of which was intense competition from Abbott Laboratories.

While company CEO Wood concentrated on these domestic acquisitions, Lilly’s competitors expanded internationally, where two-thirds of the world’s pharmaceutical market awaited. Although Lilly’s top two drugs, Ceclor (an antibiotic) and Prozac (an antidepressant introduced in 1987) were highly profitable, the company’s $1 billion annual investment in R&D did not yield any new blockbuster breakthroughs during this time.

PROZAC CONTROVERSY IN THE EARLY NINETIES

By the beginning of the 1990s, the company’s star antidepressant Prozac had become a major medical, legal, and social controversy. Many users reported relief from the sufferings of depression. About two million individuals worldwide had taken the drug by the summer of 1990. Some patients, however, reported that Prozac caused them to become suicidal. Lawsuits were filed and some politicians argued that their opponents were unstable because they took Prozac. Those who thought they were hurt by Prozac formed support groups in several states, while Lilly and the FDA continued to defend the drug’s usefulness and safety. Eventually several books were written about the pros and cons of using drugs such as Prozac to treat depression and other mental illnesses.

In 1991 Wood abdicated Lilly’s chief executive office and chose Vaughn D. Bryson, a longtime executive, as his successor. Lilly’s employees reportedly appreciated Bryson’s management style, which was much less formal than that of his predecessor. Unfortunately for Bryson, however, patent expirations, a dearth of new drugs, and general volatility in the pharmaceutical industry combined to thwart his stint at the top. The company lost over 30 percent of its market value during his 18-month tenure and recorded its first quarterly loss in its history in the fall of 1992. Wood, who had retained Lilly’s chairmanship, orchestrated a boardroom revolt to oust his protégé in 1993.

In June of that year, Randall Tobias was selected CEO and chairperson. Unlike all his predecessors, Tobias was recruited from outside Lilly’s employee roster. The former vice chairman of American Telephone and Telegraph Co. (AT&T) had served on Lilly’s board since 1986 and was by his own admission inexperienced in pharmaceuticals. Nonetheless, after just six months at Lilly’s helm, Tobias announced a reorganization of the venerable drug company.

His plan included divestment of the profitable, but distractive, Medical Devices and Diagnostics Division, through which he hoped to raise $550 million. A cost-reduction program included the elimination of 4,000 employees through early retirement. Tobias planned to use these savings to acquire the distributors needed in a pharmaceutical industry that was increasingly influenced by budget-conscious managed care organizations. In line with this focus, Lilly announced its plan to acquire PCS Health Systems Inc., the United States’s largest pharmacy benefit manager, from McKesson Corp. for $4 billion in mid-1994. Tobias, who had orchestrated AT&T’s overseas expansion, also worked to expand Lilly’s international sales from their 1993 level of about 39 percent of total revenues.

Tobias’s plan also focused Lilly’s R&D on five broad disease categories: central nervous system diseases, endocrine diseases (including diabetes and osteoporosis), infectious diseases, cancer, and cardiovascular diseases. In line with these strategic imperatives, Lilly released Lys-Pro, a new type of insulin for the treatment of diabetes, in 1995, and Zyprexa (olanzapine), indicated for schizophrenia, in 1996.

FDA APPROVAL IN THE MID-NINETIES

In 1996 the FDA approved Lilly’s Gemzar as the nation’s first drug to treat pancreatic cancer. Two years later the FDA approved using Gemzar for non-small-cell lung cancer. According to the company’s Web site, in 2002 more than 85 countries had approved Gemzar and almost 80 percent of U.S. patients with pancreatic cancer used Gemzar.

In 1997 the FDA authorized using Evista to help prevent osteoporosis in postmenopausal women. Evista sales of $552 million in 2000 made it one of the company’s major products. Other new products were Humalog, a human insulin analog, and ReoPro, a cardiovascular product discovered and developed by Centocor Inc.

After the FDA eased rules in 1997 on mass media advertising for prescription drugs, Lilly and others in the pharmaceutical industry increased their spending on television spots. Lilly spent $7 million in direct-to-consumer (DTC) promotions in 1999. The following year $46.5 million was spent, mostly for Prozac as the end of its patent protection neared.

Although the evidence was not conclusive, television advertising in particular was linked to increasing consumer sales but perhaps with a hidden cost. “The issues raised by DTC advertising are serious,” said health policy researcher Steven Findlay in Marketing Health Services in spring 2000. “They touch upon questions of public health, corporate responsibility, advertising ethics, and consumers’ capacity to understand complex medical and pharmaceutical information.”

PROZAC LOSES PATENT PROTECTION: 2001

In August 2001 Lilly lost U.S. patent protection for Prozac after a series of legal conflicts. At that point Barr Laboratories gained a six-month exclusive right to make a generic Prozac equivalent. Declining Prozac sales in the fourth quarter of 2001 led to a 14 percent reduction in company revenues. In January 2002 the U.S. Supreme Court rejected Lilly’s final patent appeal without comment, which opened the door to several other companies making generic versions of the antidepressant drug. The loss of patent protection for Prozac ended a major chapter in Lilly’s history.

Also in January 2002, the federal government settled an investigation into whether Lilly violated its own privacy policies by releasing e-mail addresses of over 600 Prozac patients. According to the New York Times on January 19, 2002, the case was “the first the Federal Trade Commission … pursued over suspected unintentional violation of a Web site’s privacy policies.”

Lilly continued to introduce numerous innovative drugs that became known as the best in their class and were sometimes the first drugs ever developed for a new class of drugs. Forteo (teriparatide), a synthetic form of a naturally occurring hormone, was approved for marketing in the United States in 2002 and provided a good example of Lilly’s innovative practices. The drug stimulated new bone formation in osteoporosis patients and worked by increasing the number and activity level of bone-forming cells. Until Forteo, osteoporosis treatments had worked by decreasing the number and activity level of cells that break down bone. In August 2002 Lilly disclosed that it had received a grand jury subpoena in relation to a federal investigation into whether the company had illegally promoted the osteoporosis drug Evista for off-label uses during 1998.

INNOVATION CONTINUES IN THE 21ST CENTURY

In January 2003 Strattera became the first new drug in 30 years approved to treat the symptoms of attention-deficit hyperactivity disorder (ADHD). Strattera was approved for use among children and adolescents and was the first ADHD medication approved for adults. The first nonstimulant drug developed to treat ADHD, Strattera was characterized by its ability to provide daylong symptom control without causing insomnia.

Also in 2003, Lilly’s joined the ranks of pharmaceutical companies seeking to gain a share of the profits seen by Pfizer Inc.’s highly successful Viagra medication to treat male erectile dysfunction. Lilly’s erectile dysfunction drug, Cialis, went on the market in the United States in late November and achieved sales of $108.3 million in its first full quarter in 2004.

The year 2004 saw the introduction of other innovative drugs. Symbyax was introduced to treat patients with bipolar depression. Alimta was approved for use in treating a particular form of lung cancer (mesothelioma) caused by exposure to asbestos. That year the FDA also approved the antidepressant Cymbalta for the maintenance treatment of major depression and for the relief of pain caused by nerve damage from diabetes. Controversy regarding the schizophrenia drug Zyprexa increased significantly in 2004 when the American Diabetes Association advised that Zyprexa was more likely to cause diabetes than other drugs commonly prescribed to treat schizophrenia and bipolar disorder.

In 2005 Lilly introduced a new drug, Byetta, intended for people with type 2 diabetes, which does not require insulin injections. Patients using other diabetes therapies often reported gaining weight after beginning treatment, but patients on Byetta reported losing weight. As a result, Lilly experienced difficulty in 2006 keeping up with demand for the drug.

Lilly withdrew its application to market the antidepressant Cymbalta as a treatment for urinary incontinence in January 2005. Federal authorities reported in June 2005 what they called a “higher than expected rate of suicide attempts” among women taking Cymbalta to treat urinary incontinence. In response to these reports, the FDA repeated prior warnings that antidepressants might lead some patients to become suicidal.

COMPANY PAYS FINE: 2005

In December 2005 Lilly pleaded guilty to charges stemming from the federal investigation into whether it had illegally promoted the osteoporosis drug Evista for off-label uses during 1998. Among other charges, the company was accused of sending unsolicited letters to physicians promoting unapproved indications for Evista. The company agreed to pay a $36 million fine. In addition to the fine, independent reviewers were assigned to oversee Lilly’s marketing of Evista for five years.

In 2005 Lilly paid $690 million to settle 8,000 lawsuits brought by patients who had developed diabetes and other metabolic diseases after treatment with the schizophrenia and bipolar disorder drug Zyprexa. The suits alleged that between 1996 and 2003, when adverse side effects were first reported, Lilly did not adequately disclose the drug’s risks.

In the fall of 2005, FDA officials began to investigate reports that linked use of the ADHD drug Strattera with increased suicidal thoughts and behavior among children and adolescents. In late 2005 the FDA issued a public health advisory to alert health-care providers, parents, and other caregivers to closely monitor behavior among these patients and note any unusual changes.

By 2006 the cancer drug Gemzar, originally introduced in 1996 to treat pancreatic cancer, accounted for 9 percent of Lilly’s worldwide sales. That same year, Lilly received approval for additional indications for Gemzar including treatment of biliary tract cancers. Gemzar was the first new drug approved for treatment of these cancers in 23 years. Also in 2006, the FDA approved Gemzar to treat women with recurrent ovarian cancer. The approval marked the fourth cancer treatment indication approved for Gemzar. Certain types of lung and breast cancer were also treated with Gemzar in combination with other drugs.

Evista, an osteoporosis drug, received additional approval from the FDA in 2007 for use in reducing the risk of invasive breast cancer in postmenopausal women with osteoporosis and in postmenopausal women at high risk for breast cancer. Also that year, the FDA approved the antidepressant Cymbalta for additional use in the maintenance treatment of major depressive disorder in adults. In the two years since its release, the drug had nearly doubled its sales, which totaled $1.3 billion in 2006.

Additionally in 2007, Lilly addressed some of the long-standing concerns regarding the schizophrenia drug Zyprexa by adding definitive warnings to the drug’s label. For the first time, the label acknowledged that the drug caused high blood sugar more readily than other drugs widely used to treat schizophrenia and bipolar disorder. It also acknowledged Zyprexa’s tendency to cause weight gain and high cholesterol. Although prescriptions for Zyprexa had decreased gradually because of concerns raised since 2004, the revenue the drug produced for Lilly did not. The company succeeded in introducing price increases sufficient to maintain a steady income from Zyprexa. Lilly received FDA approval in 2008 to market the antidepressant Cymbalta for the relief of pain caused by fibromyalgia, an especially painful chronic condition.

By early 2008 Lilly had paid $1.2 billion in settlements to 30,000 individual plaintiffs who had alleged that the schizophrenia drug Zyprexa caused them to develop diabetes or other metabolic diseases. On March 6, 2008, opening arguments began in a lawsuit filed by the state of Alaska against Eli Lilly. The suit sought reimbursement of medical expenses incurred by the state’s Medicaid recipients who had taken the drug and developed diabetes. The case was the first Zyprexa-related lawsuit to reach a jury trial and was closely watched by the nine other states that had sued Lilly with claims similar to those of Alaska. Another 33 states had not yet filed suit against Lilly at the time of trial but were investigating the company in a joint action and seeking a single settlement. On March 27 the state of Alaska agreed to a $15 million settlement, a fraction of the hundreds of millions of dollars the state originally had sought in restitution. Lilly admitted no wrongdoing in the settlement.

THE DECADE COMES TO A CLOSE

Lilly reported $20.37 billion in net sales in 2008. This marked the first time in its history the company had exceeded $20 billion in annual sales. The company’s Elanco animal care business, along with eight leading individual products (Zyprexa, Cymbalta, Humalog, Gemzar, Cialis, Alimta, Evista, and Humulin), exceeded $1 billion each in annual sales.

In 2009 the FDA approved Lilly’s cardiovascular drug Effient to be used to reduce the risk of adverse cardiovascular events in patients who had received heart stents. In July of that year, the FDA approved additional use of the osteoporosis drug Forteo to treat patients taking glucosteroid medications for rheumatoid arthritis and other inflammatory conditions. Glucosteroids had been identified as a leading cause of secondary osteoporosis, or osteoporosis brought on by other medical treatment or other conditions.

Lilly listed 24 trademarked and actively marketed pharmaceuticals on its Web site in 2009. It continued to seek innovative treatments for a wide range of diseases, including cancer, multiple sclerosis, diabetes, osteoporosis, rheumatoid arthritis, and Alzheimer’s disease. The company described pending development of biotech solutions as well as traditional chemistry-based pharmaceuticals. One of the company’s most promising areas of R&D involved personalized medicine, or therapies individually tailored to the people who would be receiving them.

Key Dates

1876:: Colonel Eli Lilly starts making ethical drugs in Indianapolis.
1920s:: In this decade Eli Lilly and Company begins selling Iletin, the first commercially available insulin.
1971:: Company buys cosmetics manufacturer Elizabeth Arden.
1977:: IVAC Corporation is acquired.
1978:: Cardiac Pacemakers is acquired.
1980:: Company acquires Physio-Control Corporation.
1982:: Lilly introduces Humulin, a human insulin, the first human health-care item made by recombinant DNA technology.
1987:: Elizabeth Arden is sold to Fabergé; U.S. Food and Drug Administration (FDA) approves the use of Prozac for treating depression.
1996:: Zyprexa for schizophrenia and bipolar disorder and Gemzar for advanced pancreatic cancer are introduced.
1997:: FDA authorizes Evista for use in preventing osteoporosis in postmenopausal women.
2001:: Patent protection for Prozac ends in the United States.
2002:: Forteo, a treatment to stimulate new bone formation in osteoporosis patients, is approved for marketing in the United States; company is under investigation for illegally promoting osteoporosis drug Evista for off-label uses.
2003:: Strattera receives FDA approval for treating attention deficit hyperactivity disorder; Cialis, a treatment for male erectile dysfunction, goes on the market in the United States.
2004:: FDA approves Cymbalta for the maintenance treatment of major depression and to relieve pain caused by diabetes.
2005:: Lilly pleads guilty and is fined $36 million in the Evista case; FDA advisory is issued in response to suicidal thinking reported among children and adolescents taking Strattera.
2006:: Gemzar receives approval for use in the treatment of biliary tract cancer and for treating women with recurrent ovarian cancer.
2007:: Evista receives approval from the FDA for use in reducing the risk of invasive breast cancer.
2009:: Effient is approved for use in reducing the risk of adverse cardiovascular events in patients with heart stents.

Constellation Brands

June 30, 2015 mnaexpert

Public Company
Incorporated: 1972 as Canandaigua Wine Company, Inc.
Employees: 4,500
Sales: $2.79 billion (2013)
Stock Exchanges: New York
Ticker Symbol: STZ
NAICS: 312120 Breweries; 312130 Wineries; 312140 Distilleries; 422810 Beer and Ale Wholesaling; 422820 Wine and Distilled Alcoholic Beverage Wholesalers; 312112 Bottled Water Manufacturing

Constellation Brands, Inc., is the only alcoholic beverage company in the United States involved in all three categories of the industry: wine, beer, and spirits. Offering more than 100 brands, Constellation ranks as the world’s largest premium wine producer and its secondlargest winemaker overall behind E. & J. Gallo. Through its ownership of Crown Imports, it is the third-largest U.S. beer distributor. The company’s operations comprise approximately 45 production facilities in North America, Asia, Europe, Australia, New Zealand, and Chile, which are separated into three divisions: Constellation Wines, Constellation Spirits, and Crown Imports. ThroughConstellation Wines, the company sells brands such as Franciscan, Clos du Bois, Arbor Mist, Hardys, and Nobilo. Through Constellation Spirits, it sells distilled spirit brands including Black Velvet and Skol. Constellation’s Crown Imports sells well-known beer brands, including Corona, Modelo Especial, and Pacifico. The company’s products are sold in approximately 100 countries.

