Commentary | Looking Back at Loral’s Battles
The following is edited for length and excerpted from “Just Say Yes,” an autobiography to be released March 28 by Greenleaf Book Group Press. Reprinted with permission. SpaceNews editor’s notes in italics.
The China Chapter
In January 1997,secured a contract from the Chinese government to build a communications satellite called ChinaSat-8. The cost to China would be $250 million.
Normally a customer would pay half the price at the time of signing and the other half upon delivery, but I negotiated to get the full amount in advance. I knew how complicated doing business with a secretive and suspicious nation like China could be, and if there were bureaucratic or political problems down the road regarding the delivery of the satellite, I didn’t want Loral to bear the burden of those delays and complications.
ChinaSat-8 was built strictly for commercial telecommunications users, but when you sell China anything that has possible military applications, you need to get a waiver from the federal government. Our government in most cases realized that such deals had a favorable affect on the balance of trade with China and created thousands of American jobs.
We had done business with the Chinese before, and we were aware of the rules. Everything went well at first. A launch date had been set. But before we could obtain a shipping license from the federal government, a tragedy occurred in China:, a multinational telecommunications company of which the U.S. government was a member, experienced a systems failure during a satellite launch.
As is usually the case after a crash, the industry created a committee to investigate and issue an independent report. Loral was invited to be a part of this review board.
The report was not supposed to be shared with the Chinese until the U.S. representatives had a look at it. The unfortunate fact of the matter, however, was that because of an administrative error made by a Loral engineer, the report was mistakenly given to the entire review committee, including the Chinese members. It constituted a clear violation of the rules.
Meanwhile, the State Department, which had assumed control of the export licensing program, was doing nothing about granting Loral a license to ship the ChinaSat-8, and it was not explaining why our application was being held up either. I was extremely frustrated by this.
I went to John Bolton, a high-ranking official there. I visited him several times. Each time he said the same thing: “I’m trying my best to get an exception made for you.” As it turned out that wasn’t true. Politics had taken over.
The Chinese government was at least as frustrated as I was. I think they understood the bind we were in. Still, eventually they sued us for the purchase price but lost the lawsuit.
Then things got truly bizarre.
U.S. press reports said Loral’s satellite export threatened national security, and had been facilitated by Schwartz’s political support for U.S. President Bill Clinton.
House Speaker Newt Gingrich demonized me and denounced me on the House floor, and California Congressman Dana Rohrabacher referred to me as a “pinko,” reviving an ugly McCarthy-era term. Conservative New York Times columnist William Safire said Loral had participated in “the sellout of American security.”
I knew Loral and I were completely innocent, and hearing my name associated with espionage or anti-Americanism felt surreal. At a party I attended in the Hamptons at around this time, a woman came up to a man I was speaking to, gestured to me and said, “What are you doing talking to him — this man is a traitor!”
The controversy shook my faith in both journalism and government. Congress created the Cox Committee to investigate Chinese espionage in hopes of embarrassing the Clinton administration. (After a year, they produced only a lot of hot air.)
My reputation was never seriously threatened, but if any doubt lingered about me, it was erased by an internal Justice Department memo made public in 2000. That document said prosecutors had turned up “not a scintilla of evidence — or information — that the president was corruptly influenced by Bernard Schwartz.”
As for ChinaSat-8, it never got shipped. Under the terms of the settlement with our Chinese customer, we didn’t have to pay back the $250 million and we were free to retrofit the satellite and sell it to someone else, which we did several years later.
Still needing a communications satellite, the Chinese purchased one from a company in France. The French company put the satellite directly into the hands of the Chinese, to do with as they pleased. I’m sure the emerging superpower got an education in satellite technology as a result. If the State Department had allowed Loral to ship the satellite when it was built, that, of course, would never have happened.
