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D Spending

Corporate restructurings are forcing some U.S. companies to curtail R&D spending even as they are being urged to increase such investments to remain competitive. Many companies, saddled by the massive debts often involved in such transactions, are having "to change their business strategy from long-term to shorter-term cash flow, which can't help but have an adverse effect on R&D," said Roland W. Schmitt, senior vice president and chief scientist at General Electric and chairman of NSF's Nationa

By | February 23, 1987

Corporate restructurings are forcing some U.S. companies to curtail R&D spending even as they are being urged to increase such investments to remain competitive.

Many companies, saddled by the massive debts often involved in such transactions, are having "to change their business strategy from long-term to shorter-term cash flow, which can't help but have an adverse effect on R&D," said Roland W. Schmitt, senior vice president and chief scientist at General Electric and chairman of NSF's National Science Board. "I think there's no question that the whole business of acquisitions, mergers and takeovers will result in lower R&D expenditures."

Charles Larson, executive director of the Industrial Research Institute in New York, fears what he sees as a growing trend.

"It's the result of the drive to maximize the bottom line every quarter, rather than taking a long range viewpoint, and that's very unfortunate," Larson said. "It is just the opposite of what we should be doing at this time … I don't think it can help our competitiveness, particularly when you look at what the Japanese are doing."

Corporate restructurings—including friendly mergers, hostile takeovers and leveraged buyouts or other measures taken to repel a takeover—have become increasingly common in recent years as more and more companies have tried to diversify and expand through acquisition rather than internal growth. The resulting battles often leave companies strapped for cash and put pressure on nonoperating expenses such as R&D.

No Basic Deterioration

In a study submitted for publication in Research and Management, Herbert I. Fusfeld concludes that corporate restructurings "have slowed the growth of R&D in a number of industries and decreased its absolute level in others." Fusfeld, who directs the Center for Science and Technology Policy at Rensselaer Polytechnic Institute's School of Management in Troy, N.Y., bases his findings on an analysis of nine companies that restructured because of a friendly merger, a defense against a hostile takeover or an effort to reduce their vulnerability to takeover attempts.

Fusfeld concludes that "there is no indication of any basic deterioration of industrial research, though there has been much pain in specific companies and a slowdown of R&D in particular industries."

Nevertheless, his study shows R&D expenditures declining dramatically at several companies following corporate restructuring. At Phillips Petroleum, for example, such spending totaled $116 million in 1983 and $125 million in 1984, but fell to $107 million in 1985 after the company bought back stock and sold assets in resisting a takeover attempt by T. Boone Pickens. In the same three-year period, the company's debt ratio climbed from 27.5 percent to 80.2 percent, and the R&D work force was trimmed from 1,300 to 900.

At Uniroyal, Fusfeld reports, R&D spending was $38 million in 1983, $42 million in 1984 and just $34 million in 1985, following a leveraged buyout and merger with CDU Acquisition in response to an unsolicited tender offer by Carl Icahn. The resulting debt load forced Uniroyal to drop a new ventures group and reduce R&D personnel from 150 to 50 workers.

The pattern was not consistent, Fusfeld points out: Chesebrough-Pond's R&D spending remained level following its friendly merger with Stauffer Chemical in 1985, and such spending increased both in amount and as a percentage of sales following DuPont's 1981 merger with Conoco.

Noting that R&D levels often are affected by market factors unrelated to corporate reorganization, Fusfeld estimates that cutbacks due to restructuring total less than 2 percent of all industry-funded R&D, and seem not to have affected research-intensive industries such as microelectronics, information technology, aerospace and pharmaceuticals.

Machines, Not People

The prospect of layoffs among scientists, engineers and technicians in U.S. industry remains a distinct worry, however. When Goodyear Tire & Rubber Co. reorganized last year following an attempted takeover by Sir James Goldsmith, for example, the company decided to "spend more on automation to make up for the loss of personnel," according to Nissim Calderon, vice president for research. Calderon, who would not supply personnel figures, emphasized that Goodyear is "maintaining a very good core of technical skills" after discontinuing R&D programs in marginal areas, but said the company increasingly is substituting computer analysis for road testing and using robots instead of people to run other tests on materials.

And at Owens-Corning Fiberglas, which is recapitalizing after rebuffing a takeover bid last year by Wickes Cos., "we've cut our research efforts about in half," said Robert C. Doban, senior vice president for science and technology. "We have stopped work on exploratory activities aimed at developing technical bases for getting into new kinds of businesses," which had consumed about a third of the company's R&D budget.

Doban predicts that exploratory research, or "nosing around in areas of science to try to develop new businesses," will soon be confined largely to small research firms funded by venture capital, as established corporations withdraw from the field.

The role for larger companies, he said, will be "to keep their finger in these kinds of activities" so they can recognize the business potential of budding technologies invented by smaller firms and obtain the rights to develop the resulting products, perhaps by acquiring the inventor.

Yet GE's Schmitt is hopeful that investment in R&D will grow again once corporate America has corrected "sloppy habits" and slimmed down. "I think we're a good way into the whole business of solving the productivity problem," he said. "If we end up with industries that are run better and more efficiently, their discretionary funds for research may be higher in the end."

Greene is on the staff of The Scientist.

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