EARLY HISTORY

In 1935, some years after the repeal of the Volstead Act and the end of Prohibition, Mack Sands opened the Car-Cal Winery. Located in North Carolina, Car-Cal Winery produced varietal table wines for limited distribution. Mack’s son, Marvin, learned about the wine industry from his father and was soon determined to open a winery of his own. In 1945, Marvin’s dream materialized when his family purchased a sauerkraut factory-turned-winery located in Canandaigua, New York (in the Finger Lakes region), and he established Canandaigua Industries.

Sands hired eight workers to produce and sell bulk wine in wooden barrels to companies that would bottle them on the East Coast. In just two years, business was so good that Sands decided to significantly change the direction of his company. With a steady flow of cash to deal with unforeseen emergencies, the head of Canandaigua Industries was determined to produce and sell wine using his own name brands. In 1948 the Car-Cal operation run by Mack Sands was closed, and all wine production was transferred to the facility in Canandaigua. In the same year, Marvin Sands purchased Mother Vineyard Wine Company, located in Manteo, North Carolina, the first in a long line of strategic acquisitions designed to expand Canandaigua’s market position.

Primarily concentrating on regional markets, Canandaigua’s new brand of wines was moderately successful. In 1951 the younger Sands opened Richards Wine Cellars in Petersburg, Virginia, and asked his father to assume control of the operation. Not long afterward, the Onslow Wine Company was added to Canandaigua’s growing list of regional wine producers. Both Richards Wine Cellars and Onslow Wine Company produced a wine called Scuppernong, which was made from varietal grapes grown primarily in the southern United States and served as a popular source for wines made throughout the region. In spite of this expansion, sales remained relatively slow and the company’s business did not grow rapidly.

In 1954, however, Sands was lucky enough to come up with something most entrepreneurs only dream about: a widely successful product that catapults a company into rapid growth and high profits. This product, which became known as the Richard’s Wild Irish Rose brand of dessert wines (named after his son Richard), spearheaded Canandaigua’s development for years to come. Quickly realizing the brand’s potential, Sands implemented an innovative franchising system, a first in the wine industry. The franchising network included an agreement between Canandaigua and five independent U.S. bottling companies, which were granted the franchise rights to bottle and distribute Wild Irish Rose brands in their areas. With a minimum capital investment, Sands watched Wild Irish Rose gain a rapidly growing share of the dessert wine market.

During the late 1950s revenues generated from the widespread sale of Wild Irish Rose allowed Canandaigua to concentrate on increasing its own production facilities. As sales of the brand grew, the company expanded to meet the explosive demands of the marketplace. People were hired to help extend the company’s sales network, and a wholesale distributor operation was established. During the early and mid- 1960s, both the sales staff and the wholesale distributor network was strengthened to meet the ever-growing demand for Wild Irish Rose brands. As sales increased, Sands continued his policy of strategic acquisition by purchasing in 1965 the Tenner Brothers Winery, located in South Carolina, and adding Hammondsport Wine Company in 1969. The acquisition of Hammondsport gave Canandaigua an entry into the sparkling wine market, a direction that Sands had wanted his company to take for years.

GOING PUBLIC, EXPANDING PRODUCT LINES: SEVENTIES AND EIGHTIES

In 1972 the company was incorporated as Canandaigua Wine Company, Inc., and one year later, it went public. Several important brands of wine were produced at Richards Wine Cellars, but it was the acquisitions strategy that continued to shape the company. The most significant acquisition was made in 1974 when Canandaigua purchased the Bisceglia Brothers Winery in Madera, California. This purchase gave the company access to a large varietal wine market in the western United States. Another milestone in the firm’s history was the production of its own brand of champagne, J. Roget, in 1979. This champagne was an immediate triumph and contributed to Canandaigua’s seemingly endless string of successful product introductions.

The 1980s were boom years for the company. In 1984 Canandaigua introduced Sun Country Wine Cooler, a carbonated concoction of wine and fruit flavorings. The cooler caught like wildfire across the United States and revenues for the product skyrocketed. During the early 1980s, the firm purchased Robin et Cie, a French producer of high-quality table wine, and renamed it the Batavia Wine Company. Batavia soon began to create different brands of sparkling wines, including champagne. In 1986 Richard Sands, son of founder Marvin, took over as president of the company. The following year, Canandaigua purchased a plant in McFarland, California, in order to produce grape juice concentrate and grape spirits.

The two most important acquisitions in 1987 included Widmer’s Wine Cellars and the Manischewitz brands from Monarch Wine Company. Widmer’s Wine Cellars, located in Naples, New York, was one of the most successful and popular makers of table wine on the East Coast. Producing a wide range of table wines, from

Dry Riesling to California varietals, Widmer had won a host of awards in wine competitions. In the late 1980s Manischewitz was the best-selling brand name in kosher wines. When Canandaigua purchased the Manischewitz assets, all the production facilities were relocated to the Widmer plant in Naples, New York. Canandaigua’s commitment to the production of the Manischewitz brands involved a separate facility, which maintained strict supervision for the making of kosher wine.

DIVERSIFICATION THROUGH ACQUISITION

In 1988 the company added Cal-Products in order to produce grape spirits. During the same year, the company purchased the Cisco brand name products from Guild Wineries, a maker of table wines, dessert wines, and champagnes. Canandaigua was so pleased with the revenue generated by these products that it acquired Guild Wineries in 1991 for $60 million. This purchase brought with it the popular brands of Dunnewood wines, Cribari vermouth, and Cook’s champagne. Italian Swiss Colony brand dessert wines were also bought at this time. During the late 1980s and early 1990s, in addition to the acquisition of domestic firms that produced wines, champagnes, and juices, the company began to import the Marcus James brand of table wines from Brazil, the popular Mateus brand from Portugal, the Keller Geister brand of table wines from Germany, and Mondoro Asti Spumante from Italy.

During the 1990s, with Sands heading the company as chairman of the board of directors, and with son Richard serving first as president then as CEO starting in 1993, Canandaigua continued to expand. One of the most significant acquisitions included Barton Inc., which was purchased in June 1993 for approximately $123 million in cash, one million shares of Canandaigua stock, and the assumption of $47.9 million in debt. Barton, located in Chicago, Illinois, was one of the largest producers of distilled spirits and also one of the largest importers of foreign beers. A firm with additional facilities in Carson, California, and Atlanta, Georgia, Barton was in the midst of its own expansion program when acquired by Canandaigua.

This purchase provided Canandaigua with an entry into the lucrative distilled spirits market. Barton’s brands were already selling well, including Scotch whiskeys such as House of Stuart and Speyburn single malt, Canadian whiskeys such as Canadian Host and Northern Light, and American whiskeys named Corby’s Reserve and Kentucky Gentleman. At the time of the acquisition, Barton Vodka was one of the largest selling domestically made vodkas in the United States. The Barton Beer division was just beginning to reap the rewards of importing such popular items as Corona Light from Mexico and Tsingtao from China.

In October 1993 Canandaigua purchased Vintners International Company, Inc., including Paul Masson and Taylor California Cellars, for $148.9 million in cash. The Paul Masson brand, one of the most popular and respected in the wine industry, was given a new label with a heavy television advertising campaign that included the familiar phrase, “We will sell no wine before its time.” Taylor California Cellars brand of table wines, one of the best-selling brands in the country, was given a new price structure. Less than one year after the purchase of the Vintners brands, wholesale orders began to exceed company estimates, and sales steadily increased.

In July 1994, Canandaigua became the sole American importer and distributor of Cordorniu sparkling wines. Established in 1972 by the Cordorniu family in Barcelona, Spain, the winery was the first to produce Methode Champernoise sparkling wines on the Iberian Peninsula. In 1992, Cordorniu built a facility in Napa Valley where it began to produce the popular Cordorniu Napa Valley Brut Cuvée.

A very significant acquisition for Canandaigua occurred in August 1994, when the company purchased both Almaden Vineyards and Inglenook Vineyards from Heublein, Inc., for $130.6 million. Inglenook Vine yards, founded in 1879 by a sea captain from Finland, Gustave Niebaum, and Almaden Vineyards, established by Etienne Thee and Charles LeFranc in 1852, were two of the oldest and most well-respected wineries in the United States. Together, the two companies sold approximately 15 million cases of wines in 1993, and Almaden ranked fifth while Inglenook ranked sixth in table wine sales within the United States. Almaden alone, before its acquisition by Canandaigua, had captured over 6 percent of the U.S. table wine market. Inglenook had cornered over 5 percent of the domestic table wine market.

With these acquisitions, Canandaigua owned and operated four of the five GAMIT brands (GAMIT is the acronym for the five major wine brands in the United States: Gallo, Almaden, Paul Masson, Inglenook, and Taylor California Cellars). These wineries produced significant amounts of varietal wines, and Canandaigua positioned itself to take advantage of the growing varietal wine market through its acquisition strategy. At the same time, the company also improved upon its ranking as the second-leading wine producer in the United States. Under new marketing techniques implemented by management, Almaden wines, such as Mountain Burgundy, grew in popularity and increased company revenues. A new pricing structure for Inglenook varietal wines, such as Premium Select and Napa Valley, also led to increasing sales.

RESTRUCTURING AND RECORD GROWTH

Double-digit sales growth during the early 1990s catapulted Canandaigua into one of the largest and most popular of the alcoholic beverage producers and importers in the United States. From 1990 to 1994, the company’s gross sales shot up from $201 million to $861 million, nearly a fourfold increase. In 1994 net income was recorded at $26 million, a 71 percent increase over the previous year. The acquisition of Barton resulted in a sales increase of $211 million for 1994, while the purchase of Vintners generated $119 million for the same fiscal year. In just one month of sales, the Almaden and Inglenook acquisition added an impressive $17 million to the 1994 year in sales.

That same year, the company announced a comprehensive restructuring program that was estimated to save approximately $1.7 million in 1995 and over $13.3 million by 1996. The acquisition of Barton and Vintners gave rise to an integration of sales staff, improvement of customer services, a marketing campaign with an enhanced focus, greater efficiency in production techniques, an implementation of up-to-date information systems, and more effective finance and administrative operations. During the mid-1990s Canandaigua consolidated all its facilities already located in California, enabling the company to group three separate bottling operations in one location. The new facility, the Mission Bell plant in Madera, California, began bottling more than 22 million cases annually.

Under the continued leadership of Marvin Sands, Canandaigua in the mid-1990s appeared to be headed for even greater profitability in the future. The company had captured 32 percent of the domestic champagne market, the largest in the industry. By the mid-1990s the company’s Barton Beer Division held 10 percent of the total market share for imported beers in the United States. In 1994 the division’s domestic brand, Point Special, increased sales by an astounding 25 percent. The company’s Dunnewood brand, a California varietal wine, also increased its sales by 25 percent in 1994. With such popular brands, and astute management that foresaw opportunities and took advantage of trends in the marketplace, it was no surprise that the company’s stock price increased by a record 37 percent for 1994.

Acquisitions continued in the second half of the 1990s, highlighted early on by the September 1995 purchase of 12 distilled liquor brands from United Distillers Glenmore, Inc., for $141.8 million. Among the key brands added to the Canandaigua portfolio were Canadian LTD whiskey; Chi-Chi’s cocktails; Fleischmann’s gin, vodka, and whiskey; Inver House scotch; and Mr. Boston liqueurs, brandies, and schnapps. This acquisition propelled Canandaigua from the eighth-largest distributor of distilled spirits in the United States to the fourth-largest.

The company suffered a brief setback during fiscal 1996 after running into operational difficulties stemming from the aggressive string of acquisitions of the previous half-decade. Canandaigua subsequently restructured its production, marketing, and distribution operations to cut costs, increase production, and improve profitability. Another key to the turnaround was the beefing up of the company’s upper management ranks, including the addition of Daniel Barnett as president of the wine division and Thomas Summer as CFO. Marvin Sands remained chairman of the company, while son Richard continued serving as president and CEO.

CONTINUED DIVERSIFICATION AND COMPANY CHANGES

The company’s 1990s diversification led to the September 1997 company name change to Canandaigua Brands, Inc. The wine division thereupon adopted the Canandaigua Wine Company name, while the spirits and beer operations were organized within Barton Incorporated. In early 1998 the company moved its headquarters from Canandaigua to Fairport, New York (located east of Rochester). For the fiscal year ending in February 1998 Canandaigua Brands reported record net sales of $1.21 billion. Net income of $50.1 million was nearly double the $27.7 million figure for the preceding year.

In the spring of 1998 Canandaigua succeeded with the launch of a new wine brand, Arbor Mist. The new line consisted of fruit-flavored varietal wines with a low alcohol content of 6 percent aimed at first-time and younger wine consumers, particularly women. By the fall of 1998 Arbor Mist had already captured 1.2 percent of the U.S. wine market. With acquisition prospects in the United States dwindling, Canandaigua began seeking international opportunities in 1998. In December that year, the company acquired Matthew Clark plc for $475 million.

Founded in 1810, the U.K.-based company was a leading producer and distributor of hard cider, wine, and bottled water in its home country. Among the company’s brands were Blackthorn and Diamond White cider, Stowells of Chelsea and QC wines, and Strathmore sparkling water. In April 1999, Canandaigua spent $185.5 million to acquire eight Canadian whiskey brands and production facilities in the provinces of Alberta and Quebec from Diageo plc. The top brand gained thereby was Black Velvet, the number three Canadian whiskey brand in the United States.

A rapidly growing sector of the wine industry in the late 1990s was the premium category, an area in which Canandaigua Brands lacked any presence. That changed in June 1999 when the company completed two separate acquisitions of Franciscan Vineyards, Inc., and Simi Winery, Inc., and began operating them as a separate division called Franciscan Estates. The purchases instantly vaulted Canandaigua into the ranks of the major makers of fine wines, with a portfolio that featured several well-respected brands: Quintessa, Veramonte, Mount Veeder, Franciscan Oakville Estate, Estancia, and Simi.

From the start of its acquisition spree in 1991 through fiscal 1999, Canandaigua Brands achieved a remarkable level of growth, with both net sales and net income increasing at a rate of 33 percent per year. Net sales for 1999 were a shade under $1.5 billion. In August 1999, soon after the company’s entry into the premium wine category, Marvin Sands died at the age of 75, after more than 50 years of leading the company. Richard Sands took over as chairman, gaining full responsibility for taking the rapidly growing company through the initial years of the 21st century.

ACQUISITIONS INCREASE REVENUES IN THE EARLY 21ST CENTURY

Under the leadership of Richard Sands, Canandaigua Brands recorded remarkable growth heading into the 21st century, with the 1999 acquisitions of Franciscan Vineyards and Simi Winery signaling a concerted push into middle- and upper-tier wines. The company changed its name again in 2000, adopting the corporate title Constellation Brands, Inc., “a more apt description of a company that has grown in both breadth and depth of its product line as well as its geographic reach,” according to a company spokesperson in the September 18, 2000, issue of Nation’s Restaurant News.

Constellation Brands completed a series of acquisitions early in the first decade of the 21st century that recast the company’s image. Known for years for its portfolio of inexpensive “jug” wines, the company broadened its scope to include fine wines, a move that led to robust growth and several massive acquisitions. In early 2001 the company acquired Turner Road Vintners and Corus Brands, purchases that gave it premium wine labels such as Talus, Vendange, Columbia, and Covey Run. In mid-2001 the company acquired Ravenswood, the most popular brand of premium Red Zinfandel in the United States. The most important transaction of the year was concluded in August, when Constellation Brands formed a joint venture company with BRL Hardy Ltd., the largest vintner in Australia.

