Cessna OKs $670-Million Merger Deal : General Dynamics to Buy General Aviation Aircraft Producer

Giant defense contractor General Dynamics and Cessna Aircraft, the country’s largest producer of general aviation aircraft, said Friday that they have reached a definitive agreement to merge in a deal worth about $670 million.

General Dynamics will launch a $30-per-share tender offer “within days” for all 19.2 million shares of Cessna’s common stock that it does not already own, a General Dynamics spokesman said. Since December, 1983, General Dynamics has owned 500,000 Cessna shares, and its chairman, David S. Lewis, has served on Cessna’s board.

The agreement is contingent on General Dynamics receiving at least 11.175 million shares in the tender offer, which, added to General Dynamics’ current stake, would give the St. Louis-based company 50.1% of Cessna’s outstanding shares on a fully diluted basis. However, the minimum requirement could be waived, the companies said in a statement.

Cessna’s board of directors approved the offer at a meeting Friday and will recommend that Cessna’s shareholders tender their shares to General Dynamics, the companies said.

Wholly Owned Subsidiary

Any shares not bought in the tender offer would be exchanged for $30 per share in cash in the subsequent merger. In addition to Cessna’s 19.7 million common shares outstanding, General Dynamics must buy $100 million in subordinated debentures convertible at $32.50 per common share and 56,708 shares of common stock subject to employee stock options.

Wichita, Kan.-based Cessna Aircraft would be operated as a wholly owned subsidiary of General Dynamics, the two companies said. Cessna Chairman Russell W. Meyer Jr. and President R. W. Van Sant would continue in those positions after the merger. In addition, Meyer would be named an executive vice president and a director of General Dynamics.

In their joint statement, Lewis and Meyer said the proposed merger “should bring substantial benefits to both companies in the important areas of aircraft design and engineering as well as improved production efficiencies.” No Cessna executives were available for comment, and the General Dynamics spokesman declined to elaborate on the statement.

Both companies had previously indicated that they were looking for a deal. In May, General Dynamics said that it planned to reduce its reliance on defense contracting by making a large acquisition but added that it would not enter a new line of business. In early August, Meyer said Cessna was “exploring several alternatives, including the possibility of forming a partnership or alliance with another company,” and the company’s stock has been actively traded. On Aug. 28, the stock price jumped $4.75, closing at $25 per share on the New York Stock Exchange.

On Friday, it was the most active issue on the NYSE, closing up $1.25 at $29.50 on volume of 3.3 million shares. General Dynamics’ stock closed down $1.875 at $73.375.

Industry analysts agreed that the acquisition probably would reduce General Dynamics’ earnings in the short term but that it makes sense for the future.

Wolfgang Demisch of First Boston said the merger “does get GD into the commercial market more extensively in a field they know.” General Dynamics has been trying to diversify away from defense contracting in preparation for the 1990s, when many of its government contracts will mature and the business will taper off, he said.

‘Calculated Bet’

“Cessna’s market share is good and its balance sheet is in good shape,” he said. “The main problem is (that) the overall market for corporate aircraft is mired in a very long and painful recession.”

“General Dynamics is making a calculated bet that it can improve the operations of Cessna and take advantage of the good products that Cessna has,” said Howard Rubel, an analyst with Cyrus J. Lawrence, a New York brokerage house. “Cessna is inheriting a rich daddy that will help it with product development.

“Most of what GD bought is business of the future,” he added.

Cessna has lost money on operations for the last several years “and other factors have contributed to the bottom line,” allowing the company to avoid net losses in all but fiscal 1983, said analyst Robert Kugel with Morgan Stanley & Co.

General Dynamics probably will attempt to sell parts of Cessna’s operations, such as its finance company, its propeller business and a division that makes pumps, valves and cylinders for farm machinery, construction and industrial markets, said Rubel of Cyrus J. Lawrence.