Not by technology alone - interview with Thermo Electron Corp.'s George Hatsopoulos - Cover Story

Chief Executive, The, April, 1993 by J.P. Donlon

Although a scientist himself, Thermo Electron's George Hatsopoulos learned that oftentimes a lot more is needed than bright ideas.

Shareholder value, long-term focus, decentralization, commercialization of new technology, productivity incentives, team building, maximization of R&D--an exhausting laundry list of current top management issues. Surely a single approach to accomplish the above with one strategic blow is not realistic. Then there is the case of Thermo Electron, a $900 million multifaceted technology company headquartered in the leafy Boston suburb of Waltham, MA. It develops and manufactures environmental and analytical instruments, cogeneration systems, process equipment, biomedical devices, specialty materials, and metallurgical services. What appears to be a hodgepodge of different products--pesticide detectors, natural gas-fueled engines, titanium hip joints, sonic computerized tomography--actually can be traced back to the research that launched the company in 1956. It was then that a young Greek who had come to the U.S. to earn a doctorate in thermodynamics at MIT turned a dissertation into a business plan. George Hatsopoulos' Big Idea was and is the commercialization of thermionics--the process of converting heat directly into electricity without moving parts. Thirty-seven years later, the original Big Idea remains an economic dud, involving exotic processes such as liquid metal cooling and superpure materials that are also super expensive. (Yet the science is sound. The U.S.S.R employed thermionics in its Topaz space reactor.) But every other idea has been a commercial success.

When Thermo Electron went public in 1967, George Hatsopoulos and his brother John, 59, who is CFO and the company's alter ego, adopted an approach oddly similar to what management consultants today retail as the "re-engineered enterprise." Recognizing that retaining entrepreneurial drive is difficult as a company grows bigger in size, and that Wall Street often misunderstands a company involved in myriad activities at different stages of product development in unknown markets, George began spinning off divisions, creating new public companies with minority public share ownership. Each majority-owned subsidiary has its own board, operating CEO, and marketing force, with Hatsopoulos providing strategic direction. This allows the public to invest directly and to more accurately evaluate a unit's performance.

Some 50 percent of employees own shares in one Thermo Electron enterprise or another. "That boosts performance and acts as an incentive," says Hatsopoulos, who himself owns 800,000 shares.

"In most companies R&D is a service overhead," says Hatsopoulos, 66. "We spin R&D to each of the units and use the center R&D to create new businesses." A combination of pride in running one's own show and an opportunity for performance-based stock options motivates the scientist/engineers to get the technology to market. The units' small size--relative to the parent--offers flexibility and demands quick decision making. Higher transaction costs are one obvious drawback: Filing nine 10Qs and 10Ks per quarter with the SEC is more expensive than one. But accounting, legal, and other administrative costs are centralized. (Hatsopoulos reckons additional G&A costs related to the spin-off strategy are no more than $3 million to $5 million per year.)

The organizational approach, which revolves around creation of a so-called partial public subsidiary (PPS), has come into vogue of late. American Express, ARCO, Coca-Cola, and Disney have PPSs. IBM intends to spin off everything into "baby blues." Sometimes it backfires as when Time sold a minority stake in its cable systems operator, and Time Warner later had to buy it back at a premium. Phillips Petroleum announced an offering of 51 percent of its natural gas processing unit GPM. Perceiving it to be a low-value deal, the market punished Phillips with a lower share price. Don Mitchell of Mitchell & Co., an investment advisory firm, offers two rules of thumb for successfully spawning a PPS: The new concern should be at least 25 percent of the market value of the parent, and the price-to-book ratio should be one multiple higher.

Thermo Electron's spin-offs haven't always met this yardstick, but their performance hasn't been shabby. Hatsopoulos' objective is for new businesses to attain a target pretax internal rate of return of 40 percent over five years. Assuming G&A costs of roughly 3 percent, the target is really about 37 percent, the CEO says. The parent's 5- and 10-year total returns to shareholders are 28.2 percent and 26.3 percent, respectively.

Down which new paths will technology take the company? One technology under development by the ThermoTrex unit is a passive microwave camera that forms "synthetic" images enabling pilots to "see" other aircraft and to navigate in fog. This capability should all but eliminate landing and takeoff collisions and should be of great interest to frequent-flying CEOs who daily face airport congestion and the potentially hazardous conditions brought on by overworked traffic controllers.