Hughes to Buy General Dynamics’ Missile Business : Aerospace: The deal is valued at a minimum of $450 million. It may signal additional mergers in the defense contracting business.

In the first major aerospace industry realignment to cope with a dwindling defense market, Hughes Aircraft agreed Monday to acquire the missile operations of General Dynamics for $450 million.

Hughes, a unit of General Motors, agreed to issue 21.5 million shares of GM H-class stock, valued at a minimum of $450 million, to General Dynamics for its California-based missile operations.

The defense industry, until now, has resisted a major reorganization that would eliminate massive excess production capacity built up during the Cold War. But additional mergers are now seen likely in the armored vehicle, combat aircraft and defense electronics industries, analysts said Monday.

The Hughes deal is subject to a definitive agreement, expected in about two months, and must be approved by the federal government. Under terms of the initial agreement, General Dynamics will retain ownership of most of its plant and property, excluding a Navy-owned factory in Pomona.

Hughes will take over the firm’s contracts, working capital, work force and equipment. The H-class stock would be sold in a public offering, but GM will guarantee the H-class stock will bring a minimum of $450 million.

Hughes Aircraft Chairman C. Michael Armstrong said Hughes did not have the “critical mass to be competitive” in the tactical missile business and did not have enough missile programs to effectively use its technology leadership.

The deal solves those problems, as well as providing earnings and cash to pay for the acquisition. Armstrong said the $450 million in stock paying for the deal “is not a gift from GM,” and that Hughes will have to repay GM out of its own earnings. He added that the acquisition is a “vote of confidence” by GM in Hughes.

“The goal that we have taken upon ourselves is to re-establish Hughes as a growth business,” Armstrong said. “We want to do that by gaining share in our defense business and diversifying into commercial sectors.”

The deal will have significant consequences for the U.S. defense industry, as well as the 9,600 employees at General Dynamics’ missile operations, concentrated in Pomona and San Diego, and 7,500 employees at Hughes in Canoga Park and Tucson.

Although both firms have been major players in the tactical missile business for four decades, they were eclipsed during the 1980s by Raytheon Corp. and faced a difficult future competing for shrinking Pentagon orders.

The merger will put Hughes missile sales on a par with Raytheon at about $2.5 billion annually and provide Hughes with a stronger position in some key missile technologies, experts noted.

In addition, the two firms have millions of square feet of empty factory space, particularly at Hughes’ Tucson plant and General Dynamics’ Pomona plant, much of which is likely to be eliminated in a future plant consolidation resulting from the deal.

“The acquisition addresses the overall problem of overcapacity in the defense industry,” said David McPherson, vice president and general manager of General Dynamics’ air defense systems division in Pomona. “You are going to see more of this happening.”

The consolidation would also significantly cut employment, but thousands of jobs were already expected to vanish as defense orders fall during the 1990s. Both Hughes and General Dynamics have massively cut employment since it peaked in 1987.

A Hughes executive said the company has not even begun the decision process to identify which facilities to close, many of which are owned by the Pentagon. It just formed a team to examine the issue.

Hughes operates other missile facilities in Alabama and Georgia. Besides Pomona and San Diego, General Dynamics has missile operations at a Navajo Indian reservation and in Camden, Ark.

General Dynamics is already transferring its Rancho Cucamonga work to Pomona, but even after that consolidation it will use only 75% of its Pomona plant, McPherson said.

“The industry has to face up to the fact that some things will have to be closed,” McPherson said.

Officials at both Hughes and General Dynamics said either Pomona or Tucson could handle all the missile production of the combined companies and that “everything is on the table.”

“The more you can get into a single location and eliminate overhead, the better you can utilize capacity,” General Dynamics Executive Vice President Michael Keel said.

Keel added that it was a “reasonable likelihood” that at least 2,000 employees at General Dynamics’ Convair division in San Diego assigned to the Tomahawk cruise missile will be relocated to Pomona or Tucson. Another 2,500 Convair employees are set to lose their jobs in August, 1993, when the advanced cruise missile program dies, Keel said.

The consolidation is also expected to affect such facilities as Camden and smaller plants in the South, the executives noted.

It remains unclear whether Hughes will attempt to consolidate the two missile engineering staffs, located in Canoga Park and Tucson. Pomona is about 50 miles from Canoga Park, a distance that would require most workers to relocate, executives noted.