A shopping spree in the '80s

Huge profits spurred an acquisition binge, and the diversification brought mixed results

It seemed like a good idea at the time: Take General Motors' massive profits and invest in tangential industries to help GM develop world-beating cars more efficiently.

It was 1978. GM had been hit hard by the gasoline crunch and stagflation, but it was on top of the U.S. car market. GM had just earned $3.5 billion on $63 billion in sales. Money was burning a hole in its pocket.

Richard Gerstenberg, who was CEO from 1972 to 1974, had wanted GM to be less dependent on vehicles and to diversify but achieve synergies, said F. Alan Smith, GM executive vice president during the 1980s.

GM looked at prefabricated housing, then clothing. But neither had the size or scale of the car business. GM even studied buying General Electric but saw no synergies.

The automaker looked inward. It was struggling with the rising power of computers as a business tool. Its information technology networks were chaotic and unconnected. Rising star Roger Smith saw leaps in technology as a way to gain a competitive edge over the Japanese automakers.

But rather than hire companies to do the grunt work, GM bought them outright.

In 1984, GM paid $2.5 billion for Electronic Data Systems to computerize GM's operations. GM shelled out another $5.2 billion — five times book value — in 1985 to try to integrate Hughes Aircraft's high-tech aerospace technology into GM cars. By then, Roger Smith was chairman and CEO.

GM also created a subsidiary with Fujitsu Fanuc to develop robots and automate its assembly lines. And it entered into costly alliances with Saab, Suzuki and Isuzu to expand its capacity and global reach.

GM number crunchers had pegged the investments in EDS, Hughes and Fanuc at $40 million in the long run. Instead, they cost $66 billion. In the end, GM's plants were no more efficient, and sales plummeted as money was spent on conglomeration rather than developing products Americans wanted to buy.

In 1987, GM had become so inefficient that it was outearned by Ford, even though Ford sold just two-thirds as many vehicles.

"GM was an organization that didn't know what it didn't know," said former GM executive Jim Hall, now managing director of the 2953 Analytics consulting firm. "These were not people with imagination. They thought they had the answers."

Another problem: Melding different corporate cultures into GM's plodding bureaucracy of 750,000 employees.

EDS was used to lightning-quick decisions by founder Ross Perot. Hughes was used to the military procurement model. GM didn't truly understand why Fanuc clients used robots.

Saab's Swedish business model was baffling. Isuzu merely rolled over for whatever GM wanted, even if it was the wrong path. Suzuki was too small to make an impact in the boardroom. In short, none was a good fit with GM.

In a 1987 interview with BusinessWeek, retired GM executive Alex Mair said, "GM bit off more than it could chew. But nobody was used to saying, 'You can't do that.' "

EDS and Ross Perot

GM's attempt to rectify its scrambled IT system led it to EDS. And while EDS fixed GM's computer systems, it also was constrained from getting outside contracts. GM and EDS had culture clashes as well.

"EDS was trying to make GM a paperless company," Hall said. "But the basis of that decision came from a consultant GM hired, who unironically made the case for a paperless company in a 600-page document in a three-ring binder."

There also was the sticky problem of having Perot on the GM board as its single-largest shareholder. The plain-talking Texan publicly fumed at the GM bureaucracy, casting the lone dissenting vote in the Hughes buyout.

"Ross Perot really wanted to take over GM," said Robert O'Connell, former GM CFO. "He overestimated his capabilities and power. I think he tried to gain control over the boardroom, and he failed to achieve that."

GM was so embarrassed by Perot's antics that it gave him $700 million in greenmail to sell his stake in GM and never speak ill of the company again. (Perot declined to be interviewed for this article.)

Perot, already a billionaire, made a $350 million profit by selling back his shares, although he put the money in an escrow account in case GM's directors changed their minds and wanted him back. They didn't.

The Hughes years

For all the attempts to integrate high technology into GM products, the Hughes Aircraft deal was filled with snarls. Hughes' idea of a large contract was 10,000 units, for products that were designed to be used once.