The two companies formed Pacific Wine Partnership, which allowed Constellation to import some of BRL Hardy’s Australian and New Zealand wines. The partnership represented an important foray into “New World” wines, that is, those produced in Southern Hemisphere countries such as South Africa, Chile, and Australia, a sector of the global wine industry that Constellation would come to dominate. The joint venture with BRL Hardy did not achieve its greatest significance until nearly two years after the Pacific Wine Partnership was formed, however, when Richard Sands completed his first massive acquisition.

The relationship between Constellation and BRL Hardy crystallized in early 2003. In April, Sands acquired BRL Hardy in a cash-and-stock transaction valued at $1.1 billion. The purchase made Constellation the largest vintner in the world, enabling the company to overtake E. & J. Gallo. The company’s wine sales increased from $1.2 billion to $1.7 billion overnight, while its total revenues swelled to more than $3 billion. Sands, who quickly developed a reputation for being a skilled negotiator, took the company to new heights with the BRL Hardy acquisition, but his appetite for acquisitions was not satisfied after completing the largest deal in the company’s history.

Roughly a year and a half later, Constellation announced it was acquiring Robert Mondavi Corporation in a more than $1 billion deal that ranked as one of the largest acquisitions in the history of the California wine industry. The acquisition, announced in November 2004 and approved by shareholders in 2005, gave Constellation control of approximately 20 percent of all California wine production. It also indicated Sands’s willingness to acquire, which enabled the company to increase its revenues from $1.5 billion to $4.5 billion during his first five years of leadership.

EXPANSION LEADS TO RESTRUCTURING

During the next several years Constellation continued to expand its roster of beverage labels through a series of joint ventures and acquisitions. In early 2005 it acquired a 40 percent stake in Italian wine brand Ruffino for $142 million. A year later the company made a major purchase, taking over Vincor International, Canada’s largest wine company, for $1.44 billion. In 2006 it also embarked on a 50-50 joint venture with Mexico-based Grupo Modelo (known as Crown Imports) to distribute its Mexican beers, including Corona and Pacifico, in the United States.

By April 2006 Constellation’s fourth-quarter profits were up 22 percent with the company reporting a net income of $58.2 million, up from $47.5 million a year earlier, despite a dip in the larger wine business. Industry pundits credited the company’s bold acquisition strategy with its ability to continue turning a profit in a stagnant market. Although the company was gaining upward momentum, Constellation underwent top management changes a year later when Richard Sands stepped down as CEO to be replaced by his brother, Robert Sands.

In 2007 and 2008 the company made several major purchases to expand its spirits and wine businesses. Constellation spent $384 million in 2007 to acquire Swedish vodka maker Spirits Marque One, producer of the prestigious Svedka label. A year later, the company created a major boost for its wine division by purchasing Beam Wine Estates, Inc., for $885 million from holding company Fortune Brands.

Both of these purchases signaled a shift in Constellation’s business strategy. During this period, higherpriced, niche, and premium products were generating most of the growth in the wine, beer, and spirits market. Constellation aimed to capitalize on this niche. The Beam Wine Estates acquisition enabled Constellation to add many well-known premium wine labels to its roster, including Geyser Peak, Wild Horse, and Clos du Bois. It also included five upscale Sonoma County, California, wineries and vineyards.

As the world economic downturn took hold in mid-2008, Constellation began experiencing a major slow-down in sales growth, which effectively ended its buying spree. Faced with significant debt and meager sales, the company looked for ways to stay profitable. Its solution was company restructuring. By the end of 2008 it began consolidating divisions, cutting back its sales force, and streamlining its wine portfolio to focus on wider-margin, higher-growth brands. In alignment with its focus on premium wines, it offloaded several middlemarket wine brands, including Almaden, Paul Masson, and Inglenook for $134 million to The Wine Group. It also sold other wine assets to Sonoma Valley–based Eight Estates Fine Wines, including Buena Vista, Atlas Peak, and XYZin.

In January 2009 Constellation reported a fall in quarterly profit by 30 percent. As a result, the restructuring continued with the company selling more than 40 lower-priced liquor brands to Sazerac Company for $334 million, including Barton whiskey, rum, and vodka; the 99 schnapps line; and Fleischmann’s vodka and whiskey. A year later in January 2010, as the economy continued to flounder, earnings fell further into decline with quarterly earnings sinking 47 percent. In this climate, the company maintained its restructuring strategy and trimmed more of its brand roster, selling its U.K. Gaymer Cider Company business to Dublin-based C&C Group for $73.2 million.

Although Constellation had sold numerous assets by 2011, it was still the world’s largest winemaker by sales. With its Australian and European wines performing below expectations, however, in January 2011 the company sold an 80 percent stake in Constellation Wines Australia and Europe and a 50 percent stake in the U.K.-based Matthew Clark to private-equity firm CHAMP. After the sale Constellation fell to the world’s second-largest winemaker, behind privately held E. & J. Gallo Winery.

ECONOMIC RECOVERY AND RENEWED EXPANSION

As the economy and its balance sheets began to recover, Constellation resumed its focus on expansion. In 2011 and 2012 the company replaced some of its lost wine volume by acquiring the remaining shares in Italy-based Ruffino for $68.6 million in October 2011 and purchasing the premium wine brand Mark West for $159.3 million in 2012.

In June 2013 the company was ready to significantly expand its product focus outside of winemaking and into beer. That month it completed its largest deal ever with the acquisition of Grupo Modelo’s U.S. beer business from Anheuser-Busch InBev for approximately $4.75 billion to gain full control of Crown Imports. The deal gave Constellation the U.S. distribution rights for top import Corona and a handful of other Mexican beers plus a Mexican brewery. At the conclusion of the deal, Constellation became the thirdlargest beer supplier in the United States.

The Crown Imports deal proved significant to Constellation’s bottom line. Six months later in January 2014 Constellation’s third-quarter income jumped 93 percent. It also gave Constellation a new market to focus on: beer. Constellation’s corporate image as a world leader in wine distribution seemed about to be headed into new territory.

KEY DATES

1945:: Marvin Sands establishes Canandaigua Industries to run a family winery.
1948:: Sands purchases Mother Vineyard Wine Company.
1951:: Sands opens Richards Wine Cellars.
1972:: Company incorporates as Canandaigua Wine Company, Inc., and goes public the following year.
1997:: Company changes its name to Canandaigua Brands, Inc.
1999:: Richard Sands takes over as chairman following his father’s death.
2000:: Canandaigua changes its name to Constellation Brands, Inc.
2005:: Constellation completes acquisition of Robert Mondavi Corporation.
2008:: Company acquires Beam Wine Estates, Inc.
2013:: Company acquires Grupo Modelo’s U.S. beer business from Anheuser-Busch InBev.

Peabody Energy Corporation

June 30, 2015 mnaexpert

Public Company

Incorporated: 1890 as Peabody Coal Company

Employees: 7,300

Sales: $6.01 billion (2009)

Stock Exchanges: New York

Ticker Symbol: BTU

NAICS: 212111 Bituminous Coal and Lignite Surface Mining; 212112 Bituminous Coal Underground Mining

Peabody Energy Corporation is the largest private-sector coal company in the world and the largest coal mining company in the United States. As a majority shareholder in 30 coal mining operations and with more than nine billion tons in coal reserves, Peabody Energy extracts more than 224 million tons of coal per year. Coal mining operations are located in Wyoming, Colorado, New Mexico, Arizona, Indiana, Illinois, Venezuela, and New South Wales and Queensland, Australia.

COALTRADE, the company’s worldwide marketing, trading, and brokerage operations, has offices in St. Louis, London, Beijing, Mongolia, and in Newcastle, New South Wales. COALTRADE sells more than 244 million tons of coal per year to customers on six continents. Peabody coal powers 10 percent of electricity generation in the United States, and it supplies 2 percent of electricity generation worldwide. The company is involved in several power generation projects, including experimental low emissions power plants and the Prairie State Energy Campus, a fully integrated coal mining and power generation project in Illinois.

ORIGINS

Peabody Coal was founded in the 1880s by Francis S. Peabody. The son of a prominent Chicago attorney, Peabody graduated from Yale University with the intention of studying law in Chicago. Displaying little aptitude for the profession, however, he opted for a career in business, working at a bank for a brief period before embarking on a private retail venture in 1883. With a partner, $100 in start-up capital, a wagon, and two mules, the 24-year-oldPeabody established Peabody, Daniels & Company, which sold and delivered coal purchased from established mines to homes and small businesses in the Chicago area. Capitalizing on the social and business relations cultivated by Peabody’s father, the company attracted a large customer base and experienced success from the onset. As sales continued to increase, the company rose to prominence among the major coal retailers in Chicago.

During the late 1880s Peabody bought out his partner’s share of the business, and in 1890 the company was incorporated in the state of Illinois under the name Peabody Coal Company. Five years later, in order to meet increasing customer demand, Peabody

Page 344 | Top of Article

Sidebar: Hide

COMPANY PERSPECTIVES

Peabody Energy’s mission is to be a leading worldwide producer and supplier of sustainable energy solutions, which power economic prosperity and result in a better quality of life.

began its own mining operation, opening Mine No. 1 in the southern Illinois county of Williamson. This venture represented the first step in Peabody’s transition from coal retailer to mining company.

At the beginning of the 20th century, coal-burning fireplaces and furnaces constituted the chief source of heat for both private residences and public buildings. Moreover, the railroad and shipping industries relied heavily on coal to power their steam engines. Over the next 10 years, however, the increasing popularity of alternative fuels (including natural gas, which had applications in home heating, and diesel fuel, which could be used to power locomotives) led to a greatly reduced demand for coal in what had been its primary markets. Nonetheless, coal became an important commodity for another developing industry during this time, as electricity was brought to homes and businesses in urban and eventually rural parts of the country. The operation of electrical utility plants demanded large amounts of coal. In 1913Peabody Coal won a long-term contract to supply coal to a major electric utility, and, realizing the growing importance of this market, the company began focusing on obtaining similar high-volume, long-term supply contracts, while acquiring more mining and reserve property to meet expected demand.

Having anticipated and adapted to changes in the marketplace, PeabodyCoal thrived. The company obtained a listing on the Midwest Stock Exchange in 1929 and became known as a coal producer rather than retailer. Despite adverse economic conditions during the Great Depression and disputes and strikes involving the unionization of mine workers, the company continued to realize profits and growth. In 1949 Peabody Coal was listed on the New York Stock Exchange. During this time, Francis S. Peabody retired and was succeeded as company president by his son, Stuyvesant (Jack) Peabody, who later ceded control to his own son, Stuyvesant Peabody Jr.

MERGER WITH SINCLAIR IN 1955

By the mid-1950s Peabody ranked eighth among the country’s top coal producers. Dependent on underground mines, however, the company lost market share to competitors engaged in surface mining, a less expensive process that yielded a higher volume of coal. Heavy losses at Peabodyensued in the early 1950s. The company engaged in merger talks with Sinclair Coal Company, the country’s third-largest coal mining operation.Peabody management believed that Sinclair could offer the company access to greater financial resources and surface mining operations that would help it to remain competitive.

Like Peabody, Sinclair was founded in the late 19th century as a retail operation. Sinclair provided customers in the vicinity of Aurora, Missouri, with coal for heating their homes and businesses. During the 1920s, Sinclair President Grant Stauffer was approached by Russell Kelce, an ambitious coal miner who sought to put his years of practical experience to use in an executive capacity. Born into a long line of coal miners, Kelce had begun working in the mines of Pennsylvania while in his teens. He later moved to the Midwest, where his father had established a mining operation. Stauffer and Kelce reached an agreement in which Stauffer would be responsible for cultivating a large customer base and long-term contracts, and Kelce would oversee mining operations. By 1926 Kelce had purchased a significant share of Sinclair Coal Co., and he became president when Stauffer died in 1949.

Kelce was also named president of the new company that resulted when Sinclair and Peabody merged in 1955. That year, Sinclair acquired 95 percent of Peabody’s stock and moved Peabody’s headquarters to St. Louis. However, the Peabody name, familiar to investors due to its listing on the New York Stock Exchange, was retained. Under the leadership of Russell Kelce, and, later, his brothers Merl and Ted, Peabody doubled its production and sales by opening new mines and acquiring established mines in the western states, including Arizona, Colorado, and Montana. By the mid-1960s, the company had opened a mine in Queensland, Australia, its first venture outside North America.

THE LITIGIOUS SEVENTIES AND EIGHTIES

In 1968 Peabody’s assets were acquired by Kennecott Copper Corporation. Although Peabody became the largest coal producer in the United States during this time, its position under Kennecott was made tenuous by an antitrust suit. The Federal Trade Commission (FTC) ruled that Kennecott’s purchase of Peabody was in violation of the Clayton Act, a decision that Kennecott challenged. In 1976, after eight years of litigation, the FTC ordered Kennecott to divest Peabody Coal Company. Peabody Holding Company, Inc., was

Page 345 | Top of Article

Sidebar: Hide

KEY DATES

1883:	Francis Peabody starts a retail coal venture.
1955:	Peabody merges with Sinclair Coal.
1968:	Kennecott Copper Corporation acquires Peabody.
1976:	Federal Trade Commission orders Kennecott to sellPeabody; holding company is formed.
1990:	Hanson PLC acquires Peabody.
1997:	Hanson spins off Peabody into The Energy Group.
1998:	Lehman Merchant buys Peabody.
2001:	Company goes public as Peabody Energy Corporation.
2004:	A $432 million acquisition includes a low-sulfur coal mine in Colorado and two mines in Australia.
2007:	Peabody begins trading and brokering coal in Asia.

formed. The following year it bought Peabody Coal for $1.1 billion. Edwin R. Phelps presided over Peabody during these years of litigation, and in 1978 he was named the company’s chairperson. The presidency was then transferred to Robert H. Quenon, a former executive in the coal division of Exxon.

Quenon met with several challenges at Peabody, including poor labor relationships, low employee morale, financial losses, and outdated plants and equipment. However, he later recalled in an interview for Peabody’s Pulsemagazine that he was encouraged by the fact that the company “had a very good management team. They understood coal, and made things happen.” Quenon oversaw a reorganization of Peabody that resulted in separate divisions for sales, marketing, mine operations, resource management, and customer service. By selling off several of its properties, the company was able to finance more modern facilities and equipment. Moreover, Quenon was able to capitalize on the OPEC oil crisis by renegotiating longer term contracts with customers who feared that coal prices, like oil prices, would soon increase dramatically.

Although Peabody became more financially stable, it also faced union strikes and litigation over safety issues during the 1970s and 1980s. The longest strike took place from December 1977 through March 1978. It ended when mine workers throughout the country accepted a new three-year contract. The 110-day strike could have led to power shortages and industrial layoffs. However, this threat to the nation’s economy was avoided largely due to the stockpiling of coal that occurred before the strike commenced. Nevertheless, this strike and another in 1981 that lasted for 75 days proved costly toPeabody, and the company strove to improve its relations with its employees.

The safety of Peabody mines was called into question beginning in 1982, when the company was charged with tampering with the results of safety tests at its mine in Morganfield, Kentucky. The tests, made mandatory for all coal mines by the Mine Safety and Health Administration (MSHA), measured the amount of coal dust to which miners were exposed. Excessive amounts of the dust were linked to pneumoconiosis, commonly known as black lung disease. Peabody pleaded guilty to 13 charges of tampering with the test results in December 1982 and paid fines totaling $130,000. Also during this time, MSHA found the company’s Eagle No. 2 mine in Illinois in violation of safety standards. Eagle No. 2 failed to provide adequate roof support beams, which resulted in the accidental death of a foreman.

Reacting to these and other similar disasters, Peabody focused its attention on safety, designating teams of engineers to design stronger roofs and better ventilation systems at its underground mines. In addition, the company patented its invention of a “flooded bed scrubber,” which operated in conjunction with mining machinery to reduce the amount of coal dust in the mines.

