Dillingham Construction Corporation

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Dillingham Construction Corporation

5960 Inglewood Drive
Pleasanton, California 94588-8535
U.S.A.
Telephone: (925) 463-3300
Fax: (925) 847-7029
Web site: http://www.dillinghamconstruction.com

Private Company
Incorporated: 1961
Employees: 8,000
Operating Revenues: $1.2 billion (2000)
NAIC: 23321 Single Family Housing Construction; 23322 Multifamily Housing Construction; 23332 Commercial and Institutional Building Construction; 23411 Highway and Street Construction; 23499 All Other Heavy Construction; 23599 All Other Special Trade Contractors

Dillingham Construction Corporation operates as a worldwide construction firm involved in the commercial, industrial, heavy civil, and marine industries. Through its subsidiaries, Dillingham provides general construction, design/build, construction management, maintenance, and emergency response services. Its construction projects have included shopping centers, theaters, office buildings, condominiums and subdivisions, power generating plants, water treatment plants, ports and harbors, airports, highways, bridges, dams, tunnels, and rapid transit projects. The firm’s customers include AT&T, International Paper Co., Las Vegas Hilton Corp., NASA, Pacific Gas & Electric Co.; San Francisco National Airport, the U.S. Department of State, and the U.S. Navy.

The Dillingham company was established in the Hawaiian islands when they were still an independent kingdom known as the Sandwich Islands. As the Hawaiian economy grew, Dillingham expanded from sugar refining and railroad transportation into construction. By the time the company reverted to private ownership in 1983, it had become one of the largest construction companies in the United States, with numerous projects completed worldwide.

Dillingham in the 1800s

Among the first Americans to settle in the Sandwich Islands were a group of New England missionaries, who arrived in 1820. They established themselves in positions of economic and political power, and began a crusade to convert the Polynesian natives to Christianity. From this group of haole (Caucasian) settlers emerged five dominant family-run mercantile companies known as “The Big Five.” These five companies established commercial interests in every aspect of the Hawaiian economy.

It was in this environment that Benjamin Franklin Dillingham unexpectedly found himself in 1865. Dillingham, a Cape Cod schooner captain, was stranded in the Sandwich Islands after losing his life’s savings in a failed commercial venture to ship bananas to California. Temporarily disabled with a broken leg, Dillingham took a job as a clerk in a local hardware store, and within two years the enterprising seaman had become co-owner of the business.

Dillingham married into the haole establishment by taking a missionary’s daughter for his wife. Still, he was unable to purchase arable land for an agricultural venture; the Big Five maintained a strict monopoly on land. He did, however, manage to buy a tract of wasteland on the island of Oahu. He organized a group of investors to develop the land for sugar cane cultivation, and built a railroad to connect the inland plantation with a wharf. The Oahu Railway & Land Company, as it became known, was highly successful. The company added more real estate and expanded its trackage—Dillingham even started to transport his competitors’ sugar.

The native Queen Liliuokalani was deposed in 1893, and a year later the Republic of Hawaii was established with Sanford B. Dole as its president (Dole’s cousin Jim founded the Dole pineapple label in 1898). Dillingham gained greater acceptance in the commercial establishment, and attempted to build a second railway on the island of Hawaii. But construction costs mounted quickly, and soon the company was severely in debt. Benjamin Dillingham summoned his son Walter to interrupt his studies at Harvard and return to Hawaii to manage the crisis.

Development and Expansion: 1902 through the 1950s

Hawaii was annexed by the United States in 1898 and made a territory two years later. The islands’ increased exposure to American shipping traffic led Walter Dillingham to establish a new family venture; with a $5000 loan, he founded the Hawaiian Dredging & Construction Company in 1902. The company’s first contract called for the dredging of Honolulu Harbor and Pearl Harbor and, by 1910, had generated enough profit to bring the company out of debt. The coral and sediment drawn from the harbors was used to fill a 5000-acre swamp on the island of Oahu, which made possible a Dole pineapple plantation, a tourist development (later known as Waikiki Beach), and, some years later, an airport.

