William Agee Will Leave Morrison Knudsen
By Joan E. Rigdon
The Wall Street Journal
(Copyright (c) 1995, Dow Jones & Co., Inc.)
Morrison Knudsen Corp. disclosed some shockingly bad news
yesterday: It said it expects big write-downs on its major construction
and transit projects and a large loss for 1994, it is in default on its loan
agreements, it may sell noncore business units and it will eliminate its
Some employees at its Boise, Idaho, headquarters brought out
noisemakers and started celebrating.
They were celebrating, according to insiders, because the company also
announced the departure of William Agee as chief executive officer.
Mr. Agee, 57 years old, was one of the early protagonists of the 1980s
takeover era and famed for his ill-fated attempt -- along with his wife and
adviser, Mary Cunningham -- to take over Martin Marietta Corp. while
chief of Bendix Corp. That 1982 bid resulted in the invention of the
so-called Pacman defense, in which Martin Marietta tried to devour
Bendix and drove Bendix into a shotgun marriage with Allied Corp. (now
Mr. Agee was a controversial figure at Bendix. Other managers felt he
promoted Ms. Cunningham in the early 1980s to a senior post because
the two were romantically involved. The two were married in 1982, after
Ms. Cunningham had left Bendix. Mr. Agee and Ms. Cunningham have
vigorously and steadfastly denied being romantically involved while they
both worked at Bendix.
Mr. Agee has been no less controversial at Morrison Knudsen.
According to insiders and documents obtained by The Wall Street
Journal, he launched a high-risk operation to manufacture rail cars, ran
the company mostly from his Pebble Beach, Calif., estate and spent
company money lavishly on a corporate jet for private use, a nearly
life-size painting of himself and Ms. Cunningham and beds of petunias at
his home. The company says Mr. Agee wasn't available to comment.
Morrison Knudsen declined to comment, saying, "These are not business
issues; we're focusing on the main business issues at MK."
Besides his critics, Mr. Agee has a following of executives who regard
him fondly. R.V. Hansberger, his first mentor and founder and former
chairman of Boise Cascade, says Mr. Agee is an "extremely brilliant" man
with a knack for rebounding from setbacks. Faced with a negative
situation, "he's always able to find something positive. He burrows in, and
he magnifies it and he turns it around," Mr. Hansberger said.
That may be difficult this time. In response to yesterday's announcement,
Smith Barney analyst Tobias Levkovich remarked: "Morrison stock was
a train wreck waiting to happen, and Bill Agee was the conductor." Mr.
Levkovich has cut his earnings estimates to zero for 1994 and 1995. The
company will announce 1994 results in mid-February.
There is no doubt that Mr. Agee was intensely disliked by some of his
subordinates. By the first week of December, each of the 11 directors
had received a letter from an anonymous band of mutinous managers.
The letter alleged that Mr. Agee had grossly mismanaged the company,
misrepresented its performance and had engaged in "aggressive, if not
illusory, balance-sheet accounting." The managers urged the board to fire
Mr. Agee "for cause."
A Morrison Knudsen spokesman responded: "It is the opinion of MK
and our independent auditors that our financial statements present fairly in
all material respects the financial position of Morrison Knudsen in
conformity with generally accepted accounting principles."
In a prepared statement yesterday, Mr. Agee said he is leaving Morrison
Knudsen of his own accord. He said he told the board in October that he
intended to retire as CEO, and the board says it formed a committee in
November to find a successor. But Morrison Knudsen didn't publicize
this, in contrast to its usual practice of alerting the Securities and
Exchange Commission to even minor personnel changes, such as vice
presidency promotions. Mr. Agee declined to comment further.
Mr. Agee will remain chairman, CEO, president and a member of the
search committee until a successor is named. The company "is beyond
the early stages of the hiring process," but wouldn't say when a new CEO
would be named. After that, it is unclear which titles beside CEO Mr.
Agee would surrender.
Morrison Knudsen's directors also declined to comment further. In a
terse news release, the company said it expects "additional losses in
1994" because of writedowns on construction and transit projects and
the complete write-off of its Vertex operation in Arkansas, a
hazardous-waste incineration concern. The company said it plans "an
energetic restructuring program that will include changes in the company's
management, as well as perhaps the sale of additional noncore business
units." It said it has started discussions with its banks, led by J.P. Morgan,
to "overcome loan defaults caused by fourth-quarter losses." Morrison
Knudsen has about $225 million of short-term debt.
