Westinghouse Electric Corporation

Westinghouse Electric Corporation was a titan of American industry, founded in 1886 by the brilliant inventor George Westinghouse. For much of the 20th century, it stood as a premier industrial Conglomerate, a direct rival to General Electric (GE). The company was a pioneer in electrical infrastructure, famously championing alternating current (AC) over Thomas Edison's direct current (DC) in the fierce “War of the Currents.” For decades, Westinghouse was a symbol of American innovation and manufacturing might, involved in everything from nuclear power plants and jet engines to household appliances. However, its story took a tragic turn in the late 1980s when a disastrous foray into financial services, primarily through its subsidiary Westinghouse Credit Corp., led to crippling losses. Drowning in debt, the company was forced to sell its legendary industrial businesses, ultimately transforming into a media company (CBS Corporation) before the industrial legacy was extinguished. Today, Westinghouse is a classic cautionary tale for investors about the dangers of straying from one's core business.

For nearly a century, Westinghouse was a blue-chip powerhouse. Its technological duel with GE shaped the modern electrical grid. While Edison and GE promoted DC power, Westinghouse, with the help of Nikola Tesla's patents, proved the superiority of AC for long-distance power transmission. This victory was famously showcased when Westinghouse lit up the 1893 World's Columbian Exposition in Chicago and later harnessed the power of Niagara Falls. The company's engineering prowess was undeniable. It was a leader in:

• Power Generation: Building turbines and generators for power plants worldwide, including becoming a dominant force in the nuclear power industry.
• Defense Electronics: A major contractor for the U.S. military, producing advanced radar and electronics systems.
• Broadcasting: A pioneer in radio and television, launching the first commercial radio station (KDKA) and owning a major network of TV stations.
• Consumer Products: Manufacturing a wide range of appliances, from refrigerators to elevators.

For investors of that era, Westinghouse represented a safe, stable, and growing investment in the core of the American economy. It was a company that literally built the modern world.

The seeds of Westinghouse's destruction were sown not in its factories, but in its finance division. Westinghouse Credit Corp. was originally created to provide financing to customers buying Westinghouse products—a sensible strategy. However, during the 1980s, its management, chasing higher returns, transformed it into a high-risk speculative lender. It dove headfirst into junk bonds, commercial real estate, and financing for Leveraged Buyout (LBO) deals. When the commercial real estate market collapsed in the late 1980s and early 1990s, Westinghouse Credit was saddled with billions of dollars in non-performing loans. The losses were so catastrophic that they threatened to bankrupt the entire corporation. The once-mighty industrial giant was forced into a fire sale, selling off its crown-jewel businesses one by one just to pay off the debts incurred by its reckless financial arm. In a final, desperate move, the company acquired CBS in 1995, shed its remaining industrial operations, and renamed itself CBS Corporation, effectively burying the Westinghouse name and legacy.

The spectacular collapse of Westinghouse offers timeless lessons for value investors. It’s a perfect case study in how a great business can be destroyed by poor capital allocation and a loss of focus.

Legendary investor Peter Lynch coined the term Diworsification to describe the tendency of companies to diversify into businesses they don't understand, ultimately destroying Shareholder Value. Westinghouse is the poster child for this concept. The management team, experts in engineering and manufacturing, proved to be terrible high-risk lenders. They abandoned their core strengths for the siren song of financial engineering, with disastrous results. Investor Takeaway: Be deeply skeptical when a company you own ventures far outside its established field of expertise. A steel company buying a software firm or a retailer starting a hedge fund should be a major red flag.

This story is a powerful illustration of Warren Buffett's most famous principle: invest only within your Circle of Competence. Westinghouse’s management team stepped miles outside their circle. Their expertise was in building complex machinery, not in assessing the credit risk of speculative real estate deals. Investor Takeaway: Just as you should stick to investing in businesses you can understand, you should favor companies run by managers who stick to running the business they know best.

The immense Leverage taken on by Westinghouse Credit Corp. is what turned a bad situation into a fatal one. Debt can amplify returns on the way up, but it is a merciless killer on the way down. The obligations from the finance arm became an anchor that dragged the entire, otherwise healthy, industrial corporation to the bottom of the sea. Investor Takeaway: Always inspect the Balance Sheet. A company with a pristine business but a mountain of debt is an accident waiting to happen. Prudent value investors favor businesses with low to manageable levels of debt. The story of Westinghouse is a stark reminder of why.