In 1983 Quenon was made president and CEO of Peabody’s parent company, Peabody Holding Co., and Wayne T. Ewing was named president of Peabody Coal. Two years later, when Ewing moved to the PeabodyDevelopment Company, another subsidiary of Peabody Holding, he was replaced at Peabody Coal by Howard W. Williams. Improved labor relations atPeabody were reflected in the successful negotiations of contracts with the United Mine Workers. The company and its miners avoided strikes in 1984 and 1988.

Growth in Peabody’s operations continued. In 1984 the company acquired the West Virginia coal mines of Armco Inc. for $257 million, resulting in new contracts with northeastern utility companies. During this time, Peabody’s headquarters were relocated in Henderson, Kentucky, which offered closer proximity to its central mines.

CLEARING THE AIR IN THE NINETIES

The passage of the Clean Air Act Amendments by Congress in the early 1990s forced many coal producers, Page 346 | Top of Articleincluding Peabody, to reassess their operations. Phase I of the act mandated that U.S. industries work to reduce the amount of sulfur dioxide emissions produced by their plants. Although the installation of scrubbers at coal-burning power plants would enable such companies to modify the effects of high-sulfur coal themselves, most customers preferred to switch to a low-sulfur coal product. As a result, Peabody’s competitive status hinged on its ability to renegotiate customer contracts and provide a product lower in sulfur content.

Some Peabody mines, including Eagle No. 2, lost major contracts and were forced to close, whereas others were able to implement new equipment and procedures that produced low-sulfur coal. The prospect of the stricter clean air requirements outlined in Phase II of the act, scheduled to go into effect by 2000, prompted Peabody to invest heavily in technology, hoping to be better prepared for eventual shifts in demand.

Hanson PLC acquired Peabody Holding Company, Inc., in 1990, a year after the bidding process had been set in motion by Newmont Mining Corporation, a company in which Hanson had a 49 percent shareholding. Irl F. Engelhardt was named president of Peabody Group, while G. S. (Sam) Shiflett becamePeabody Coal’s 13th president.

In addition to the responsibilities of containing costs and implementing substantial changes in the company’s Illinois Basin mines, Shiflett faced the threat of a strike by United Mine Workers during the first year of his presidency. Several developments in the coal industry contributed to dissatisfaction among mine workers. Technological advancements, including the computerization of some mining operations, led to reductions in the workforce. Moreover, new nonunion mining operations emerged, offering stiff competition through lower coal prices, which unionized miners feared would lead to wage cuts. Finally, as coal companies were increasingly acquired by large, international conglomerates, the lines of communication between labor and management became convoluted, and the potential for rifts increased.

The costly, extended strike and over a year of negotiations ended in December 1993, when the union agreed to a new four-year contract. The contract included provisions for an improved health care plan as well as the establishment of the Labor Management Positive Change Process (LMPCP). LMPCP, an effort to resolve future problems through cooperation rather than confrontation, invited employees to voice concerns regarding mine conditions and job security and suggest solutions. As chairperson of the Bituminous Coal Operators’ Association, Peabody President Shiflett was instrumental in designing and negotiating the contract to resolve the strike.

In the mid-1990s, Peabody continued to rely on the utility industry as its primary customer base. With analysts predicting steady increases in the country’s demand for coal in the 1990s and bolstered by rising demand at electric generation plants, Peabody Group looked forward to renewed profits and expansion throughout the 1990s.

CHANGING HANDS IN THE LATE NINETIES

Peabody and Eastern Group, a U.K. electricity distribution and generating company, were spun off by Hanson in March 1997 to create The Energy Group PLC. The new company planned to become an integrated electric company and immediately began buying U.S. power marketing companies such as Boston-based Citizens Lehman Power LLC. Renamed Citizens Power, this was eventually sold to Edison Mission Energy for about $110 million.

Within four months of listing on the London and New York stock exchanges, Energy Group attracted a takeover bid by Portland-based PacifiCorp. In May 1998, Lehman Merchant Banking Partners emerged as Peabody Group’s new owner, paying Texas Utilities $2.3 billion. Texas Utilities had acquired Energy Group PLC for $7.4 billion and retained ownership of Eastern Group.

Peabody Coal raised its stake in Evansville, Indiana-based Black Beauty Coal Co. to 81.7 percent in February 1999. Peabody had owned 43.4 percent of Black Beauty and paid $150 million to buy 33.3 percent more from P&M Coal Mining Co. and 5 percent from a management group. Just before the purchase, Peabody had paid $1.3 million to settle a United Mine Workers claim related to the 1994 transfer of coal reserves to Black Beauty, a nonunion company.

Peabody announced a $1 billion, six-year contract to supply the Tennessee Valley Authority’s Cumberland Generating Station in August 1999. The contract stipulated that two-thirds of the coal come from mines in Kentucky. Union and government officials were negotiating to keep those mines open beyond 2002, offering millions in incentives and concessions. Within a few months, Illinois Power would stop buying coal from Peabody’s last Illinois mine, choosing lower-polluting Wyoming coal instead.

In late 2000, Peabody Coal’s Black Mesa Mine in Arizona drew protests from members of the Hopi and Navajo tribes, which had leased Peabody the lands since Page 347 | Top of Articlethe mid-1960s. The protesters took issue with the pumping of billions of gallons of water from the “N” aquifer to move pulverized coal along a 273-mile pipeline to the Mojave Generating Station in Laughlin, Nevada. APeabody representative cited studies that the operations consumed less than 1 percent of the aquifer’s water. (Members of the Hopi tribe would later suePeabody for discrimination on the basis of national origin, alleging that the company hired only Navajos at its Kayenta and Black Mesa mines.)

P&L Coal Holdings Corporation, known commonly as Peabody Group, changed its name to Peabody Energy Corporation in April 2001. PeabodyEnergy netted $456 million in an initial public offering (IPO) held on May 22, 2001. The energy sector, stoked by California’s recent power crisis, was hot again. The emphasis placed on coal by President George W. Bush and the Department of Energy made Peabody’s pure play even more appealing. Lehman Merchant Banking Partners, a unit of Lehman Bros., retained a 59 percent stake in the company. Peabody was still left with $1 billion in debt after the IPO. Lehman had long placed a priority on reducing Peabody’s debt. In January 2001, Peabody sold an Australian coal business to London’s Rio Tinto PLC for about $450 million plus the assumption of $119 million in debt.

DOMESTIC AND INTERNATIONAL STRATEGY FOR THE 21ST CENTURY

Under the leadership of Irl Engelhardt, Peabody Energy sought to transform itself into a public company. In the United States, Peabody shifted from high-sulfur coal mining to primarily low-sulfur coal mining due to cost and environmental considerations. Also, the company invested in technology to reduce emissions at coal-fueled power generation stations. Internationally,Peabody prepared to supply growing Asian economies with coal. In particular, rapid economic development in China and India promised to sustain high demand for coal for decades to come.

In the western United States, Peabody purchased low-sulfur coal properties that would garner higher profit margins than its Appalachian operations.Peabody acquired mines in the Powder River Basin, an area rich in low-sulfur coal that overlapped Wyoming and Colorado. Peabody expanded the North Antelope-Rochelle coal mine in Wyoming, the largest coal mine worldwide. The acquisition placed Peabody among the largest coal producers worldwide.

In 2004 Peabody purchased the Twentymile Mine in Colorado, which produced more than seven million tons of low-sulfur coal per year. It was one of the largest underground mines in the United States and one of the most productive. Installation of new equipment and the addition of 80 new employees resulted in a 40 percent increase in production.

The Twentymile Mine was part of a larger acquisition package that included two mines in Queensland, Australia. Peabody Energy purchased the three coal mines from RAG Coal International for $432 million. With annual production at seven million tons of coal, the Australian mines providedPeabody with a base of customers in growing Asian markets.

Although the company purchased a high-sulfur coal mine in southern Illinois and Indiana, it did so to retain its lead position in the southern Illinois energy market. In 2005 Peabody initiated development of a $2 billion electricity power plant adjacent to the mine, in Illinois. The Lively Grove Mine would supply coal to the 1,500 megawatt plant, which would use new technology for reducing carbon emissions from burning coal. Several municipal and cooperative utilities agreed to purchase an aggregate 47 percent interest in the project, called the Prairie State Energy Campus.

DIVESTMENTS, EXPANSION, AND IMPROVED PROFITABILITY

By early 2005, Peabody successfully made the transition to a profitable public company. The company divested its high-cost Appalachian assets, and expansion of the company’s overall mining capacity occurred just as the market for coal began to explode due to higher costs for oil and natural gas. Revenue increased 29 percent in 2004, to $3.6 billion.

With George Boyce as chief operating officer, then chief executive officer,Peabody continued to develop international operations. Serving Asian markets involved developing sizable coal producing operations and opening new sales offices. The company opened an office in Beijing in the fall of 2005; established a relationship with Shenua Group, one of the largest coal producers in China, in April 2006; and began dealing in coal in early 2007. Joint ventures with established Chinese coal producers in 2009 further expanded Peabody’s brokering and mining activities.

Peabody Energy accelerated mine development in Australia. The October 2006 acquisition of Excel Coal, Ltd., included 500 million tons of coal reserves. Construction of a coal export terminal in New South Wales, Australia, supported coal exports to China. In 2008 the company completed its acquisition of the Millennium Mine in Queensland and increased production capacity to three million tons annually. In the fall of Page 348 | Top of Article2009 PeabodyEnergy opened sales offices in Jakarta, Indonesia, and in Singapore.

Peabody planned to double coal production and exports by 2014. However, negotiations to acquire Macarthur Coal Ltd., the largest worldwide exporter of metallurgical coal, dissolved in the summer of 2010. Nevertheless, Peabodywas well-positioned for growth, and Boyce considered the development of 100 gigawatts of clean electricity by 2025 to be a national security issue.

THE ENVIRONMENTAL FUTURE

As the coal industry sought to address public concern for carbon dioxide emissions at coal-fueled electricity generating plants, Peabody became interested in technologies for “clean coal.” In 2007 Peabody joined the FutureGen Industrial Alliance, a collaboration with 12 energy companies and the U.S. Department of Energy, to develop a 275-megawatt power plant that reduced emissions more than 90 percent. FutureGen expected to open the power station using carbon capture technology in Mantoon, Illinois, in 2012.

However, Peabody and the coal industry faced opposition to the development and implementation of carbon capture and storage (CCS) technology from environmentalists. CCS involved a process of siphoning hydrogen from coal-burning emissions and using it to produce emission-free electricity. The remaining carbon dioxide would be stored underground, in geological formations. While this resolved the problem of air pollution, the safety of underground storage remained unproven.

Peabody obtained federal subsidies to invest in the development of clean coal technology. The company invested in technologies of other projects, such as China’s GreenGen. In 2010 Peabody purchased a $15 million equity interest in Calera Corp. Calera developed CCS technology that recycled synthetic carbon monoxide into usable cement-like materials.

Harris Corp.

June 30, 2015 mnaexpert

Public Company
Incorporated: 1926 as Harris-Seybold-Potter Company
Employees: 14,000
Sales: $5.11 billion (2013)
Stock Exchanges: New York
Ticker Symbol: HRS
NAICS: 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 334290 Other Communications Equipment Manufacturing; 334210 Telephone Apparatus Manufacturing; 541512 Computer Systems Design Services; 334220 Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing; 333318 Other Commercial and Service Industry Machinery Manufacturing; 423690 Other Electronic Parts and Equipment Merchant Wholesalers

Harris Corporation, whose roots date back to a printing company established in 1895, operates as a leading international communications and information technology (IT) company. Harris makes a leading line of broadband-enabled tactical radios (Falcon) used by military and public safety personnel. It is also active in government IT services and communications systems. In 2012 Harris announced plans to sell its broadcast and production business, allowing it to focus on what the company has trademarked as “assured communications.”

OHIO ORIGINS

In 1895 the Harris Automatic Press Company was founded in Cleveland, Ohio. This company manufactured large multicolor presses used to print books and newspapers. In the early decades of the 20th century, the Harris Automatic Press acquired the properties of two other companies involved in the printing business: Seybold Machine Company of Dayton, Ohio, and Premier & Potter Printing Press Company, Inc., of New York. The name of the company was then changed to Harris-Seybold-Potter Company.

In June 1957 the company merged with the Intertype Corporation of Brooklyn, New York, and its name was again changed, this time to Harris-Intertype Corporation. Intertype, a manufacturer of hot metal typesetting machines, also operated a plant in England.

Throughout these acquisitions the business remained essentially unchanged: it built and marketed printing machinery. Such machinery included offset lithographic presses, envelope presses, paper cutting machines, and bindery equipment, and at Intertype, hot metal typesetting machines. Later acquisitions, in particular the Gates Radio Company, gave the company the capacity to manufacture broadcasting transmitters and microwave equipment.

The boom in the aerospace industry that began in the 1950s gave rise to many companies that produced components for government projects. One of the earliest of these businesses was Radiation, Inc., established in 1950 by Homer Denius and George Shaw, both of whom were electronics engineers. At first Radiation employed a staff of only 12 and was housed in space rented from the Naval Air Station in Melbourne, Florida. The site was convenient because it was located only a few miles south of Cape Canaveral (now Kennedy) Space Center.

From the start, the company produced miniaturized electronics, tracking, and pulse-code-modulation technologies, all crucial to aerospace programs. Radiation’s involvement with the aerospace program included equipment for the Telstar and Courier communication satellites and the Nimbus and Tiros weather satellites. Military systems that relied upon Radiation equipment included the Atlas, Polaris, and Minuteman missiles.

Radiation’s initial success was due in part to the high quality of its staff. Many of the highest-level managers held advanced degrees in engineering. John Hartley, the CEO of the firm until 1995, joined Radiation after serving on the faculty of Auburn University. Hartley joined the firm in 1956, the same year that Radiation stock was first sold to the public. Another person who left academia to join the staff at Radiation was Joseph Boyd. In the late 1950s and early 1960s Boyd taught electrical engineering at the University of Michigan. At the same time he was also director of Willow Laboratories, a prestigious science and technology research institute with a staff of more than 1,000 scientists and engineers. Boyd joined Radiation in 1962 and within a year was made president of the firm. His first significant action as president was to set up a microelectronics plant to develop and produce integrated circuits. The following year, Hartley was named as director of this division of Radiation.

EXPANDING THE BUSINESS

During the early 1960s, Radiation devoted itself to improving its market position in the interconnected fields of digital communication, space communication, data management, and computer-based control systems. The company was also successful with satellite tracking systems and alphanumeric data processing. By 1967 the company was one of Florida’s largest employers (at 3,000 employees) and sales passed $50 million a year. The company was well established as a government contractor for both military and nonmilitary projects. Radiation’s management, however, wanted to expand the company’s business activity in the commercial sector. To do this, they decided to merge with a commercial company. At roughly the same time, Harris– Intertype Corporation was seeking to expand its operations into the electronics field.

George Dively, the chairman of Harris-Intertype, had succeeded in building up the company’s business from $10 million in annual sales to almost $200 million. Nonetheless, Harris-Intertype’s printing machines were still mechanical, and Dively realized that future technological developments would require electronics. Radiation seemed a perfect candidate for acquisition. The purchase price of $56 million was considered quite steep. Harris shares were traded for Radiation’s in a ratio that valued Radiation’s earnings at twice those of Harris. Harris’s management wanted Radiation’s electronics talent, however, not just its earning power. The two companies merged in 1967 under the Harris-Intertype name. Dively remained chairman of the company. Homer Denius, one of the founders of Radiation, became vice chairman, and Boyd became an executive vice president for electronics. After the merger, annual sales surpassed the $250 million mark and the combined number of employees exceeded 12,000.

The Harris-Radiation hybrid proved to be a success and innovations began to flow from the company almost immediately. Electronic newsroom technology, for example, was the direct result of a study made by Radiation of how to update Harris’s mechanical presses. Most important, however, the merger gave birth to an essential management strategy known as “technology transfer”: developing commercial applications of technology originally developed for the government.