The disclosures are in sharp contrast to an optimistic letter to
shareholders that Mr. Agee included early last year in the annual report.
He said 1993 had been a "banner year," and that "we are poised ready
for the 21st century."
But analysts have been disappointed with Morrison Knudsen's
performance for years. Earnings have largely stagnated since Mr. Agee
took over in 1988, averaging around $35 million a year except for 1992,
when accounting charges of $17.4 million resulted in a net loss of $10.6
million. Mr. Agee propped up the performance a bit by investing heavily
in the securities of other companies, selling the stocks for one-time gains.
Meanwhile, the company's balance sheet deteriorated steadily as the
company started capitalizing expenses, rather than writing them off as
incurred, and as it began leasing plant and equipment rather than buying it.
By the end of 1993, longterm lease and rental obligations ballooned to
$266 million from $38 million in 1988.
His subordinates assert that his key mistake was to try to expand the
company, an old-line construction firm that helped build the Hoover Dam
and the TransAlaska Pipeline. Mr. Agee did this, company observers
say, by taking bigger risks on large construction projects and by trying to
restart the rail-car manufacturing business in the U.S., a field dominated
by the Japanese.
Mr. Agee built up the rail-car business by bidding low on contracts. For
instance, when Morrison Knudsen bid on a contract to build 80 transit
cars for Bay Area Rapid Transit District in Oakland, Calif., in 1992, Mr.
Agee significantly knocked down the bid to win the job, insiders say. The
result: "We were looking at a $14 million loss on the contract the day we
won it," says an insider who declined to be named. Morrison Knudsen
won the contract, for $141.6 million. Mr. Agee planned to cover the loss
by getting BART to exercise its option to order more transit cars, insiders
Morrison Knudsen confirms it was counting on the extra cars. "It was bid
on the basis that at least 70 cars would be awarded in a follow-on
contract, but that did not materialize," in time to avoid taking a loss on the
contract, a spokesman said. BART's options on 70 cars expire in March.
Insiders assert that too many contracts were underbid. In the second
quarter of 1994, Morrison Knudsen took a $40.5 million loss, after a
$59.4 million charge for underbid transit-car contracts. In the third
quarter, it took a $9.2 million charge for underbidding a $100 million
contract to rebuild locomotives for Southern Pacific.
In a scathing report in November, Mr. Levkovich of Smith Barney wrote
that underbidding a $100 million contract by that much "is difficult to
Morrison Knudsen didn't return repeated phone calls seeking comment
on these issues.
Morrison Knudsen's misfortunes dismayed some middle-level managers,
but they say they also were angered by Mr. Agee's management style and
the way he spent company money on himself and his family. These
managers say Mr. Agee was essentially an absentee CEO, running the
company from Pebble Beach for the last two years. He flies in a
corporate vice president for debriefings from Tuesday to Thursday.
Mr. Agee's 1993 compensation of $2.4 million equaled 6.8% of
Morrison Knudsen's net income, more than any other CEO of a company
with earnings in that range, according to a Forbes magazine list.
According to insiders, Morrison Knudsen paid $4 million a year for a
corporate jet for Mr. Agee, equal to 13% of the company's general and
administrative budget. According to documents obtained by the Journal,
other expenses were $7,050 for a portrait of Mr. Agee and his wife,
which now adorns Morrison Knudsen's depot in Boise, and $10,153.12
for landscaping services in June at his Pebble Beach estate, including
$3,360 for 240 flats of petunias.
The company declined to comment on these expenses, saying they were
not business issues.
The chairman of Morrison Knudsen's compensation committee until Nov.
16 was Peter Ueberroth, the former baseball commissioner who was
brought on the board in 1989. Mr. Ueberroth, who resigned without
explanation, didn't return phone calls. Morrison Knudsen said Mr.
Ueberroth resigned because of time constraints. Other directors include
Peter Lynch, the famed investor who formerly managed Fidelity Group's
Morrison Knudsen's stock fell to $9.50 from $12.50 in trading on the
New York Stock Exchange yesterday, a 69% drop from the high last
year. The stocks of two units spun off to shareholders in 1993 and 1994
have each fallen by more than 50% from initial trading prices.
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