That didn't mesh with the consumer mindset of an automaker. After Hughes created head-up displays for the instrument panels of the Pontiac Grand Prix and Oldsmobile Cutlass, Hughes engineers were baffled when GM asked that the technology be expanded to other product lines.

Things got worse. The Howard Hughes Medical Institute, the prime shareholder of Hughes Aircraft, became dissatisfied with the company's financial performance after GM acquired it.

The institutional shareholders were so upset with GM that they tried to drive down the value of their own shares. Knocking the price down far enough would trigger a $2 billion make-good payout by GM to the institute that had been baked into the purchase arrangement. To quiet the uproar, GM split the stock and raised the dividend.

One of the few shining moments for the GM-Hughes collaboration was the creation of the Sunraycer solar-powered electric vehicle, which won the World Solar Challenge and set 10-kilometer and 10-mile speed records for a vehicle of its type. Although the Sunraycer had little in common with cars available on the showroom floor, it was a test for future electric-vehicle development.

The robot follies

Then there was GM's foray into automation. In June 1982, GM joined forces with Fujitsu Fanuc Ltd. of Japan to become the world's largest supplier of robots.

While GM-Fanuc was one of the few profitable robot makers through the 1980s, profits were slim. GM-Fanuc sales were mostly to GM.

Building robots involved more than just flipping a switch and watching the machines do the work. Engineers toiled over endless lines of software code to get the machines to complete their processes properly and communicate with other robots on the factory floor.

The Buick City complex in Flint, Mich., was a marvel of just-in-time assembly and robotics, but it also had one of the slowest startups in GM history. For weeks, the robot arms that glued and set windshields for Buick LeSabres and Olds 88s dumped the glass inside the cars. Plant managers had to have people do the work anyway.

It was harder slogging at GM's gleaming $600 million "factory of the future" in Hamtramck, Mich., which had recurring problems with its 260 industrial robots and other computer-controlled manufacturing systems.

"The Poletown plant was the ultimate binge," Hall said. "GM saw that the average Japanese plant had so many robots, so GM thought more would be better. They didn't know how and why the robots were being used; they just wanted to use more of them."

Auto alliances

Then there were the intricate tie-ups with other automakers, which had varying degrees of success.

After losing to Ford in a bidding war for Jaguar, GM snapped up Saab instead. Pundits can argue about who got the worse deal.

GM also made forays into Japan, linking with Isuzu, Suzuki and Toyota. GM bullied Isuzu to stop building passenger cars yet somehow was unable to lead Isuzu into capitalizing on the SUV boom in America. GM plundered Suzuki's small-car expertise to create the Sprint and replace the aging Chevette. Model sales plummeted from 120,000 to 30,000.

Perhaps the best alliance was GM resurrecting its strife-torn plant in Fremont, Calif., with Toyota. With Toyota taking the lead, the old plant, reborn as New United Motor Manufacturing Inc., or NUMMI, went from GM's worst to one of its finest.

The divestiture

For all the trouble the acquisitions entailed, GM made out well when it came time to sell something.

GM's initial investment in Hughes looked bad at the start, when its market cap plunged by $1.7 billion in five years. But GM made back its money in divestiture. In 1997, GM sold Hughes' defense arm to Raytheon for $10.1 billion in stock.

Then, in 2003, it sold its Hughes Electronics business — owner of DirectTV satellite TV — to News Corp. for $6.6 billion. That was a bittersweet deal since it happened only after a massive $26 billion deal with EchoStar Communications collapsed when the Federal Communications Commission killed it on antitrust grounds.

GM spun off EDS in 1996 for an estimated $25 billion, 10 times the amount GM paid for it.

Despite the problems, some GM executives feel the alliances were worth the effort.

"Those were good companies," said F. Alan Smith. "We made money off them, and to some degree EDS helped us, though not without bruises."

You can reach Mark Rechtin at mrechtin@crain.com. -- Follow Mark on