PURCHASE OF RF COMMUNICATIONS

Two years later, RF Communications, Inc., of Rochester, New York, was purchased through an exchange of shares. By the time of its purchase, RF was well established as a manufacturer of point-to-point radio

equipment. Even after this rapid expansion, the company’s electronics business remained primarily with the government, especially in the aerospace field. Harris- Intertype was responsible for the production and development of the data-handling systems for the preflight check of the Apollo spacecraft and for the digital command-and-control computer of the Gemini spacecraft.

At the beginning of the 1970s, the company made several other major acquisitions. In 1972, Harris- Intertype purchased General Electric’s product line of TV broadcasting cameras, transmitters, studio equipment, and antennas for $5.5 million in cash, adding greatly to its original broadcasting product line. In addition, UCC–Communications Systems, Inc., of Dallas, Texas, was purchased from the University Computing Company for $20 million in cash. This company was a leading producer of computer terminals and communications subsystems for the data processing industry in general. Two years later, in 1974, Harris-Intertype acquired Datacraft Corporation and also divested itself of its corrugated paper machinery business. Datacraft was a producer of superminicomputers. During the same year the company changed its name to Harris Corporation.

These acquisitions, made under the leadership of company President Richard Tullis, were integral to Harris’s evolution from a business that was 84 percent mechanical into one that was 70 percent electronic. The integration of the purchases and the continual introduction of new product lines, however, took its toll on the company’s earnings. From the late 1960s to the late 1970s earnings growth was not outstanding and investors, in large part, ignored the company. By 1976 things began to change for Harris. Over the following three years its stock rose more than 100 percent. Meanwhile, the acquisitions campaign did not slow down even during the fallow period.

Subsequent acquisitions were all in the field of data processing and handling. Purchases were made every year throughout the remainder of the decade and well into the 1980s. By 1977 Harris’s sales were more than $646 million and earnings were greater than $40 million. Boyd was appointed chairman and CEO two years later, in 1979.

That year Harris reached a significant agreement with S.A. Matra, a French state-owned electronics company. Under this agreement, which was to provide the French with a factory to manufacture integrated circuits, all of the $40 million funding was supplied by Matra and the French government. Harris provided only technology and management. The French retained 51 percent of the company, leaving Harris with the remaining 49 percent.

TECHNOLOGY TRANSFER

Since Harris had begun to deal predominantly in electronics, the company found itself in a market with extremely powerful competition. By this time the concept of technology transfer was the central element of the company’s management policies. Although defense contracts accounted for only around 20 percent of Harris’s business, military projects were its most advanced production efforts. In general, government contracts are for custom products instead of standard items, which help push the state of a technological art to its limit. In addition, these projects tend to be motivated more by technology than by cost considerations.

Harris’s challenge was to translate work on customized, ultrahigh-technology products into profitable commercial projects. Harris adopted a more general strategy of competing for government work only in those areas in which the company anticipated the ready development of commercial products. The development of a video terminal for electronic newsrooms, derived from the company’s Vietnam-era work on an army battlefield message sender, was a successful example of this technology-transfer policy.

Throughout Harris’s history its acquisitions program was well planned. In 1980 Harris made another important purchase, of the Farinon Corporation, a manufacturer of microwave transmitters, electronic switchboards, and other sophisticated telephone products. At the time of its purchase, Farinon was a small company, with sales of only $100 million. Outside observers believed that the purchase price of four million Harris shares, worth around $125 million, was much too high. Management at Harris justified the price, however, on the grounds that it had to beat out other bids (GTE, RCA, Siemens, and Loral Corporation had all expressed interest in Farinon) and that Harris was buying technology and market position, not earnings or revenues.

Harris passed the billion-dollar mark in annual revenues in 1981, and went on to weather the recession of the early 1980s quite well. Earnings per share grew roughly 15 percent a year during this period. New plants were in operation 30 miles south of the Kennedy Space Center in Florida and the company had become the largest industrial employer in Florida.

TURNING POINT IN 1983

In 1983 Harris marked another turning point in its history. Harris had risen from the sixth-largest supplier of printing machines to the number one position in the country, but in the spring of that year, Harris sold its printing business to concentrate exclusively on electronics. In the autumn, Lanier Business Products, Inc., was merged into Harris on a $276 million stock purchase. Lanier was involved primarily in office automation and was noted for its business computers, dictating systems, copying machines, and wordprocessing systems. Lanier brought Harris greater strength in the commercial sector since it boasted 350 sales offices throughout the United States and a sales force of more than 2,000 people, 700 of them marketing Lanier’s copying machines (which were manufactured by 3M Company).

Later in the year the Federal Communications Commission (FCC) ordered Harris to stop production and marketing of a system that allowed AM radio stations to broadcast in stereo. The FCC also ordered the stations that had already purchased the units to cease broadcasting using the units. According to the FCC, the unit actually marketed by Harris differed significantly from one that the agency had approved the preceding year. Management at Harris claimed that the order had little effect on the company’s overall business performance since Harris had a backlog of only $2 million for the system, out of a total of $430 million for the communications sector that year.

Massive layoffs and a major reorganization began in the same year and continued for about three years. The company’s government communications systems group was dissolved and employees from that group were reassigned to other divisions in the government systems sector. As other divisions also were consolidated, the workforce at Harris was reduced by several thousand employees. At the end of this period of adjustment, Harris and 3M entered into a joint venture to market and service copiers and facsimile machines as a result of their earlier connection through Lanier. The new company, named Harris/3M Document Products, Inc., was headquartered in Atlanta, Georgia, and owned equally by 3M and Harris.

Harris had a spate of problems with government contracts. In June 1987 the company agreed to settle out of court, for $1.3 million, a claim that Harris had overcharged NASA to upgrade the security system for a ground tracking station. Later in the year the company pleaded guilty to making false claims relating to a contract with the U.S. Army. The settlement in this case came to more than $2 million refunded as excess profits and another $2 million in penalties.

BLOCKED TAKEOVER ATTEMPT

That same year the Pentagon stopped a takeover of Harris by the British communications company Plessey. Plessey, roughly the same size as Harris and one of Britain’s largest electronics manufacturers, was itself acquired by Britain’s General Electric Co. PLC and Germany’s Siemens in 1989. The takeover was apparently blocked because of the sensitive nature of much of Harris’s activities. For instance, the company was the major supplier of electrical components hardened against damage from the electromagnetic pulse generated by nuclear weapons. It was reported that Harris also manufactured top-secret equipment for the National Security Agency.

In addition to being well protected against takeover, Harris was well established in custom electronic systems, office automation, communications, and microelectronic products. Company revenues more than doubled in the 1980s, from $850 million to more than $2 billion. The largest growth in both sales and profits came in the semiconductor and government systems sectors. By 1989 Harris had become the largest U.S. supplier of radio and television broadcasting equipment and dictating equipment and the largest producer of low- and medium-capacity microwave radio equipment. It was the largest supplier of integrated circuits to the U.S. government and the sixth-largest producer of integrated circuits in the country. It was also the largest producer of satellite communications earth stations, a major supplier to NATO armed forces, and sold commercial products in more than 100 countries.

Competition with the Japanese continued to be fierce, growth was slowing in the communications industry, and office automation had been a more competitive field than Harris anticipated. Cutbacks in personnel and the major reorganization of divisions, however, streamlined the company. In late 1988 Harris bought GE Solid State, General Electric’s semiconductor company, for more than $200 million, and in 1989 Harris purchased 3M’s 50 percent interest in Harris/3M and renamed the company Lanier Worldwide, Inc., after adding Lanier Voice Products to that business.

MORE THAN DEFENSE

Harris’s corporate strategy in the 1990s was marked by four emphases: it would continue to transfer the technology expertise of its Electronic Systems Sector to nondefense markets; it would build on the growth of Harris Semiconductor following the purchase of GE Solid State; its Communications Sector would lead the company into international markets; and it would continue to promote the products, services, and globalization of Lanier Worldwide. In January 1991 Harris learned that it had won a $1.7 billion Federal Aviation Administration (FAA) contract to develop the voice switching and control system of the nation’s air traffic control (ATC) communications systems. The contract, the largest in the company’s history, demonstrated that Harris’s strategy of diversification into nondefense work was bearing fruit and led to other major ATC projects in Alaska, Washington, D.C., and Malaysia.

Harris’s push into another nondefense high-tech sector, advanced energy management systems for electric utilities, was strengthened in 1992 when Harris acquired Westronic Inc. of Canada. A year later Harris won a major contract to upgrade the FBI’s National Crime Information Center database records using its specialized information processing technology. By the mid-1990s Harris added two new nondefense markets to its technology transfer strategy: health care and railroads. Harris developed information processing and communication technologies to improve diagnostic capabilities and cost efficiencies in the health care field, and in a joint venture with General Electric, Harris designed and manufactured an advanced electronic system for managing railroad traffic. Although the U.S. defense budget was reduced by two-thirds between 1984 and 1995, Harris continued to win major defense projects, primarily in defense communications and aerospace, most notably the U.S. Air Force’s F-22 Advanced Tactical Fighter and the U.S. Army’s Comanche helicopter.

Because of unexpected problems integrating Harris Semiconductor with General Electric’s much larger semiconductor business following the merger in 1988 as well as a downturn in the semiconductor market in the late 1980s, Hartley reassigned Electronic Systems Director Phil Farmer to Harris’s semiconductor operations in 1991. Farmer immediately began flattening the unit’s management structure, reducing costs and expenses, and rationalizing its plant capacity. By the end of 1992 Harris Semiconductor was profitable again and by 1995 it was introducing more than 200 new products a year, particularly for the automotive, communication, and power-control circuits industries.

Harris’s Communications Sector meanwhile established itself as one of the company’s fastest-growing businesses by moving aggressively to fill the communication infrastructure needs of the world’s developing countries. Between 1990 and 1994, international sales in its communications division grew from one-third to one-half of its total business. It upgraded television stations in Mexico, sold digital microwave radio systems to emerging countries, and supplied telephone equipment to remote regions of China and India. It also moved quickly into the promising new markets of highdefinition television (HDTV) and cell phone–based personal communications services.

Harris’s 1989 formation of Lanier Worldwide also was paying off. By 1995 Lanier’s global sales had climbed to $1 billion and with 1,600 international sales and service centers it had become the largest independent office equipment distributor in the world. Lanier enjoyed two important firsts in 1994: it introduced a line of multifunctional printer/fax/copy machines and began offering facilities management services to major corporations, in which Lanier not only provided clients with all of the office machines and supplies they needed but brought in Lanier employees to perform the copying. In 1995, Farmer, a 13-year veteran with Harris, succeeded Hartley as Harris’s chairman and CEO.

In 1996 Harris acquired the wireless products business of NovAtel Communications, formed a joint venture to provide telecommunications and broadcast equipment to China, demonstrated the first HDTV transmitter, announced the construction of a semiconductor plant in China and a new U.S. facility to make power metal oxide semiconductors, and won a $73 million contract from the FAA for weather and radar processor systems. In 1997, Harris announced the construction of a $5 million new space antenna facility, a $10 million digital television center in Cincinnati, a joint venture with General Electric to develop a new generation of digital information management systems for electric utilities in developing countries, and the acquisition of Northeast Broadcast Lab, a maker of radio broadcast equipment. It also strengthened Lanier’s corporate office services business by acquiring American Legal Copy Services, a copying service for the legal profession; Quorum Group, an information services business for lawyers; Trans-Comp, a provider of medical transcription services; and Agfa-Gevaert, the photocopier business of Bayer.

CONFIGURING FOR A NEW MILLENNIUM

As Harris prepared to enter the new millennium, the company faced challenges brought on by a severe downturn in the semiconductor market. At the same time, weak conditions in Asian economies wreaked havoc on the company’s bottom line. As such, Harris launched a restructuring effort that dramatically reshaped the company. In early 1999, Harris put its semiconductor business up for sale in order to focus on its core communications equipment operations. Intersil Corporation, which was created by investment firm Sterling Holding Co., bought the group in a deal worth approximately $700 million. Harris then spun off its Lanier Worldwide subsidiary. The company planned to use the proceeds from the spin-off to fund its acquisition strategy.

When the dust settled, Harris stood as a leaner, more focused entity. During the early years of the new millennium, the company operated with four main divisions that served the government, RF, microwave, and broadcast communications markets. To strengthen these divisions, the company formed strategic partnerships and made key purchases. Shortly after it sold its semiconductor unit, Harris formed an alliance with Wavtrace Inc. to distribute and manufacture technology related to wireless broadband products that would be marketed to service providers. It also added Exigent International, a satellite command and control software manufacturer, to its fold in 2001.

Harris continued its growth-through-acquisition policy over the next several years. The Orkand Corporation was purchased in 2004 in a deal that added new customers to Harris’s lineup, including the U.S. Postal Service, and the U.S. Departments of State, Energy, Health and Human Services. Encoda Systems became part of Harris’s Broadcast Communications division that same year. Encoda’s operations included automation, media asset management, traffic, and billing software. In 2005, Harris took its Broadcast Communications expansion one step further with the $450 million acquisition of Leitch Technology Corporation, a specialist in digital video broadcast and production. Harris’s share of the global broadcast/video production market grew to 20 percent after the deal.

With both sales and profits on the rise, Harris’s transformation appeared to have paid off. The company enjoyed record results in 2005 as revenue increased by 19 percent over the previous year, reaching $3 billion. Harris’s net income also experienced hefty gains as it rose 52 percent to $202 million. The company’s strategy in the years to come included new product development. It spent $870 million on R&D in 2005 alone. At the same time, Harris continued to position itself as the provider of choice to its customers. New contracts included a $1 billion, 10-year technical services program for the National Reconnaissance Office; a $350 million, 10-year program to provide tactical common data links for U.S. Navy helicopters; a $275 million contract to provide mission support services to the FAA; and a $175 million contract to provide maintenance and engineering services for the Defense Information Systems Agency’s Crisis Management System.

BALANCED APPROACH

Revenues were $3.5 billion in 2006 and growing at a double-digit rate during the War on Terror and U.S. interventions in Iraq and Afghanistan. The RF Communications Division in Rochester, New York, accounted for about one-quarter of total sales, or $809 million. There was activity on the civilian federal side as well. During the year Harris won a $600 million contract to help the U.S. Census Bureau automate its field data collection.

By 2007 Harris’s share price had tripled under the leadership of Howard Lance, who had become CEO four years earlier. Lance effectively sought international business to buffer against the severe ups and downs of federal contracting, while diversifying the company into new areas and hiving off noncore units.

Harris bought government IT specialist Multimax Inc. for $400 million in June 2007. Zandar Technologies, an Irish manufacturer of multi-image display processors used in video production rooms, was added to the Broadcast Communications division late in the year. In November 2009 Harris acquired Patriot Technologies, LLC, an IT provider for the health care industry. Carefx Corporation, a small Arizona-based IT provider that helped hospitals manage disparate systems, was acquired in 2011 for $155 million.

Harris continued work on the FAA Telecommunications Infrastructure contract to upgrade capabilities at more than 4,300 FAA and defense facilities in the United States and abroad. Bolstering its NextGen work for the FAA, Harris bought the ATC business of Canada’s Solacom Technologies in 2009. In 2012 the FAA awarded a team led by Harris a $330 million, seven-year Data Communications Integrated Services contract to upgrade its ATC network. Automation of routine messages was one of the FAA’s aims. Another major contract came from the U.S. State Department, which hired a Harris-led team to update its consular communications network in 2012. The award, shared with nine other companies, was worth $750 million.

