Following the lead of General Motors, Chrysler made a major acquisition outside the automotive field Wednesday, agreeing to buy Gulfstream Aerospace for $637 million in cash and notes.
The diversification move into the corporate jet business by the No. 3 auto maker comes just two weeks after GM agreed to acquire Hughes Aircraft for about $5 billion, immediately establishing GM as a major force in the defense and aerospace industries.
The two acquisitions, combined with strong rumors in the financial community that Ford Motor has been hunting for another high-tech acquisition after being outbid by GM for Hughes, signal a new, aggressive drive by the domestic auto companies to use the record profits that they have built up over the last two years to reduce their heavy dependence on the highly cyclical car market.
$19 Per Share
Chrysler Chairman Lee A. Iacocca indicated in a prepared statement Wednesday that his company will make other big diversification moves in the near future. He said the deal “is an important step in our long-range plan to diversify into high-tech industries like aerospace and electronics and fast-growing industries like financial services.” But he insisted that Chrysler would, at the same time, “continue to invest heavily in the automotive industry.”
Chrysler said it will pay $19 per share for all 34 million outstanding shares of the Savannah, Ga.-based executive jet producer. About 71% of the stock is controlled by Gulfstream Chairman Allen E. Paulson, an old friend of Iacocca’s.
Chrysler will buy Paulson’s interest in Gulfstream for $126 million in cash and another $327 million in installment notes staggered over the next seven years, while the auto company will pay $184 million in cash for the 29% of Gulfstream’s stock held by the public.
Paulson, who has agreed to continue to run Gulfstream as a subsidiary of Chrysler for at least five years, is reportedly selling his stake in the profitable jet maker because of potential losses on his major personal investment in Wheeling-Pittsburgh Steel, which entered bankruptcy proceedings in April. Paulson owns about 34% of the troubled steelmaker.
Directors of both Chrysler and Gulfstream approved the sale Wednesday, which is expected to be completed by August, pending government approval.
Paulson bought Gulfstream, the world’s leading producer of intercontinental executive jets, from Grumman in 1978. Chrysler initially approached him about buying a 20% stake in the firm but, as the negotiations continued, the auto maker decided to buy the entire company.
Sold Tank-Building Unit
The Gulfstream deal comes three years after Chrysler was forced to sell off its biggest and most profitable non-automotive business for badly needed cash. To stay afloat in 1982, the company reluctantly sold its lucrative tank-building operations to General Dynamics, but Chrysler has been in the market for a big acquisition ever since it began its dramatic return to profitability.
Despite the recent slump in the aircraft business, Gulfstream has continued to do well because it has concentrated on the market for expensive jets for corporate executives. Gulfstream earned nearly $27 million on sales of about $602 million last year, and analysts say it should prove to be a steady moneymaker for Chrysler.
“I think this is very good for Chrysler,” said Maryann Keller, an investment banker and automotive analyst with Vilas-Fischer Associates, a New York investment firm. “They can just sit back and watch the cash roll in.”
Currently, Gulfstream’s only product is the Gulfstream III intercontinental jet, sold as a luxury executive plane to corporate customers and as a surveillance aircraft to the Pentagon. The company has a big backlog of orders from corporate customers. (Chrysler owns two Gulfstream jets, a company spokesman said.)
And Gulfstream is already building an order backlog for the Gulfstream IV, which won’t go into production until 1986.
Last year, Gulfstream shed itself of one of its biggest problems by taking a $21-million write-off on production of an unsuccessful propjet.
$3-Billion Cash Pool
The company, which currently has about 3,700 employees, is trying to sell its idled Bethany, Okla., factory where propjet production was shut down last year.
Analysts note that the cash portion of the deal will exhaust only about 10% of Chrysler’s $3-billion pool of cash and marketable securities, and so they believe that Chrysler can easily afford other acquisitions.
“Chrysler could even do a few more of these,” without crimping its spending on new product programs in the auto industry, said David Healy, automotive analyst with Drexel Burnham Lambert in New York.
But at the same time, analysts believe that Gulfstream is far too small to reduce Chrysler’s dependence on the auto industry. Chrysler’s 1984 sales of $19.6 billion were more than 30 times larger than Gulfstream’s revenue of $602 million, and Healy notes that Gulfstream’s sales and earnings would account for only about 2.5% of Chrysler’s combined sales and earnings.
“It will only be significant if it turns out to be part of a broader acquisition strategy, and Chrysler has indicated that it is,” Healy said.
No Synergy Seen
Keller dismissed Chrysler’s claims that its automotive operations will benefit from a transfer of technology from Gulfstream. She said that Gulfstream is primarily an assembler of luxury aircraft and that it is not on the cutting edge of aerospace research and development.
“All this talk about synergy between the aircraft and auto businesses is just for public consumption,” Keller said. “Gulfstream doesn’t have any technology. It’s just very good at putting chandeliers in luxury jets and charging corporations a lot of money for them.”
But that doesn’t mean Gulfstream won’t be a good buy for Chrysler, she added. “It’s very affordable, it won’t require much cash output or management time from Chrysler and it will be a separate operation that just throws off money.”