Investor Buffett Acquires 15% of General Dynamics : Defense: Stake viewed as endorsement of downsizing strategy.


One of America’s savviest investors, Omaha billionaire Warren E. Buffett, has bought a 15% stake in General Dynamics, the defense and aerospace contractor, in a dramatic sign that some of America’s defense firms and their shareholders stand to benefit smartly as the industry shrinks.

General Dynamics has embarked on a maverick post-Cold War strategy in the defense industry to sell off some of its assets, hold down investment spending and roll back a horde of cash to its shareholders. Earlier this year, the firm bought back $957 million worth of its stock and may close 1992 with $1 billion in the bank.

In an era when defense firms are scrambling to lay off workers and mothball weapons plants, they are also reaping huge cash windfalls and attracting investors such as Buffett who believe the best-run defense firms will be generating huge returns to shareholders, securities analysts said Thursday.


While other defense industry companies are attempting to diversify into commercial industry or enlarging their stake in defense through acquisitions, General Dynamics is going in the other direction--a planned 20% shrinkage in its business and concentration on four core weapons sectors.

“They have done all the right things,” said Morgan Stanley analyst Phil Friedman. “All the other defense companies are against what General Dynamics is doing. They think they are dismantling the company.”

Indeed, the Falls Church, Va.-based firm has sharply curtailed investments. In the last quarter, it spent just $4 million on plant and equipment and $20 million on research, all a tiny fraction of its past rate of spending.

Company Chairman William Anders has argued passionately that unless the defense industry eliminates excess capacity, cuts costs and improves efficiency, it will not attract investor capital that will allow it to prosper.

Anders has boldly asserted that marginal players should get out, because they only drive up Pentagon costs and undermine the strength of the U.S. aerospace industry’s competitive position. General Dynamics’ four core businesses are fighter aircraft, submarines, tanks and space launch systems. It recently sold its missile business, located in Southern California, to Hughes Aircraft.

Buffett’s entree into General Dynamics seems to prove the validity of Anders’ insistence that only healthy firms will attract investment. Buffett personally called Anders Wednesday to disclose his big stake in the firm. The conversation was “cordial,” company spokesman Alvin A. Spivak said.


In a statement, Anders said, “We are pleased with this significant expression of confidence in General Dynamics.”

The firm’s shares responded sharply after Buffett disclosed he had acquired 4.35 million shares in open-market purchases in recent weeks. The stock added $1.75 to close at $75.625 in trading on the New York Stock Exchange Thursday, after soaring from about $42 per share early this year.

As part of Anders’ program to enhance shareholder value, the firm said it will distribute spare cash through increased or special dividends, as well as stock buybacks.

Prominent among those shareholders is the Crown family of Chicago, which has owned roughly 20% of the firm since the 1960s. The Crown holdings have increased roughly $280 million this year.

Although General Dynamics appears to be succeeding, other defense firms have also earned high marks with much different strategies, said Robert Paulson, director of the aerospace practice at the consulting firm McKinsey & Co.

Buffett, and his investment partner Charles T. Munger--a prominent Los Angeles attorney--invest through a holding company named Berkshire-Hathaway. Buffett made a fortune on plays in GEICO Corp., an insurance company, and in Washington Post Co., in which he invested the equivalent of $3 a share in 1973 for stock now worth more than $200.


But Buffett’s investment in Salomon Brothers, which ran into legal and financial troubles, has proven that he doesn’t always win. He made no comment Thursday on his purchase of General Dynamics.

Times staff writer James Flanigan contributed to this story.