FOCUS ON “ASSURED COMMUNICATIONS”

Boosting its low-wage manufacturing capabilities, in 2010 Harris opened a transmitter plant in Brazil to support South America’s transition from analog to digital television broadcasting. Harris introduced its Selenio multimedia platform in 2011. This system was designed to help broadcasters transition to Internet protocol (IP) technology. However, reflecting the company’s changing focus, in May 2012 Harris President and CEO William M. Brown announced plans to divest the broadcast communications operation. The company would henceforth specialize in what it called “assured communications.”

In 2010 Harris paid $525 million for CapRock Communications Inc., a global market leader in managed VSAT communications used in the remote operation of oil rigs. The next year it added Schlumberger’s Global Connectivity Services business for $397.5 million, folding it with CapRock into the new Harris CapRock Communications.

The U.S. Department of Defense bought $1.2 billion of tactical radios from Harris in 2010. The next year, however, this number was halved. Harris, however, continued to receive orders for its Falcon Secure Personal Radio system as allied foreign governments modernized their militaries. By providing broadband data capabilities, such radios allowed soldiers to communicate with UAVs and exchange other digital information. By this time, more than 50 countries were using the system.

There remained a sizable potential RF, or tactical communications, market at home. Fewer than 5 percent of the Department of Defense’s 1.2 million radios had wideband capability. In October 2012 Harris won a $397 million contract to supply Falcon radios to the U.S. Department of Defense. The acquisition of M/A- COM’s wireless business from Tyco Electronics for $675 million three years earlier had brought Harris into competition with Motorola in the public safety radio market.

Another significant award in 2012 was the 15-year, $291 million contact to supply an IP-based communications network for the FAA’s NextGen initiative. After losing a $3.5 billion bid to run the Navy/Marine Corps intranet program in June 2013, Harris became a subcontractor to Hewlett-Packard, the contract winner. Harris was also supplying antennas for the latest iteration of The Boeing Company’s Inmarsat satellites, Global Xpress, a mobile broadband network for ships and airlines.

Harris had 14,000 employees and total revenues of about $5 billion in 2013. There was a sizable backlog. Its FAA Telecommunications Infrastructure contracts extended to 2022, 20 years after first awarded. Harris was also an avionics supplier to the F-35 Joint Strike Fighter program. Throughout its long history, Harris had grown accustomed to introducing revolutionary innovations in communications technology. While it had replaced paper and ink for radio waves and electronics, it remained a trusted supplier at home, and globally.

KEY DATES

1895:: Harris Automatic Press Company is established in Cleveland, Ohio.
1957:: Harris Automatic Press merges with Intertype Corporation.
1967:: Radiation and Harris-Intertype merge.
1972:: General Electric’s product line of TV broadcasting cameras, transmitters, studio equipment, and antennas is purchased.
1983:: Harris sells its printing business to concentrate exclusively on electronics.
1987:: Pentagon stops takeover of Harris by British communications company Plessey.
1999:: Harris sells its semiconductor business; Lanier Worldwide subsidiary is spun off.
2005:: Leitch Technology Corporation is acquired.
2012:: Company announces plans to sell its video production and broadcasting operations.

Sempra Energy

June 30, 2015 mnaexpert

Public Company

Founded: 1886

Employees: 13,839 (2009)

Sales: $1.119 billion (2009)

Stock Exchanges: New York

Ticker Symbol: SRE

NAICS: 221122 Electric Power Distribution; 486210 Pipeline Transportation of Natural Gas; 221210 Natural Gas Distribution; 221122 Electric Power Distribution

Sempra Energy (Sempra) is a Fortune 500 energy services holding company which was formed by the 1998 merger of Pacific Enterprises and Enova Corporation. Sempra Energy’s subsidiaries provide electricity, natural gas, and value-added products and services. Sempra possesses a large regulated utility customer base in the United States, serving 29 million customers, mostly in California. The company operates around the globe, maintaining a presence in North and Central America, Europe, and Asia. The Sempra name is derived from the Latin word for “always.”

PACIFIC LIGHTING: 1886–1905

Pacific Lighting Corporation was founded in San Francisco in 1886 as Pacific Lighting Company by C. O. G. Miller and Walter B. Cline. Both men, who had worked for Pacific Gas Improvement Company, a company owned by Miller’s father, saw an opportunity to start their own business when their employer decided not to use the newly invented Siemens gas lamp. Miller and Cline began buying Siemens lamps in San Francisco and soon expanded into the southern California utility business, buying a one-half interest in a gas manufacturing plant in San Bernardino, California. Their business flourished, and in 1889 Pacific Lighting Company bought three Los Angeles-area gas and electric firms with combined assets of more than $1 million. Miller and Cline created a subsidiary, called the Los Angeles Lighting Company, to consolidate the three formerly competing firms. Pacific Lighting’s attention remained focused on the Los Angeles area for most of the next century.

Pacific Lighting supplied the gas and lighting for the small but rapidly growing city of Los Angeles. Los Angeles Lighting immediately began to make needed improvements in the Los Angeles gas system, which subsequently led to a decrease in prices. The company faced stiff competition from numerous small utilities during the 1890s, however, that retarded its growth. To help increase profits, Los Angeles Lighting began importing and selling coal and gas-powered appliances, hoping to stimulate the demand for gas. Pacific Lighting then bought a controlling interest in Los Angeles Electric Company in 1890, and in 1904 it combined all of its Los Angeles lighting and electric operations to form Los Angeles Gas and Electric Company (LAG&E). In 1907 Pacific Lighting Company was incorporated and changed its name to Pacific Lighting Corporation.

GROWING GAS PAINS: 1906–24

Pacific Lighting’s gas sales increased tenfold between 1896 and 1906 as Los Angeles expanded. Sales grew further after the San Francisco earthquake of 1906 caused many to move from northern California to Los Angeles. The city grew so fast that Pacific Lighting could not meet demand, and some parts of the city went without gas for days during cold spells in the winter of 1906 to 1907. Seeing an opportunity, a group of Los Angeles businessmen created the City Gas Company in an effort to win Pacific Lighting’s dissatisfied customers. The City Gas Company could not match the resources of the older Pacific Lighting, however, and in 1910 it sold out to Pacific Light and Power, which owned Southern California Gas Company, one of Pacific Lighting’s largest competitors. A conservatively run company, Pacific Lighting concentrated on supplying its service area and collecting its rates while rivals Southern Gas and Southern Counties Gas Company of California worked on new gas technology.

By 1915 the Los Angeles utility industry was dominated by Pacific Lighting Corporation and three other firms. These utilities were extremely unpopular with the public and had to continually fight off the threat of municipal ownership and government regulation. Pacific Lighting and the other utilities fought Los Angeles’s attempts to build a municipal electric system by trying to block the financing and by launching time-consuming lawsuits. In 1917 the utilities came under the jurisdiction of the newly formed California Public Utilities Commission (CPUC).

Since Pacific Lighting supplied its services to Los Angeles’s densely populated downtown area, where operating costs were low, another municipal utility would not be able to match its rates. This situation slowed the momentum of the municipal ownership movement, and the battle remained stalemated throughout the 1920s. Meanwhile, southern California continued to grow rapidly, and Pacific Lighting put its resources into expanding its services, spending $10 million to build a new electric plant and to enlarge its substations. To fight off municipal ownership, Pacific Lighting began a public relations campaign and sold stock.

THE MUNICIPAL MOVEMENT: 1925–40

After the Great Depression began in 1929, the tide shifted toward municipal ownership of utilities, partly because cash-starved citizens hoped municipal ownership would lower their bills, and partly due to the anticorporate political climate. In 1929 the city of Los Angeles announced it was going to buy Pacific Lighting’s electrical properties. The city had contracted to buy a share of the hydroelectric power produced by the new Hoover Dam and wanted to use Pacific Lighting’s power grid to deliver it. The company’s electric properties provided one-sixth of its revenue, so it fought the move as long as it could. Pacific Lighting, however, needed to renew its gas franchise, and the city would do that only if the company agreed to sell its electric properties. The properties were sold to the city in 1937 for $46 million.

Although stung by the loss of its electric operations, Pacific Lighting continued to grow as a gas utility. It ran its operations conservatively, initially expanding its services only to regions that could be served by existing gas generating plants. As natural gas became more widely available in California, Pacific Lighting’s gas operations expanded.

Pacific Lighting had acquired control of the gas distribution systems of Southern Counties Gas in 1925, Santa Maria Gas Company in 1928, and Southern California Gas in 1929. These companies had expanded more aggressively than Pacific Lighting, particularly around Los Angeles, in some cases quadrupling output during the 1920s. Part of this expansion came from the rapid growth of Los Angeles, and part from new uses for gas, such as space heating and water heating. By 1930 Los Angeles led the United States in natural gas consumption, and Pacific provided gas to half the population of California. It was the largest gas utility in the United States, serving nearly two million people. Pacific Lighting made broad policy decisions for its new subsidiaries, but left the day-to-day operating decisions to the management of the individual firms.

Natural gas was a more efficient and less expensive fuel than manufactured gas. As Pacific Lighting and its subsidiaries had switched to natural gas during the 1920s, both gas rates and gas consumption had dropped. To compensate for the loss in volume, Pacific Lighting successfully promoted gas for industrial use. Industrial customers were attracted to the low rates and ease of handling associated with natural gas, as well as to the fact that natural gas did not require storage facilities. Industries used natural gas primarily during the summer to absorb Pacific Lighting’s excess capacity, while during the winter Pacific Lighting required industries to use more energy from other sources. To maintain natural gas sources as the fuel became more scarce in the Los Angeles area, Pacific Lighting built longer pipelines, aided by improvements in technology.

Pacific Lighting worked on advertising campaigns with other gas utilities during the Great Depression to counter the belief that gas supplies would soon run out and to promote the sales of gas-fueled appliances. This successful campaign helped the company weather the Depression, despite decreased use of its gas by industry.

In 1933 an earthquake caused extensive damage to Pacific Lighting’s gas pipeline system, as did torrential rains in 1938. In an attempt to help recoup some of the losses suffered during the 1930s, Pacific attempted to combine Southern Counties Gas and Southern California Gas. The request was denied by California regulators, however, on the grounds that two companies, even if owned by the same holding company, would produce more competition than would one company.

RISING SUPPLY COSTS: 1941–52

During World War II Pacific Lighting diverted energy to defense manufacturers and converted an old gas plant to the manufacture of war-related chemicals. The demand for natural gas increased dramatically during and after the war, and Pacific Lighting sought new means of keeping pace. New defense industries drew even more people to southern California, so conditions for the company during the late 1940s and 1950s were similar to those during the 1920s, requiring large capital outlays for new construction.

In 1947 Pacific Lighting spent $25 million to build the Biggest Inch pipeline, which brought large amounts of natural gas to California from southern Texas. Demand grew so quickly that an extension to the large gas fields of the Texas panhandle was built in 1949. The company also built vast underground storage areas in southern California. Over the next ten years, Pacific Lighting greatly increased the volume of its interstate delivery system, and out-of-state gas made up 90 percent of the company’s supply. In addition, the company had promoted gas-powered appliances so effectively that 90 percent of all cooking ranges and 98 percent of water heaters and home-heating systems in southern California used natural gas. To meet demand, Pacific Lighting offered industries low rates in exchange for using other energy sources when demand peaked on cold winter days.

By 1950 the cost of bringing gas to customers had doubled since the years before World War II, but rates had risen only 15 percent. Pacific Lighting repeatedly sought unpopular rate hikes during the 1950s, and it increased its public relations efforts to help improve its image. Prices stabilized in the early 1960s as a result of regulatory changes that gave Pacific Lighting and its suppliers greater pricing flexibility. By the mid-1960s Pacific Lighting had become the largest gas supplier in the world, and its prices were among the lowest in the United States. Company head and founder C. O. G. Miller died in 1952, and his son Robert Miller became chairman.

RESTRUCTURING AND THE ENERGY CRISIS: 1953–79

In 1965 Pacific Lighting restructured its pipeline subsidiary, Pacific Lighting Gas Supply Company, and changed its name to Pacific Lighting Service and Supply. In 1967 the firm moved its headquarters from San Francisco to Los Angeles. Three years later, Pacific Lighting received regulatory permission to merge Southern California and Southern Gas into one company, called Southern California Gas Company. Pacific Lighting created another subsidiary in 1972, Pacific Lighting Coal Gasification Company, to build a coal gasification plant.

Meanwhile, despite the new pipelines, by the late 1960s gas supplies were dwindling again. Paul Miller, who became president of Pacific Lighting in 1968, sought additional supplies across an increasingly wider area, including Alaska, the Canadian Arctic, and the Rocky Mountains. In 1970 the company created another subsidiary called Pacific Lighting Gas Development Company, to find new gas sources. It soon signed a contract with Gulf Oil Canada to purchase large amounts of gas from a new pipeline that the company was building in Canada’s Northwest Territories. Pacific Lighting also got involved in the Alaska Natural Gas Transportation System approved by the U.S. government in 1976, although more than a decade passed before any gas from the project was transported to southern California.

The energy crisis in the 1970s presented grave problems. Energy needs were increasing while Pacific Lighting’s gas suppliers began cutting back the company’s supplies. Pacific Lighting considered bringing in liquid gas from overseas, while working with Pacific Gas & Electric, another California utility. The two firms began construction of a liquid natural gas plant at Little Cojo Bay, California, in 1979, although construction was halted in 1984 because the natural gas shortage had eased. The shortage ended because of conservation efforts and a federal law passed in 1978 that partially deregulated prices for new gas finds. The deregulation led to higher prices, which in turn caused widespread complaints. The company launched another public relations campaign on radio and television to explain why prices were rising.

The price increases, fuel shortages, and slowing population growth in southern California convinced Pacific Lighting executives to begin diversifying. At first Pacific Lighting’s new affiliates were gas-related, but soon the company branched into real estate, air conditioning, agriculture, alternative energy, and retailing. In the early 1970s, Southern California Gas began two major solar energy research projects. More importantly, the company moved into gas and oil exploration and development. In 1975 Pacific Lighting Exploration Company invested in drilling in the Dutch sector of the North Sea. The ventures into agriculture and air conditioning were sold off in the late 1970s and early 1980s. In 1987 the firm sold its real estate operations for $325 million, believing the money could be more profitably invested elsewhere.

BEYOND NATURAL GAS: 1980–90

In 1983 Pacific Lighting bought Terra Resources, which owned oil and gas property in 18 states. Five years later it bought Sabine Corporation, a Dallas, Texas-based exploration firm. By the late 1980s, oil and gas exploration provided 11 percent of Pacific Lighting’s revenue. Pacific Lighting still wanted to move into areas unrelated to the utility business, however, and in 1986 it bought Thrifty Corporation, a chain of Los Angelesbased retail stores. The purchase gave Pacific Lighting ownership of 500 Thrifty Drug Stores, 27 Thrifty Jr. Drug Stores, and 89 Big 5 sporting goods stores. Pacific acquired Thrifty in a stock swap valued at $886 million, or 25 times Thrifty’s annual earnings.

Thrifty had been founded in 1919 by two brothers, Harry and Robert Borun, and their brother-in-law, Norman Levin. Initially the firm sold drugs and sundries wholesale. After the stock market crash in 1929, the firm opened its own cut-rate drugstores. By World War II the firm operated 17 stores in the Los Angeles area. In the 1950s, with strip malls appearing and Thrifty’s sales dropping, the firm switched to larger stores with a broader selection. In the 1970s, with competition increasing, Thrifty adopted a more aggressive marketing strategy, switching from low-end promotions to a policy of total discounts. By the mid-1980s the firm feared a hostile takeover. When Pacific Lighting offered to buy Thrifty, the company reluctantly accepted, partly because Pacific Lighting had a reputation for allowing its subsidiaries great freedom.