Dillingham’s company diversified into pier services, warehousing, barge transportation, and land development. After the Japanese bombing of Pearl Harbor in 1941, the company joined a 14-member consortium of construction companies whose job it was to build air bases on islands captured from the Japanese.

After the war, Dillingham’s companies performed construction work in foreign countries. It was involved in widening the Suez Canal, constructing a harbor in Kuwait, and building a variety of structures in Australia. In the United States, Hawaiian Dredging maintained harbors in the Pacific and established a strong presence in the mainland construction industry. The company’s principal owner, Walter Dillingham, became one of the richest men in Hawaii by the late 1950’s. Dillingham’s success, however, did not go unchallenged.

For many years the mainland Permanente Cement Company enjoyed a monopoly in Hawaii. Its proprietor, an outspoken 72-year old entrepreneur named Henry J. Kaiser, had done a great deal of business with Dillingham. But, when Dillingham decided to participate in establishing a local competitor, Kaiser returned the challenge. He announced plans to build a cement plant in the islands and, furthermore, to establish a dredging business in Hawaii. The conflict between Kaiser and Dillingham degenerated into personal attacks, and Kaiser accused Dillingham of disrupting his business with underhanded tactics. Dillingham called Kaiser an “outsider,” and maintained that he had no business being in Hawaii.

Dillingham found itself at the fore of a disturbing trend: Hawaiian markets were no longer isolated from mainland interests. The local establishment was forced to adopt more aggressive business strategies in order to maintain its historical competitive advantages. On many levels Hawaiian businesses banded together in self-interest. Walter Dillingham served on the boards of five major companies, including a newspaper and the Bank of Hawaii. Later, he was appointed to the board of American Factors (a Big Five sugar and real estate conglomerate called Amfac). Dillingham opposed statehood for Hawaii because he felt the islands would be dominated by the International Longshoremen’s and Warehousemen’s Union, which he believed was controlled by communists. (In 1949 the union led a strike which paralyzed the Hawaiian economy for 179 days.) In 1959, as Dillingham began to emerge as the victor in its battles with Kaiser, Hawaii was inducted as the 50th state.

The Dillingham Corporation: 1961

Walter Dillingham gradually relinquished managerial responsibilities to his son Lowell. Only one philosophy course short of a degree from Harvard, Lowell returned to Hawaii in 1934 to learn every aspect of the family business. He was named president of Hawaiian Dredging in 1955, and of the Oahu Railway in 1960. In 1961 he oversaw the merger of his two companies to form the Dillingham Corporation, and the transformation of the family business into a public company.

The company began construction of buildings in 1959. One of its largest projects was the $30 million Ala Moana Center, a large shopping complex which nearly doubled the amount of store space in downtown Honolulu. Having decided that the company should pursue a more global perspective, Lowell Dillingham initiated the “Dilco“ plan, under which Dillingham would aggressively seek new projects outside of Hawaii. As a result of the program, Dillingham won contracts to build the 43-story Wells Fargo Building in San Francisco, water works in Vietnam, a large hotel in the Philippines, airfields in Thailand, and numerous other structures in Australia. Dillingham also performed harbor improvements in Iran and established a group of seven subsidiaries in Australia, New Zealand, and Papua New Guinea.

The Dilco plan proved enormously successful—profits had risen from $48 million in 1962 to $325 million in 1968. While the Dillingham family was undoubtedly the greatest beneficiary of this growth (they retained 41% ownership of the company), private investors also found Dillingham an excellent investment. After Dillingham gained a listing on the Pacific Exchange, management strived to expand even further in anticipation of a second listing on the larger New York Exchange.

Company Perspectives:

Dillingham Construction is an employee-owned, worldwide contractor providing construction and engineering solutions that generate the highest level of customer satisfaction, shareholder returns, and employee opportunities. We strive towards integrity in all business activities, continuous improvement of company and individual performance, respect and care for the environment in which we work, and equal opportunity and empowerment to promote employee performance, growth, and mutually beneficial long-term relationships. Quality is our signature, excellence is our goal.