The period 1999-2001 featured substantial investment by Loral and partners in themobile satellite telephone service. Launch delays, a spectacular launch failure and cost overruns delayed commercial introduction, and cellular deployment was expanding. In 2001-2002, the bursting of the telecom bubble caused a severe recession in the commercial satellite manufacturing business, putting pressure on Globalstar and on Loral’s core satellite manufacturing division, Space Systems/Loral. The weakened Loral was now vulnerable.
I retired as chairman and chief executive of Loral Space and Communications on Feb. 1, 2006. Although I left Loral in good shape, with our stellar management team in place, I did not, because of circumstances beyond my control, leave the chairmanship in very good hands.
I got a call from a man named Mark Rachesky, who asked me if we could get together to talk about Loral. It turned out he’d been acquiring our bonds quietly but aggressively. Rachesky made his money by buying bonds low and converting them into stock — often by forcing the target company into bankruptcy.
This allowed him to take control of a company, after which he would methodically strip out and sell off assets and cease making investments in things like research and development in order to increase his short-term profit. Under his control, a company might undertake a large dividend recapitalization, meaning it would borrow money and return Rachesky the amount he’d invested.
Firms like his ordinarily cared nothing about the employees or the long-term goals of the companies they were dismantling. He was, in other words, a classic corporate raider.
Rachesky smiled a lot at dinner and was very charming. He said: “I’m a big bondholder. I think we can work together.”
“Really?” I said. “I don’t think we would work together very well at all.”
“Why is that?”
“Because we have diametrically opposed views. My view is to keep building the company, to think in the longer term. Your view is to get the stock price as high as possible for your own benefit as a major stockholder. Sometimes these two philosophies can be successfully blended — but not in this case.”
To reduce the pressure of its debt, Loral struck a deal with Intelsat to sell Intelsat six Loral satellites for $1 billion, plus an agreement that Intelsat would purchase a Loral-built satellite. But Intelsat was concerned that the arrangement might be compromised to Intelsat’s disadvantage if Loral were to file for bankruptcy. Loral agreed to file for Chapter 11 reorganization, which allowed the Intelsat sale to occur, but also allowed Rachesky to convert his bonds to stock, and he now owned 35 percent of Loral’s equity.
I planned to pay back our debts in full and to make sure all our employees and even local merchants we did business with — the deli that catered our occasional in-house breakfasts and lunches, the pizza guy — didn’t get hurt or left out of any settlement. Rachesky, on the other hand, wanted to pay back cents on the dollar and gouge the employees at every turn.
I once had an argument with Rachesky’s lawyer, who said, “Why don’t we just take the assets from the pension fund? Money’s money, right?”
“Wrong,” I said. “This is the employees’ hard-earned money, and it’s going to stay where it is.”
What Rachesky wanted defied common decency. It was unthinkable to me to take advantage of your employees, to cut or eliminate their pensions or reduce their compensation just so you could enrich yourself.
I fought Rachesky at every turn. He had the largest block of votes. Rachesky took me to court, trying to have me forced out or at least have my decisions overturned. The judge ruled in my favor.
We emerged from the reorganization on Nov. 21, 2005, a much stronger company than we had been before the filing. The one group that gets hurt in a reorganization is the shareholders. To my everlasting regret, there wasn’t a thing I could do about it. With this one exception, I was proud of the way we had handled ourselves.
But with Mark Rachesky controlling the board, it was not the same Loral for me. Running the company wouldn’t be fun anymore, and that was one of the main reasons I resigned.
I am embarrassed by the failure of Globalstar [which has since fielded a second-generation constellation and is rebuilding the business]. If I take any consolation it is that I failed while trying to grow the company.
Ultimately, relatively few “little guy” investors were hurt by the failure. The brunt of the loss, rather, was borne by the high-yield debt investors and Loral as well as by the telecoms that used our satellite technology as insurance against cellular technology and accepted the price of that insurance as a cost of doing business. If someone had to get hurt because Globalstar didn’t work out as we had hoped and expected, I preferred it would be them.
Bernard L. Schwartz is the retired chairman of Loral Space and Communications.