Pacific Lighting moved further into retailing in the next two years, buying more sporting-goods retailers in the Midwest and in Colorado, more than 100 Pay’n Save drugstores, and 37 Bi-Mart general merchandise stores. These purchases made Pacific Lighting the second-largest sporting-goods retailer in the United States and the largest drugstore chain in the western United States. To reflect its increasing diversity, Pacific Lighting changed its name to Pacific Enterprises in 1988. Paul Miller retired in 1989, and James R. Uk-ropina became chairman and CEO, ending 103 years of leadership by the Miller family.

In buying Thrifty, Pacific Enterprises had decided to trade short-term profits for long-term growth. The purchase left Pacific Enterprises short of funds, while its retail operations suffered from price wars, shoplifting, increased competition from supermarkets, and changing economics. The company also failed to find any large oil or gas deposits, and its core business suffered. To pay its stock dividends, Pacific Enterprises borrowed money and raised it by issuing stock, a move which worried some Wall Street analysts. To deal with the situation, Ukropina restructured management and temporarily cut back on oil and gas drilling. Revenue for 1990 was $6.92 billion, although the firm suffered a net loss of $43 million due to write-offs incurred by both its retail and gas and oil exploring operations.

THE BIRTH OF SEMPRA ENERGY: 1991–98

Willis B. Wood Jr. was named CEO in 1991 and led the company through restructuring that refocused on the core utility business and restored the parent company to a sound financial footing. Wood was succeeded by Richard D. Farman near the end of the decade, shortly before Pacific Enterprises’ announced a merger with Enova Corporation.

Having announced the merger plans in October 1996, Pacific Enterprises and Enova Corporation awaited approvals by the California Public Utilities Commission, the Federal Energy Regulatory Commission, and the Securities and Exchange Commission. The merger was completed in June 1998, and the entity that resulted from the combined operations of both companies was named Sempra Energy. The new board of directors consisted of 16 members, with eight representatives from each of the merging companies.

Enova Corporation, a leading energy management company providing electricity, gas, and value-added products and services in the United States and Mexico, joined Pacific Enterprises to form the largest public company headquartered in San Diego. Prior to the merger, Enova boasted the ownership of San Diego Gas & Electric Company, which had 1.2 million electric meters and 715,000 natural gas meters, serving three million consumers. Pacific Enterprises’ contribution to the deal included its interstate and offshore natural gas pipelines, centralized heating and cooling facilities, and natural gas distribution operations in Latin America.

After reorganizations, the new corporation was the parent company of eight subsidiaries based in the United States, including Sempra Energy Solutions. Former Pacific Enterprises shareholders received 1.5038 shares of SempraEnergy common stock for each share of Pacific that they had owned prior to the merger deal. Sempra Energy’s market value was deemed to be $6.2 billion on the day of its founding.

EXPANSION AND ANOTHER ENERGY CRISIS: 1999–2005

With such a strong foundation, it was natural that Sempra quickly began looking into growth opportunities. The same year as its formation, it purchased CNG Energy Services from Consolidated Natural Gas Co. for $48 million. The following year, in February 1999, Sempra announced it had reached agreement to merge with Colorado’s KN Energy Inc. for the tidy sum $1.9 billion. KN Energy was the sixth-largest natural gas pipeline company in the United States, and the secondlargest pipeline operator. Sempra looked poised to continue its growth on a national scale, but by June the company had called off the deal, citing below-average earnings on KN Energy’s part. Nevertheless, Sempra pushed ahead with expansion in 1999, opening European offices in England, Germany, and Norway.

Between 2000 and 2001, Sempra’s already strong performance saw a major boost in the form of the California energy crisis. As was later revealed, some utility companies such as Enron, Inc., caused the crisis by manipulating supply of electricity, causing shortages and “rolling brownouts” throughout the state. Energy companies, including Sempra, reaped major profits off the skewed supply and demand, and in the midst of the crisis the state, desperate to restore normalcy, signed contracts highly favorable to theenergy companies. Although Sempra benefited in the short-term from the crisis, the fallout and repercussions of the event would dog the company for the remainder of the decade.

In 2002, as the cause behind the crisis came to light, California filed a complaint against Sempra with the Federal Energy Regulatory Commission. This was only the beginning of the litigation, most of it alleging that Sempra acted knowingly in manipulating the market and squeezing lopsided contracts out of a panicked customer base. The last suits were not settled until 2010, when Sempra cut a deal with the state of California. In exchange for a $410 million settlement, Sempra would admit to no wrongdoing and any ongoing lawsuits and legal proceedings would be considered closed.

The threat of lawsuits was not enough to put Sempra off making good on its record profits. The influx of money was turned towards expansion, namely solidifying the company’s reach beyond its traditional base of California and moving into the traditional heart of the natural gas industry, the Gulf Coast. To that end, in 2003 Sempra purchased a liquid natural gas terminal in Louisiana. In April of 2004, Sempra set into motion over a billion dollars’ worth of expansion plans. First, the company revealed plans to construct a $600 million liquefied natural gas receiving terminal located in Port Arthur, Texas. It also announced an ambitious, $430 -million acquisition deal to purchase 10 Texas power plants. The following year, Sempra Commodities formed a joint venture with Pennsylvania’s New Hope Partners to produce ethanol.

STRENGTHS AND WEAKNESSES: 2006–10

Despite its increasing reach, expansion, and acquisitions, the heart of Sempra remained in Southern California. Of the copmany’s 29 million customers, the Southern California Gas Co., in an operating range that stretched out over 20,000 square miles, serviced 20 million. A further 3.4 million customers were claimed by the San Diego Gas & Electric company, which covered a service area stretching from the southern reaches of the greater Los Angeles area all the way to the Mexican border.

Some analysts believed that Sempra’s continuing geographic focus would prove to be a weakness. Over 90 percent of its revenues were generated in the United States in 2009, a very high percentage for an international company. Moreover, only a tenth of 1 percent of its revenues originated in Asia, far and away the best and fastest-growing market for energy companies. Market analysts suggested that Sempra risked missing out on emerging opportunities for growth in Asia through its continued focus on North America.

However, in 2010 Sempra’s position remained strong. Sempra’s focus on cleaner-burning natural gas, for example, positioned it as a strong competitor in a market increasingly sensitive to environmental concerns. Already an industry giant, Sempra looked poised to continue expanding throughout the 2010s.

KEY DATES

1886:	Pacific Lighting Company formed.
1933:	An earthquake causes extensive damage to Pacific Lighting’s gas pipeline system.
1947:	Pacific Lighting spends $25 million to build the Biggest Inch pipeline, which brings large amounts of natural gas to California from southern Texas.
1965:	Pacific Lighting restructures its pipeline subsidiary, Pacific Lighting Gas Supply Company, and changes its name to Pacific Lighting Service and Supply.
1967:	The firm moves its headquarters from San Francisco to Los Angeles.
1998:	Pacific Enterprises and Enova Corporation merge under the name Sempra Energy.
1999:	Sempra announces $1.9 billion merger deal with Colorado’s KN Energy Inc., then calls the deal off four months later.
2001:	Sempra reaps record profits during California energy crisis.
2002:	The state of California files a complaint against Sempra, asking to renegotiate deals cut during the energy crisis, claiming they were negotiated under duress.
2010:	Sempra agrees to pay the state of California $410 million to settle the last of the lawsuits stemming from the 2001 energy crisis.

Loews Corporation

June 30, 2015 mnaexpert

Public Company
Incorporated: 1969
Employees: 21,600
Sales: $17.91 billion (2006)
Total Assets: $76.88 billion (2006)
Stock Exchanges: New York
Ticker Symbol: LTR
NAIC: 551112 Offices of Other Holding Companies; 524126 Direct Property and Casualty Insurance Carriers; 312221 Cigarette Manufacturing; 213111 Drilling Oil and Gas Wells; 486210 Pipeline Transportation of Natural Gas; 211111 Crude Petroleum and Natural Gas Extraction; 721110 Hotels (Except Casino Hotels) and Motels

Loews Corporation is a holding company with diversified interests in insurance, tobacco, the energy industry, hotels, and watches. Run from the post-World War II era to the late 1990s by brothers Preston Robert (Bob) and Laurence (Larry) Tisch, the company was amassed through “value investing.” The Tisches earned a reputation for purchasing troubled firms, making them profitable, and selling them at a premium. Bob was known for his operational savvy, while elder brother Larry was considered the financial genius. In the early 21st century, Loews remained in the control of the Tisch families, who held more than 20 percent of the firm’s publicly traded stock. Two sons of Larry, James and Andrew Tisch, and a son of Bob, Jonathan Tisch, began running the company in the late 1990s.

Among Loews’ major holdings is an 89 percent stake in the publicly traded CNA Financial Corporation, one of the largest property and casualty insurance companies in the United States; CNA contributes roughly 58 percent of Loews’ revenues. Another 22 percent of revenues is derived from the wholly owned Lorillard, Inc., the oldest and third largest U.S. cigarette maker and the producer of such brands as Newport, Kent, and True; late in 2007, however, Loews announced plans to spin off Lorillard. Loews derives around 12 percent of its revenues from its 51 percent stake in the publicly traded Diamond Offshore Drilling, Inc., one of the world’s leading contract drillers of offshore oil and gas wells. Other energy holdings include a 70 percent interest in the publicly traded Boardwalk Pipeline Partners, LP, operator of interstate natural gas pipeline systems, and full ownership of HighMount Exploration & Production LLC, a firm engaged in the exploration and production of natural gas in the United States. Another wholly owned subsidiary is Loews Hotels Holding Corporation, operator of 18 hotels and resorts in the United States and Canada.

EARLY INVOLVEMENT IN HOTELS

The Tisch brothers received an early business education from their father, Al, who owned a manufacturing plant in Manhattan. Bob and Larry were given the task of making phone sales to retail stores and wholesale distributors. The two brothers also helped operate a few summer camps their parents owned in New Jersey. This “hands-on” experience was coupled with formal training. After a brief hiatus spent in the army, Bob graduated with a degree in economics from the University of Michigan in 1948. Larry graduated cum laude from New York University’s School of Commerce at the age of 18, went on to earn an M.B.A. from the Wharton School in Philadelphia, and later enrolled in Harvard University’s law school.

In 1946 Al and Sadye Tisch sold their summer camps and purchased the Laurel-in-the-Pines Hotel in Lakewood, New Jersey. The hotel business went well, and soon became more than the parents could handle alone. Larry dropped out of Harvard in order to help run the business and Bob soon followed. It was not long before the older couple decided to sign over their share of the hotel (worth about $75,000 at the time) to their sons and give them control of the operation.

The brothers soon began leasing two other small New Jersey hotels and managed to turn a profit. Then, in 1952, they acquired two grand but old hotels in Atlantic City called the Brighton and the Ambassador. They demolished one to build a motel in its place, and quickly resold the other at a profit. Later, the Tisches liquidated some of their New Jersey investments to purchase their first two hotels in New York City. These early transactions established the pattern that would characterize their later business dealings, which grew increasingly diverse and valuable.

In 1956, with only eight years’ experience in the business, Bob and Larry erected the $17 million Americana Hotel in Bal Harbour, Florida, and paid for it in cash. Although it was subsequently sold to Sheraton in the 1970s, it represented an important step in the brothers’ careers. With the Americana, they firmly established themselves among the major hotel operators, and later acquired such prominent hotels in the United States as the Mark Hopkins, the Drake, the Belmont Plaza, and the Regency.

ADDING THEATERS (1960) AND TOBACCO (1968)

In 1959 a major antitrust ruling forced Metro-Goldwyn-Mayer (MGM) to relinquish ownership of Loew’s Theaters. This decision created an opportunity for the Tisch brothers, allowing them to move into a new business area. Six months before MGM was to divest Loew’s, Bob and Larry purchased a large stake in the theater chain; by May 1960 they had gained control of the company.

The brothers did not enter into the theater business because they knew about the motion picture industry, nor did they purchase Loew’s because it was already a profitable operation on its own. On the contrary, Loew’s theaters were losing money. They were large, multitiered movie houses with high ceilings and interiors reminiscent of the industry’s “golden age,” by this time long past. They played only one motion picture at a time and were rarely filled to capacity. Television and the proliferation of films coming out of Hollywood meant that theaters would have to cater to various tastes simultaneously in order to secure larger audiences. The old Loew’s theaters were not designed for this purpose.

The reason Bob and Larry Tisch purchased Loew’s had to do with real estate. The Loew’s theaters, although antiquated, were located on valuable city property. It was the opportunity to acquire this valuable property that prompted the brothers to purchase the company. Almost immediately they began liquidating the theaters, demolishing 50 of them in a matter of months and then selling the vacant lots to developers. This, of course, hastened the demise of the palatial movie house, but it was nonetheless a necessary business tactic. Loew’s remained a prominent participant in the movie industry into the early 1980s.

Sidebar: Hide

The long-established and well-recognized Loews name became the corporate title under which all Tisch operations (including hotels) were placed.Loews Corporation, a holding company formed in 1969, ran smoothly and efficiently, turning substantial profits every year. By 1968 the brothers again had the capital and the inclination to diversify and invest in a new business sector. This time they acquired Lorillard Industries, the nation’s oldest tobacco manufacturer.

Lorillard, the maker of Kent and Newport cigarettes, had once been a major company with a large share of the tobacco market. Managerial incompetence and discord, however, had paralyzed the company, bringing it near collapse. Upon assuming control of Lorillard, the first thing Larry Tisch did was examine the firm’s subsidiaries, particularly its candy and cat food divisions, which were consuming a disproportionate amount of resources. The brothers discovered that the top executives spent 75 percent of their time on candy and cat food, which together made up only 5 percent of Lorillard’s total business. Lorillard divested itself of these interests and of the executives who were so fond of them, then redirected the company toward its tobacco operations. Market share slippage was reversed, and Lorillard climbed back to the top ranks of the U.S. tobacco market.

ACQUISITIONS OF CNA (1974) AND BULOVA (1979)

A similar scenario took place in 1974, when Loews acquired CNA FinancialCorporation, a large insurance firm. The Chicago-based conglomerate had reported a $208 million deficit that year and was expected to lose more. Like Lorillard, its subsidiaries were draining the financial resources of the company. CNA’s tangential interests were poorly managed and veritable “money pits.” Moreover, there was considerable waste at the top of CNA’s corporate structure.

When Loews took charge it divested unprofitable or distractive subsidiaries to concentrate on the worthwhile core businesses. The Tisch brothers then took aim at the wastefulness that plagued CNA’s headquarters. Many executives were fired as Tisch austerity measures prevailed over past CNA lavishness. The 3,000-square- Page 300 | Top of Articlefoot suite of the former chairman was rented out, as was the corporate dining room. The streamlining had a dramatic and positive effect. In 1975 CNA earned a $110 million profit, and remained financially sound over the next decade, achieving annual revenues of over $3 billion by the late 1980s.

Loews’ next major turnaround target was the Bulova Watch Co. In 1979 the Tisch brothers bought 93 percent of the then-troubled firm for $38 million. At the time, Bulova’s quality-control problems had contributed to its slip from the top of the watch market to the number two spot. Not only had longtime rival Seiko Corporation won the market share battle, but Bulova was also threatened by Timex Enterprises Inc.’s introduction of competitively priced entries. It looked to some observers as if Bulova had squandered its brand cachet; the name was simply not recognized by a new generation of consumers.

The Tisch brothers applied their proven method of managerial restructuring, but without total success. Bulova’s problems went beyond personnel and corporate networks: the product itself needed to be revised. James Tisch, Larry’s son, headed the operation and immediately introduced 600 new watch styles, complete with extended warranties. To deal with the image problem, an extensive advertising campaign was launched. The company recovered, albeit slowly. By 1984 it had cut its losses to $8 million (roughly half of its 1980 total), yet it was still not paying for itself. The company did not turn a profit until 1986. That year, Bob Tisch accepted an appointment as U.S. Postmaster General. Despite the concerns of those who felt his absence would weaken the company’s performance, most analysts contended that Bob Tisch’s move to Washington, D.C., would help Loews, citing the advantages of both political and financial connections.