In order to spur growth through diversification, Dillingham acquired two large California-based construction companies, a supplier of liquefied petroleum gas, and a Canadian tug boat company. Dillingham also entered into joint ventures in mining in Canada and Australia but failed in its attempt to gain control of the United Fruit Company. Herbert C. Cornuelle, a former president of both United Fruit and the Dole Corporation, joined Dillingham as an executive vice-president. Cornuelle later became the first non-family executive to serve as company president.

The diversification program encountered problems when it was realized that the company had grown too fast for effective consolidation or efficient management. By 1970, Dillingham had acquired over 30 companies and, while revenues increased 1,000 percent, return on equity fell by 3.9 percent. As president, Cornuelle had the dual task of raising short-term profits while maintaining the company’s expansion. He elected to dispense with all marginally performing assets, and to invest the proceeds in more profitable maritime and natural resource ventures—areas more closely related to Dillingham’s established operations. While Dillingham was made more competitive as a result of Cornuelle’s strategy, because its new profits had not been used to reduce its debt, the company unknowingly became vulnerable to a hostile takeover.

Takeover Attempts and Privatization in the 1980s

A controversial financier named Harry Weinberg announced that he had acquired a 10 percent interest in Dillingham. Weinberg demanded representation on the board of directors, complaining that Dillingham’s stock was undervalued and that the company’s real estate holdings had been under-exploited. Cornuelle responded by reducing the number of board seats from 15 to three. With the situation deadlocked, Weinberg later agreed to purchase some of Dillingham’s most promising real estate. Ownership of these properties, which included the Ala Moana Center, was transferred to a limited partnership owned by Weinberg and a group of other shareholders. The partnership later split up the portfolio and sold the properties at a substantial premium over its original investment in Dillingham.

Cornuelle’s takeover defense was successful, but Dillingham had lost its most profitable division. In order to support the company’s share price, Dillingham’s other three divisions—construction, maritime operations, and energy—would have to become more profitable. Management was particularly optimistic about expansion of the energy division, which conducted oil and gas exploration, produced liquefied petroleum gas, and transported oilfield equipment.

Share prices, however, remained weak and, as Dillingham was failing to gain the attention of investors on Wall Street, the company became the apparent target of another takeover. Kuo International, a Singapore-based company run by petroleum interests, announced in 1983 that it had increased its holdings in Dillingham to 7 percent. Unable to mount a second defense without seriously dismembering the company, Dillingham turned to the investment banking firm Kohlberg Kravis Roberts & Company (KKR)for advice. KKR recommended that Dillingham return to private ownership; as a private company, it would no longer be subject to hostile takeovers or share performance evaluations. A group of institutional investors was created to purchase all of Dillingham’s outstanding shares of $350 million (including $30 million for Harry Weinberg’s interest). Dillingham management retained a 12 percent interest in this group and appointed J. Joseph Casey president and chief executive officer. Casey emphasized Dillingham’s expertise in construction, and encouraged greater involvement in higher-risk projects. While this shift in emphasis was expected to incur larger debts in the short term, it provided the company with greater operational mobility.

In 1986, however, KKR began selling off the Dillingham companies. The construction business, which was operating at the time as the 15th-largest construction firm in the U.S.—was sold to SC-US Inc., a subsidiary of Japan’s largest construction firm, Shimizu Construction Company Ltd. Shimizu took a 45 percent stake in Dillingham and the remainder was sold to the firm’s management and employees. The deal was unprecedented for the construction industry; it marked the first time that a Japanese concern had acquired a large interest in a U.S.-based construction firm.

With Donald K. Stager acting as company president, Dillingham began selling off assets to relieve its debt load. During the late 1980s, the firm recorded losses due to a downturn in the industry and unprofitable projects. Its Canadian subsidiary was sold, along with some of its Guam operations. In order to cut costs, the company moved headquarters from San Francisco to Pleasanton, California, and cut 200 jobs.

