Friends in High Places
from Spring 2000
by Ron Connaught
Deep under traffic-choked Interstate 93 in downtown Boston, a roadway is being constructed to free Beantowners from the asphalt nightmare above. It’s an automotive conduit known locally as the Central Artery. The 14-year, $12 billion project, called the Big Dig, requires the construction of a new tunnel under the existing highway that will ultimately connect with the new Ted Williams Tunnel that runs under Boston Harbor to Logan Airport.
The immense complexity of the project, and the fact that most of it takes place below the surface, couldn’t be a better metaphor for describing its principal designer and builder: Bechtel Corp. The San Francisco construction-engineering giant is in its 102nd year of business and has perhaps 1,000 projects under way in more than 50 countries. For all that, the company is a household name mainly if your household happens to be named Bechtel. Incredibly, given the difficulty large family corporations have in staying intact, a fourth generation descendent of founder Warren “Dad” Bechtel is now at the helm in the form of great-grandson Riley Bechtel, 48, grandson of Stephen Bechtel Sr., and son of Stephen Jr. The firm’s revenues reached almost $13 billion in 1998 and future bookings appear to be at least that strong.
What has Bechtel built? A better question might be: What hasn’t it built? OK, let’s do a little name-dropping. Hoover Dam? Bechtel was the lead partner of the Six Companies consortium (others included Kaiser Industries and Morrison Knudsen) that threw the largest public works project ever across the Colorado River near Las Vegas. It built the first commercial nuclear plant in Chicago. There’s Oakland’s Bay Bridge, the Bay Area Rapid Transit system (BART), the Washington, D.C. Metro subway, and, most recently a variety of warehouse and distribution companies for e-commerce companies. Worldwide, Bechtel has built an astounding variety of pipelines, plants, mines, and hydroelectric dams, many of them under the most damnable conditions, such as Canada’s ferocious winters, the Middle East’s scorching deserts, and Papua New Guinea’s flesh-rotting jungle. When Iraq set Kuwaiti oil fields ablaze in 1991, it was Bechtel that doused the fires, in part by reversing the flow of the oil pipelines it had built, channeling seawater inland. Bechtel may be one of the world’s best de-constructors too. It is now on the case at Chernobyl in the Ukraine, dismantling that nuclear facility. It is also decommissioning nuclear plants around the U.S. and disposing of Uncle Sam’s biological weapons.
That’s quite a portfolio for a company that started in 1898 with one man, two mules, and a trombone in what was then the Oklahoma Territory. Warren Bechtel, a lad handy with a trombone, had set out from the family farm in Pennsylvania and migrated to Kansas where he got caught up in the leading technology of his day: railroads. A born construction man and gifted manager, Bechtel eventually parlayed work grading road for the rails into bigger and bigger projects as his growing teams of workers cut swaths through the Sierras, first for the Southern Pacific Railroad and later building roads for the state and federal governments.
Bechtel’s engineer sons got the company into bigger and bigger projects, particularly dams. Stephen Bechtel made the first in a series of particularly prescient strategic shifts. Correctly recognizing that the U.S. was entering an oil-driven era, his decision to develop the pipeline business resulted in the company’s first overseas work, from which the family would derive incredible wealth.
Bechtel survived the Depression on the strength of its Hoover Dam project—completed more than two years ahead of schedule and well under budget—and it established the company’s “we build the impossible” reputation that survives today. In fact, during the Second World War, Bechtel and its subsidiaries would claim astounding feats of manufacturing and construction: ships in California, bombers in Alabama, pipelines and refineries in the Middle East, and, most remarkably, a pipeline from Calgary to Alaska, thrown up in the teeth of Arctic winters—and in total secrecy.
In the post-war building boom Bechtel would bestride the globe. Introduced to Saudi Arabia’s royal family while doing wartime work on Saudi refineries, Steve Sr. and his company became the ruling family’s in-house engineering firm and built large parts of the country’ s infrastructure. This closeness advanced generation unto generation. A crowning achievement during Steve Jr.’s reign was the construction of the industrial city of Jubail, including everything from schools to chemical plants.
Much of the company’s global growth, as well as an aura of mystery that bordered on sinister, could be laid at the feet of the first Steve Bechtel. An avuncular fellow and a truly global executive, he would spend six months a year traveling, his wife always in tow, making friends in high places all over the world. He was a big believer in doing favors for people without expecting a fast quid pro quo. Over the course of time he would become friendly with every king, generalissimo, sheik, and major or minor potentate who might want someday to build a power plant or refinery. Some of these rulers were honest and benevolent men; others looked for a cut. Bechtel played by the local rules.
Steve Sr. also had an uncanny knack for recognizing what was coming next in construction. Just before World War II, he was convinced that shipping would grow. For months, he carried around a strategic plan for building ships. He was in Washington, D.C., one day in 1940 when he ran into a friend who had a friend who was the admiral who headed the Navy’s shipbuilding department. The admiral needed someone to build 60 ships for England in a hurry. Bechtel got the job. With Steve’s brother, Ken, running the shipyard, the company broke all kinds of records for shipbuilding, a further tribute to the Bechtel family’s innovative management.
Among Steve Sr.’s greatest friends was his longstanding partner John McCone, a right-wing industrialist who would go on to become deputy Air Force secretary, head of the Atomic Energy Commission, and, finally, head of the CIA under President Kennedy. Each of those jobs translated to work for Bechtel. The CIA connection provided the raw material for mystery and conjecture, of course, but it turned out to be a mere forerunner for all kinds of speculation during the Nixon and Reagan administrations.