INVESTMENT IN CBS

Late in 1985 Larry Tisch sold the company’s namesake movie theaters and purchased a significant amount of CBS Inc. stock to help the company fight a takeover attempt by Ted Turner. Throughout 1986 Tisch increased Loews’ holdings in CBS to 24.8 percent and obtained a seat on the board of directors. He was elected president of CBS that September, much to the relief of stockholders and employees, who had grown frustrated and uneasy during the Turner takeover attempt.

Tisch’s popularity was short-lived, however. Intending to operate CBS as if it were any other business, he took measures to alleviate waste and make CBS more cost-effective. Wage cuts and spending reductions, along with wholesale firings, caused a serious rift in the huge broadcasting firm. The news division, traditionally given considerable leeway in regard to fiscal accountability, was especially hard hit. Some wondered if Tisch would be able to mend CBS without sacrificing the people and principles that once made it the most respected of the three major American broadcasting networks. Eventually, Loews reduced its investment in CBS to 18 percent through sale of stock back to the company.

Bob Tisch’s activities and interests outside Loews garnered attention as well. He was one of New York City’s most vocal supporters and had been elected over 15 times to the chairmanship of New York’s Convention and Visitors Bureau. In fact it was Bob Tisch and the bureau’s president, Charles Grillett, who came up with the idea of using an old jazz expression, the “big apple,” to signify New York City. Later, Bob would represent the metropolis as its “official ambassador” (read lobbyist) in Washington, D.C. In 1990 he accepted the chairmanship of that city’s chamber of commerce. In 1991 Bob Tisch paid over $75 million to acquire half of the New York Giants professional football team.

ENTRANCE INTO OFFSHORE DRILLING

Over the course of the 1980s, the Tisches had reduced their stake in Loews from 45 percent to 24 percent, prompting some analysts to speculate that they were preparing to dismantle their conglomerate. Instead, the company, which had amassed a $1.75 billion “war chest,” started investing in new ventures, most notably oil. By 1990 Loews had spent $75 million on oil rigs and acquired Diamond M Offshore Inc., a Houston, Texas, drilling company. Loews amassed the world’s largest fleet of offshore drilling rigs with the 1992 purchase of Odeco Drilling, Inc., which was merged with Diamond M in 1993 to form Diamond Offshore Drilling, Inc. In spite of that status, Loews’ drilling segment lost over $103 million in 1992, 1993, and 1994. The company’s annual report for the latter year blamed regional overcapacity and reduced demand for the negative results.

While other large hotel companies struggled in the early 1990s, Loews Hotels thrived under the direction of Jonathan Mark Tisch, son of Bob Tisch. Jonathan Tisch was praised for creative, ambitious, and often philanthropic promotions. His annual “Monopoly Power Breakfasts” featured celebrity contestants who played the famous Parker Brothers game competing on a customized board. Proceeds of the event went to charities. The upscale hotel chain’s “Good Neighbor Policy” and its recycling programs earned it industry accolades as well. Following an industry-wide trend, Loews Hotels lost $1.79 million in 1993, then reported a net profit of $17.02 million in 1994.

The Tisches continued to apply their turnaround strategies to Bulova in the early 1990s. In 1995 they completed the divestment of that subsidiary’s defense interests in order to concentrate on the core timepiece business. Although sales and profits declined as a result, Bulova was able to stay in the black in the early 1990s.

Loews’ two largest investment areas, cigarettes and insurance, were very vulnerable in the early 1990s. Price wars prompted Lorillard to launch a bargain cigarette brand, Style, in 1992, then cut the retail price of its flagship Newport brand 25 percent in 1994. In the decidedly antismoking climate that predominated, cigarette manufacturers already faced with legislation that banned smoking from virtually all public places also encountered many lawsuits. As of fiscal year 1994, Lorillard was a named defendant in 17 individual and class-action suits brought by cigarette smokers, their estates and heirs, and even flight attendants who claimed to be victims of secondhand smoke.

When Loews subsidiary CNA Financial acquired Continental Corporation in December 1994 for $1.1 billion, it became the third largest property and casualty insurer in the United States. It also took on Continental’s liabilities regarding Fibreboard Corporation, a company that manufactured asbestos insulation products from 1928 to 1971. In 1993 Continental and its codefendants reached a $2 billion settlement (of which Continental was responsible for $1.44 billion) to cover past and potential liabilities.

EXIT FROM CBS

Another key divestment came in 1995, when Loews engineered the sale of CBS to Westinghouse Electric Corporation for $5.4 billion. This ended Larry Tisch’s controversial reign at CBS, and Loews’ share of the proceeds amounted to nearly $900 million, swelling the company’s coffers. In late 1995, Loews took Diamond Offshore public, selling about 30 percent of the company in an offering that raised $300 million.

Titular changes in the early 1990s seemed to indicate preparations for a changing of the guard at Loews. In the late 1980s, Bob had occupied the positions of president and chief operating officer, while Larry acted as chairman and CEO. Yet as the two brothers became septuagenarians, they consolidated their responsibilities, becoming cochairmen and co-CEOs. James S. Tisch, son of Larry and a likely successor, advanced to president and chief operating officer, while Andrew H. Tisch, another son of Larry, led Lorillard.

In late 1995 Lorillard agreed to buy six discount cigarette brands from B.A.T. Industries PLC for about $33 million, but in April 1996 the Federal Trade Commission rejected the deal on antitrust grounds. Loews Hotel, meantime, entered into a joint venture with MCA Inc. in 1996 to develop three themed luxury hotels in Orlando, Florida, as part of MCA’s expansion of its Universal Studios Florida theme park. The first, the Portofino Bay Hotel, opened in the fall of 1999 with 750 rooms. This property aimed to replicate the famous Italian seaside village of Portofino. The Hard Rock Hotel opened in January 2001 and the Royal Pacific in June 2002. After helping to develop the hotels, Loews Hotels managed the properties under a contract arrangement. With the travel industry enjoying a resurgence in the economic boom time of the late 1990s, Loews Hotels moved ahead with other expansion plans as well. The company returned to Miami in 1998 with the opening of the Loews Miami Beach Hotel, an 800-room property in the Art Deco district of Miami Beach. In early 2000 the 590-room Loews Philadelphia Hotel was opened near the downtown convention center, and Loews Hotels also purchased the Coronado Bay Resort hotel in San Diego, California.

SUCCESSION TO NEW TISCH GENERATION

In 1997 Loews lost more than $900 million on a pretax basis from its $70 billion securities portfolio as a result of the bearish Larry Tisch’s short-selling strategies against the long-running bull market. Net income as a result fell to $793.6 million from the $1.38 billion figure of the previous year. Late in 1998 the succession from one Tisch generation to another came to fruition. The Tisch brothers stepped down from their co-CEO positions but remained cochairmen. James Tisch was promoted to president and CEO. In addition, an office of the president was formed consisting of James Tisch, Andrew Tisch, who also held the title of chairman of the executive committee, and Jonathan, who also continued to serve as president and CEO of Loews Hotels.

The new leadership at Loews faced many challenges, not the least of which was the increasing level of litigation and regulation facing Lorillard. The settlement costs from tobacco-related suits began to reach significant levels in 1997, when Lorillard paid out $122 million. Payments then escalated to $346.5 million the following year. Late in 1998 Lorillard and the other major tobacco companies reached a $206 billion settlement with 46 states for the reimbursement of public healthcare costs associated with smoking. Settlements with other states totaled another $48 billion. Lorillard took pretax charges of $579 million and $1.07 billion in 1998 and 1999, respectively, in connection with the settlements, the payments for which were to continue into the 2020s. In September 1999 the U.S. Justice Department filed a massive lawsuit against the major tobacco makers, modeled after the state lawsuits, with a potential industry liability well in excess of the state settlement.

Individual and class-action lawsuits continued as well, with Lorillard a defendant in no fewer than 825 cases as of the end of 1999. The most important of these was a class-action lawsuit filed in Florida, Engle v. R.J. Reynolds Tobacco Co., et al. The Engle trial began in October 1998, with a jury returning a verdict against the defendants in July 1999, finding that cigarette smoking is addictive and causes lung cancer, and that the tobacco companies had engaged in “extreme and outrageous conduct” in concealing the dangers of smoking from the public. The penalty phase of the trial then commenced. In April 2000 the jury awarded $12.7 million in compensatory damages to three sample plaintiffs, but then three months later delivered a potentially huge blow to the industry when it awarded $144.9 billion in punitive damages, by far the largest punitive damage award in U.S. history, dwarfing the $5 billion awarded in a suit against Exxon Corporation in connection with the Exxon Valdez oil spill. Lorillard’s share was $16.25 billion. The tobacco companies immediately vowed to appeal, a process destined to last years. In the meantime, Lorillard and the other tobacco firms had been able to manage the increasing litigation payments simply by raising cigarette prices.

TURNAROUND EFFORTS AT CNA

Meanwhile, with the insurance market slumping and earnings down, CNA was undergoing a restructuring. In 1998 the company cut its workforce by 2,400, consolidated some processing centers, and exited from certain areas, such as entertainment and agriculture insurance. In October 1999 CNA sold its personal lines insurance business, which included automobile and homeowners insurance, to the Allstate Corporation. In early 2000 CNA put its life insurance and life reinsurance units on the block but in August of that year announced that it would keep them.

CNA’s struggles continued. In 2001 the company was forced to boost its claims reserves by $2 billion, in part to cover asbestos-related claims as well as to cover shortfalls in the amounts set aside for various liability policies, including commercial auto and medical malpractice. In addition, CNA was responsible for around $470 million in claims related to the destruction of the World Trade Center during the September 11, 2001, terrorist attacks on the United States. Late in 2001 CNA launched a restructuring to streamline its property-casualty and life insurance operations that involved the elimination of 1,850 jobs, while at the same time moving to discontinue its variable life and annuity business. A charge of $125 million was booked in connection with this restructuring. CNA consequently posted a net loss of more than $1.6 billion for 2001, which pushed Loews into the red as well, to the extent of a $589.1 million loss.

To further prop up CNA, Loews pumped an additional $1.75 billion into the company. In 2002 Loews installed a new management team led by CEO Stephen W. Lilienthal to completely overhaul CNA. By 2004 CNA had repositioned itself as primarily a commercial property and casualty insurer having jettisoned its life, group, reinsurance, and trust businesses. The effort to clean up the aftermath of poor underwriting practices in the 1990s continued as CNA had to increase its reserves by an additional $1.8 billion in 2003. Once again, the red ink at CNA spilled over to Loews, as the latter suffered a net loss of $610.7 million that year. By 2006, however, CNA appeared to have turned a corner, posting its strongest results ever, including record net income of $1.11 billion.

END OF TOBACCO ROAD, FURTHER ENERGY VENTURES

In the meantime, on the tobacco front, Loews in early 2002 created a tracking stock called Carolina Group that was intended to reflect the performance of its Lorillard subsidiary. An initial public offering (IPO) of Carolina Group stock raised $1.1 billion, but Loews nonetheless retained full ownership of Lorillard. The litigation picture for U.S. tobacco brightened the following year when a Florida appeals court vacated the $144.9 billion Engle judgment and ordered the decertification of the class involved in the case. This ruling was upheld by the Florida Supreme Court in 2006. Rulings had also come down on the side of the tobacco companies in regard to the Justice Department’s lawsuit, which appeared to negate another major threat. By 2007 Lorillard remained a defendant in roughly 2,900 cigarette-related product-liability lawsuits. Loews, however, had plans to extricate itself from the tobacco field. In December 2007 the company announced its intention to spin off Lorillard as a separate, publicly traded company in mid-2008.

When Larry Tisch died in November 2003, Bob Tisch became sole chairman, a position he held until his own death almost two years later. At that point, Andrew and Jonathan Tisch were named cochairmen, with James Tisch remaining president and CEO. This leadership troika pushed Loews further into the energy field, building on the Diamond Offshore business that the previous Tisch generation had created.

In May 2003 Loews acquired Texas Gas Transmission, LLC (TGT), from the Williams Companies, Inc., for $795 million in cash plus the assumption of $250 million in debt. TGT owned and operated a 5,800-mile natural gas pipeline and storage system originating in Louisiana and Texas and extending to markets in the South and the Midwest. Then in December 2004 Loews more than doubled its natural gas pipeline assets by acquiring Gulf South Pipeline, LP from Entergy-Koch, LP for $1.14 billion. Gulf South’s assets included 8,000 miles of natural gas pipeline in the U.S. Gulf Coast region, making for a complementary fit with the TGT system. Loews created a new subsidiary called Boardwalk Pipeline Partners, LP for its pipeline operations, and it took this subsidiary public in November 2005 through an IPO of 14.5 percent of Boardwalk’s shares. Most of the $271.4 million in net proceeds was used to pay down Boardwalk’s debt.

Loews plunged even deeper into energy in July 2007 with its acquisition of an array of natural gas exploration and production assets from Dominion Resources, Inc., for $4 billion. The assets included properties in the Permian Basin in Texas, the Antrim Shale in Michigan, and the Black Warrior Basin in Alabama with proven reserves of natural gas and natural gas liquids of approximately 2.5 trillion cubic feet of gas equivalent. These assets formed the basis for a new Loews subsidiary called HighMount Exploration & Production LLC. Several months later, in January 2008, Loews offloaded the smallest of its subsidiaries, Bulova, selling it to the Japanese watchmaker Citizen Watch Co., Ltd., for $250 million. With one divestment complete and another (Lorillard) pending, Loews was posed to narrow its holdings to the property and casualty insurance operations of CNA, its various energy interests, and Loews Hotels.

Company Perspectives

Our Company maintains a long-term orientation in guiding our subsidiaries, seeking acquisitions and managing the holding company’s capital.

We help our subsidiaries develop first class management terms, and we consult intensely on matters of strategy and capital management, but ultimately we rely on our subsidiaries’ managers to determine and implement their strategies.

We seek out undervalued opportunities to create value, whether through cash flow generation or asset appreciation, and we focus on identifying and managing downside risks.

Key Dates

1956:: Tisch brothers erect the Americana Hotel in Bal Harbour, Florida, establishing themselves as major hotel operators.
1960:: Tisch brothers gain control of Loew’s Theaters (the apostrophe is later dropped from the corporate name).
1968:: Tisch brothers acquire Lorillard, the oldest U.S. tobacco manufacturer.
1969:: Tisch brothers create a holding company, Loews Corporation, for their diversified interests.
1974:: Loews acquires CNA Financial Corporation.
1979:: Company purchases a majority stake in Bulova Watch Co.
1985:: Movie theaters are divested and a 25 percent stake in CBS is purchased, with Larry Tisch becoming president.
1990:: Company acquires Houston drilling firm Diamond M Offshore.
1992:: Odeco Drilling is acquired.
1993:: Diamond M and Odeco are merged to form Diamond Offshore Drilling, Inc.
1994:: CNA acquires Continental Corporation.
1995:: Loews engineers the sale of CBS to Westinghouse, with Loews gaining nearly $900 million from the sale; Loews takes Diamond Offshore public.
1998:: Tisch brothers step down as co-CEOs; James Tisch is promoted to president and CEO. Lorillard and other tobacco firms reach $206 billion settlement with 46 states over tobacco-related health costs.
2002:: New management team at CNA begins an overhaul that eventually repositions the firm as primarily a commercial property and casualty insurer.
2003:: Loews enters the natural gas pipeline business via the acquisition of Texas Gas Transmission, LLC.
2005:: Company takes its pipeline subsidiary, Boardwalk Pipeline Partners, LP, public.
2007:: Loews spends $4 billion for an array of U.S. natural gas exploration and production assets that form the basis for the new subsidiary HighMount Exploration & Production LLC; company announces its intention to spin Lorillard off as a separate, publicly traded company.
2008:: Loews sells Bulova to Citizen Watch Co., Ltd.