Key Dates:

1902:: Walter Dillingham establishes the Hawaiian Dredging & Construction Company.
1934:: Lowell Dillingham becomes involved in the family business.
1959:: The company enters the building construction industry.
1961:: With Lowell as president, Hawaiian Dredging and Oahu Railway merge to form Dillingham Construction.
1968:: Profits rise to $325 million.
1970:: At this point in its history, Dillingham has acquired over 30 companies.
1983:: Dillingham is taken private in a $350 million leveraged buyout led by Kohlberg Kravis Roberts & Co.
1985:: Dillingham secures its first contract from the U.S. State Department.
1986:: Kohlberg begins selling off parts of the Dillingham companies.
1987:: Shimizu Construction Company Ltd. purchases a 45 percent stake in Dillingham Construction.
1990:: Revenues reach $930 million.
1992:: The firm partners with Obayashi Corp. to construct part of a $8.3 billion supercollider project in Texas.
1997:: Subsidiary Nielsen Dillingham Builders constructs the shell of the building that will house the National Ignition Facility, the world’s largest laser.
1998:: Subsidiary Dillingham Construction Pacific builds a bilge and oily waste facility at the Pearl Harbor Naval Complex in Hawaii.
2000:: Dillingham’s sales reach $1.2 billion.

Overcoming Hardships: 1990s

Dillingham recorded profits in 1990 when revenues reached $930 million and managed to stay in the black the following year when revenues fell to $770 million. A reoccurring downturn in the industry, brought on by a weakening U.S. economy, was named a culprit in the significant drop in revenues. As such, Dillingham began focusing strong efforts on international growth while continuing to seek out lucrative domestic projects.

In 1992, the firm partnered with Obayashi Corp. to build a 2.7 mile section of the 54-mile, $8.5 billion supercollider project in Texas, which was developed to allow scientists to observe and study subatomic particles. By this time, Dillingham was also involved in a $860 million project to construct a six-lane freeway in Turkey and was beginning to bid on projects in Japan. The firm had become well-known for its construction projects, including the Hyatt in San Francisco, the ValleyCare Medical Center in its hometown of Pleasanton, the Hyatt Regency Waikoloa in Hawaii, the Scripps Clinic in San Diego, and for its work on the Los Angeles Metro Rail project as well as the Hawaii Deep Water program.

While some of Dillingham’s subsidiaries won bids for lucrative projects during the late 1990s, others were hurt by a faltering Hawaiian and Asian economy. In 1997, Nielsen Dillingham Builders Inc. landed a contract to construct the framing, metal deck flooring, roofing, and metal siding of the National Ignition Facility, a laser complex home to the world’s largest laser. Hawaiian Dredging Construction Company, however, recorded a 36.5 drop in 1997 earnings due to weak demand in Hawaii’s construction industry. The subsidiary did manage to secure a $11.1 million contract to build a bilge and oily waste collection and processing facility at the Pearl Harbor Naval Complex. Dillingham’s operations in Asia also dropped off, as the economy in that region became unstable.

By the time Dillingham entered the new millennium, the construction company had been involved in projects around the world. Through its commercial construction services, it had erected over 60 shopping centers and retail outlets; 41 theaters, stadiums, and amusement parks; 26 million square-feet of enclosed office space; 95 hotels and resorts; 86 high-rise condominiums and apartment buildings; and 64 single family and townhome residential subdivisions. By way of its industrial construction services, Dillingham had built 100 power generating plants, 43 water treatment plants, 38 industrial storage facilities, and had been involved in ten hydroelectric projects and 95 petroleum industry-related projects. The company had also constructed 120 ports and harbors, secured 42 dredging contracts, built 128 airports and air bases, 546 bridges, 134 miles of tunnels, and 1,500 miles of highway.

Sales in fiscal 2000 reached $1.2 billion, an increase of 4.3 percent over the previous year. While Dillingham’s profits were directly related to the strength of the economies in which it operated, the company appeared well positioned to continue its 100-plus year tradition of overcoming hardships while maintaining growth efforts and securing lucrative contracts.

Principal Subsidiaries

Dillingham Construction International Inc.; Dillingham Construction N.A. Inc.; Hawaiian Bitumuls Paving & Precast Company; Hawaiian Dredging Construction Company; Nielsen Dillingham Builders Inc.; Watkins Engineers & Constructors Inc.