Steve Sr. was an old friend and fan of Richard Nixon and, like him, an internationalist. With Nixon in the White House, Steve became a member of the board of the Export-Import Bank, whose mission, interestingly enough, was to underwrite massive construction projects in developing nations.
Steve also became friends with Nixon’s struggling secretary of labor, George Shultz, and helped the former economics professor smooth relations with the AFL-CIO’s irascible boss, George Meany. Fast-forward to the Reagan Administration, which saw Bechtel’s head counsel, Caspar Weinberger, named secretary of defense. “Cap the Knife” would help Reagan increase the deficit significantly.
By this time, Steve Jr. had taken over as chairman. His CEO? None other than Shultz. But Shultz soon moved back to Washington, joining Weinberger as a cabinet member when Reagan appointed him secretary of state. To many, it seemed as though a shadowy Big Corporation was now running the country.
For all its connections in the U.S. and around the world, Bechtel was unable to fend off a global slump that brought the company to its knees in the mid-1980s. Collapsing energy prices choked off refinery and pipeline development in the Middle East, and fierce price competition from foreign construction firms vacuumed the profit out of big projects. At home, the nuclear business shriveled in the aftermath of the Three Mile Island accident and the falling price of conventional fuels. Ironically, the loss of Shultz to Washington had deprived the company of perhaps its ablest executive. The damage to Bechtel was immense: Revenues collapsed to $8.2 billion in 1984 from a record $14.1 billion in 1983. Some 22,000 employees, or almost 50% of the workers, were let go in massive layoffs from 1982 through 1987.
Riley Bechtel became CEO in 1990 in the wake of all this bloodletting. But the restructured company he is leading out of the carnage is much more aligned with the lean, flexible organizations that are critical to any company today. Bechtel has evolved into a matrix management system organized around both geography and industry sector. “We’re always adjusting,” says company spokesman Jeff Berger. “In a global market, the key is adjusting more quickly than your competition.”
And rather than wait around for projects to be announced, the company has put itself in a position to develop, sell, and finance everything from power plants to tunnels. Bechtel Enterprises has taken a piece of more than 40 such deals, including natural gas pipelines and water systems. The same business unit also has won the job of running various airports, including the one at Luton, near London. Intergen, the group’s energy arm, has partnered with Enron to take advantage of electric utility deregulation to buy, develop, and run power plants.
The ability to finance and take equity stakes in various projects affords Bechtel a number of advantages. First, it provides partners, clients, and lenders a certain comfort level. That was one factor, says Berger, that led to Bechtel’s winning a huge job to build a polyethylene plant for Exxon in Singapore. Second, because the company is an owner, it can look at the world from the customer’s perspective—a helpful vantage point in its contract work.
Information management gives Bechtel a further edge. Bechtel’s global networks allow the company to distribute work that can be done off site to wherever there are available resources.
And in the world of construction management, where every project is a collection of zillions of details, Bechtel has helped to develop a number of software programs that enable the company to ride herd over the work flow. One program integrates engineering and construction, a junction that is historically a constant source of conflict. Bechtel is also an investor in a company called Blueline Online, whose Web-based system allows a prime contractor and its myriad subcontractors on a job to collaborate more smoothly. This ability to manage projects more efficiently enables Bechtel to make guaranteed bids on projects and be confident of getting most jobs done on, or under, budget.
Traditionally, construction companies are better at building things than they are at creating long-lasting shareholder equity. As the failure of Germany’s Philipp Holzmann AG proved recently, even good times don’t guarantee anything. Part of the problem is that the industry, including Bechtel, sways with the business cycle; when the cycle swoons—look out below. Downturns in the eighties proved deadly for U.S. industry, particularly in the face of lowball bidding where Asian competitors often played hardest.
Analysts value construction companies using a fraction of their future revenue streams—known as backlog—rather than their earnings. That’s because revenues are far less predictable in construction than in most businesses. Valuations are also adjusted depending on which segment of the industry provides a construction company with its revenues. The margins are higher in the “heavy and highway” segment—roads and bridges, to the rest of us.
It’s tough to put a price tag on Bechtel. Tobias M. Levkovich, a managing director and analyst at Salomon Smith Barney, estimates the company’s worth to be somewhere between $4 billion and $9 billion. Several things account for the range. Bechtel is highly diversified: It is spread over nine industry sectors, including pipelines, petroleum and chemicals, and telecommunications, and nobody outside the company knows all its various margins. In addition, outsiders can only guess at the value of Bechtel’s equity positions in different projects. Reportedly, one such deal gave Bechtel a slice of MCI, which must have paid off lavishly when WorldCom bought the telecom.
One compelling reason for Bechtel to stay private is that the family likes it that way. The Bechtels don’t need the money. They are worth billions, and the fourth generation shows no signs of looking to Wall Street for cash. Nor is the company itself hurting. Bechtel has its own finance arm, and a construction company’s cash needs aren’t great. Furthermore, its debt is not significant. In other words, there doesn’t seem to be much that the public market could provide that the family and company don’t already have.
Yet, like many large private firms, Bechtel is structured so that upper management employees get shares while they are employed and sell them back to the company at a set price when they retire. Nonfamily senior managers own the majority of Bechtel’s stock. It’s a setup reminiscent of UPS. As we know, Big Brown’s move to the Big Board unlocked billions of dollars of wealth for its army of deliverymen, mechanics, and sorters. “I serve at the pleasure of management,” Riley Bechtel told Forbes last year. Hmm. Might he not pleasure his managers even further with an IPO?
