Boeing To Buy Hughes Satellite

Hughes Electronics Corp., one-time maker of airplanes and spy satellites, placed a big bet on the New Economy Thursday with a $3.75 billion cash deal to sell its satellite-building businesses to Boeing Co.

The pact takes Hughes out of the aerospace industry altogether and will allow it to focus on building its entertainment and high-speed wireless communications businesses. It makes Boeing the world's biggest maker of satellites.

Hughes plans to pursue its goal of becoming a dominant player in the world of high-speed wireless communications.

"These strategic moves accelerate the transformation of Hughes into a highly focused entertainment and data information services and distribution company," said Michael T. Smith, chairman and CEO of Hughes.

The deal will boost revenues and earnings from Boeing's space and communications operations about one third. The Hughes operations being acquired were believed to have generated sales of $2.3 billion during 1999, Boeing said in a news release.

Hughes has a backlog of 36 satellites on order worth an estimated $4 billion.

"Boeing intends to be No. 1 in space. This acquisition is a significant step forward in executing our goal of becoming the industry leader in integrated, space-based information and communications," said Phil Condit, Boeing chairman and chief executive officer.

In addition to Hughes' space and communications unit, Boeing gets Hughes' Electron Dynamics and Spectrolab, which make satellite components. The three businesses have a combined workforce of about 9,000 employees, primarily in Southern California.

Analysts found little to criticize in the deal, which meshes Hughes' expertise in satellite hardware with Boeing's Delta and SeaLaunch rocket programs.

Hughes is expected to use proceeds from the sale to expand DirecTV, the satellite-to-home TV service, and develop Skywave, a wireless broadband system that will target the Internet and other communications systems.

Both ventures promise to make Hughes, already the leader in wireless TV services, a key player in the rapidly meshing entertainment and communications businesses.

"Broadband communications, Internet access is really the wave of the future, and Hughes is in a position to move into that really quickly," said Marco Caceres, an analyst with Teal Group in Fairfax, Va.

"I think this is a trend in the whole satellite market. Companies that traditionally have built hardware are getting into satellite services, because that's where the real money is being made," he said.

Hughes was founded as Hughes Aircraft in 1932 by Howard Hughes. During World War II, the company built the Spruce Goose, a wooden transport military plane that never flew except for a brief test run over Long Beach harbor.

After the war, Hughes branched out into defense electronics. The company began to move into commercial ventures, such as DirecT, after the Cold War ended.

Hughes executives said in the past they wanted to keep their commercial satellite operations as a complement to DirecTV, which has with more than 8 million subscribers. That was before Hughes ran through more than $5 billion promoting DirecTV, buying up its competitors and developing Starwave.

Hughes spent more than $2 billion made from the sale of Hughes Aircraft to Raytheon in 1997. In addition, the company piled up an estimated $3.3 billion in long-term debt, said Paul Nisbet, an analyst with JSA Research.

Ultimately, Hughes executives decided the potential of those ventures outweighed the advantages of hanging onto satellite manufacturing, an industry that has been chilled by launch failures and allegations of unauthorized technology transfers by U.S. companies to China.

"If they wanted to grow that investment intensive part of their business, they had to get some cash. I think they came to a conclusion that the satellite manufacturing business was expendable," Nisbet said.