Ford to Sell Aerospace Unit and Focus on Cars : Automobiles: With U.S. defense budgets shrinking and the auto business growing more competitive, the firm has decided to concentrate its resources.
In one of the first attempts by a major American corporation to pull out of the defense industry since the revolutionary changes now sweeping Eastern Europe began to place intense budget pressure on the Pentagon, Ford said Friday that it plans to sell its Newport Beach-based Ford Aerospace division and concentrate more of its resources on the car business.
With its once-enormous cash reserves gradually dwindling thanks to an auto sales slump and a series of non-automotive acquisitions, Ford is likely to use the money it raises from the sale of Ford Aerospace in an effort to become more competitive against the growing threat posed by Japanese auto companies. “The decision to sell Ford Aerospace reflects the intention to concentrate our resources on our other businesses,” Ford Chairman Donald E. Petersen said. There was no indication Friday of who might buy the subsidiary.
Ford Aerospace, with 3,000 employees in Newport Beach and 17,000 nationwide, produces a range of products for the military and for civilian space programs, including missiles, satellites and space ground station systems. Ford also recently acquired BDM International, a large defense industry management consulting firm that has been merged into the aerospace unit. Ford Aerospace had 1989 contract awards worth $1.83 billion, of which 66% were defense related.
Ford’s move comes in the early stages of what is likely to be a massive restructuring throughout the defense sector, as the Pentagon budget shrinks now that the war threat from the Soviet Bloc has been dramatically reduced.
But perhaps more importantly for Ford, the decision also comes in the midst of the worst downturn in the auto industry since the recession of the early 1980s.
And in order to keep up with the Japanese, who are pouring dozens of new models into the American marketplace, Ford realizes that it must spend billions of dollars to quickly update its car lines. In 1989, for instance, Ford had to invest roughly $6.5 billion in capital programs, about twice as much as it spent in 1987.
Until recently, Ford had enough money in its kitty to pay for its new car product programs; in 1987, the auto maker had more than $10 billion in cash and securities on hand.
But a series of big acquisitions outside of its core North American automotive operations has eroded much of that cushion. Today, analysts say, Ford has only about $5 billion left in that cash pool.
So the sale of Ford Aerospace--which analysts say could bring between $800 million and $1 billion--could help pay for new cars.
“Ford has come to the conclusion that it is going to need as much capital as it can muster to grow its auto business,” said Jack Kirnan, automotive analyst with the Kidder, Peabody & Co. investment firm. “And defense doesn’t look too promising.”
But with defense industry stocks taking a beating and many other companies thinking about getting out of the business, Ford probably won’t be able to get as much it would like for its aerospace operations.
Currently, 68 defense companies or operations have been privately put up for sale, making it a “buyer’s market in defense properties,” Kirnan said. “Ford probably could have gotten $1.5 billion or more for it two years ago,” Kirnan added, compared to today’s likely price.
The decision to sell apparently follows a broad review by Ford’s top management of all of its non-automotive operations to determine which businesses the world’s second-largest auto maker wants to keep in the 1990s. Besides autos, the company has apparently decided that it wants to stay in only one area--financial services, in which it has made several major acquisitions in recent years.
One early result of its review of its diversified operations came last year, when Ford sold off Rouge Steel, its troubled steel-making subsidiary. The auto maker is also reportedly considering the sale of its Ford New Holland unit, which makes agricultural equipment.
“Ford is getting rid of its stuff that doesn’t seem to have a focus,” said Maryann Keller, an automotive analyst with the Furman Selz Mager Dietz & Birney brokerage.
“In the case of Ford Aerospace, they decided not to develop their aerospace business beyond what it was,” Keller added. “Ford Aerospace is a tiny player; it isn’t No. 1 or 2 in any area, so Ford decided it had other fish to fry.”
Keller argued that Ford Aerospace’s fate was sealed after Ford failed to make a major acquisition in the defense industry in the mid-1980s. Most notably, Ford lost out to General Motors in its bid for Hughes Aircraft.
If it had won Hughes, Ford would overnight have become one of the nation’s biggest defense contractors. But without Hughes, Ford Aerospace remained just the nation’s 23rd-largest military contractor, and the 10th-largest space program contractor.
“When they didn’t get Hughes, they were left with a little company competing against giants,” Keller observed.
Ford’s decision to husband its cash for the coming crisis in the auto industry parallels a similar move by Chrysler, which has been trying to sell its Chrysler Technologies subsidiary. That consists of Gulfstream Aerospace, which makes corporate jets, along with Electrospace Systems, a smaller defense electronics unit.
But the decisions at Ford and Chrysler to refocus on autos have come late in the game. While Detroit’s auto makers were using their enormous profits in the mid-1980s to diversify away from cars, the Japanese were concentrating billions of dollars on the auto business; the results of that campaign can now be seen in the form of new cars and trucks at this winter’s auto shows in Tokyo, Detroit and Los Angeles.
“These companies (Ford and Chrysler) are now starting to realize that they did underspend in their core business,” Kirnan said.
FORD’S BIG ACQUISITIONS IN THE ‘80s
Company Date Price Type of business First Nationwide Dec., ’85 $493 million savings and loan New Holland March, ’86 $330 million agricultural equipment Aston Martin Oct., ’87 not released British specialty cars U.S. Leasing Nov., ’87 $512 million equipment lease financing BDM July, ’88 $406 million defense consulting Associates Oct., ’89 $3.35 billion finance company Jaguar Nov., ’89 $2.3 billion British luxury cars
FORD AEROSPACE AT A GLANCE
Percent of contract awards by segment. 1989 awards total unavailable from source; 1988 awards totaled $1.937 billion. Percentages equal more than 100% because of rounding.
DEFENSE RELATED: 67%
INTERNATIONAL: 15%
U.S. GOVERNMENT NON-MILITARY: 14%
U.S. COMMERCIAL: 5%
Source: Ford Aerosapce
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