Lehman Brothers Collection - Contemporary Business Archives

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Litton Industries, Inc. - Lehman Brothers Collection

Litton Industries, Inc.

List of Deals

Litton Industries' origins can be traced back to Electro Dynamics, an electronics company founded by Charles "Tex" Thornton. Thornton believed that he would have to expand his company quickly, since most small electronics companies tended eventually to be eliminated or absorbed by larger competitors. He also believed that the U.S. Defense Department would be seeking increasingly sophisticated weapons and that there was room in the defense industry for another large electronics company. Upon founding Electro Dynamics, Thornton began his hunt for the perfect company to acquire as he started to build his business. His eye fell upon Litton Industries, a vacuum tube manufacturer in California. Thornton's only obstacle, however, was the $1.5 million necessary to purchase the company. Thornton turned to Lehman Brothers, an investment firm. Lehman Brothers had followed Thornton's career since he was a vice president at Hughes Aircraft and had decided to finance Thornton before he even requested assistance. Joseph Thomas from Lehman Brothers later said that their firm did not invest in Electro Dynamics as much as it invested in the ability of Thornton. With the funds provided by Lehman Brothers, Thornton purchased Litton Industries in 1954. The company acquired a few smaller electronics firms that same year.

Thornton's strategy was to continue purchasing electronics companies with high growth potential and to build Litton into a company that could meet almost any request for advanced technology. After acquiring a company, Thornton allowed the original employees as much freedom as possible so that they could continue conducting the operations that made the company desirable in the first place. When he purchased Litton Industries, Thornton promised Lehman Brothers that his company, with $8 million in sales, would have $100 million in sales within five years. As it happened, Litton reached $120 million in sales by 1959.Thornton had merged with Monroe Calculating Machines to reach his goal. Monroe benefited from Litton's technological assets while Litton needed Monroe's sales and service outlets. By that time, Litton was manufacturing calculators, inertial guidance systems for aircraft, potentiometers, barratons, duplexers, klystrons, and other electronic products. Almost half of Litton's business was with the U.S. government.

By 1961 Litton was the fastest-growing company on the New York Stock Exchange. During its first eight years of existence, Litton had acquired twenty-three companies. By 1963 sales had reached half a billion dollars. An article in Fortune magazine suggested that Litton's success lay in going against the current wisdom. During that decade, one of the company's most important acquisitions was Ingalls Shipbuilding Corporation, the country's third-largest private shipbuilder. Ingalls made submarines and oil-drilling equipment to which Litton's electronic controls could be added. In the middle of the decade Litton continued to sustain its high rate of growth, even after it passed the $1 billion mark in sales.

After fifty-seven quarters of remarkable growth, Litton reported a decline in earnings of $11 million and, as a result, its stock plummeted. The decline in profits would not have been such a catastrophe if Litton stock had not been selling at forty times earnings. Critics charged that Litton's true innovations were in investor relations rather than in high technology. The company used unusual, but not illegal, accounting techniques that exaggerated its growth. Litton's highly publicized technological innovations and perceived advantage in the market was also exaggerated. Finally, it was revealed that Litton relied heavily on other companies' research and development of new products and that Litton's success resulted from producing other companies' inventions inexpensively. Part of Litton's failure to develop better products can be attributed to the company's emphasis on short-term growth. Management often overlooked long-term research and development in favor of immediate financial gains.

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