General Electric Co. said Monday it will sell its aerospace business to Martin Marietta Corp. for $3 billion, creating a new defense industry giant that will pose a menacing challenge for Southern California companies battling for contracts in an age of shrinking military budgets.
The deal would give Martin Marietta annual revenues of about $12 billion, making it the world's largest defense electronics firm. It would move ahead of long-time industry leader Los Angeles-based Hughes Aircraft, which posted 1991 revenues of $7.7 billion.
The deal announced Monday is the largest so far in what is expected to be a wave of consolidations to sweep the defense industry over the next decade.
"Companies that combine will be the survivors," said Martin Marietta Chairman Norman R. Augustine at a news conference here. "There is room for strong survivors, not a bunch of weak companies. We have proved adept at managing build-ups to win wars, now we have to manage the build-downs to win the peace."
GE will receive $3.05 billion, including cash and $1 billion worth of convertible preferred stock in Martin Marietta, headquartered in Bethesda, Md. This gives GE, based in Fairfield, Conn., a chance to reap considerable benefits if Martin Marietta can boost its profits and stock price. GE will get two seats on an expanded board of directors.
The acquisition could allow Martin Marietta to cut its costs and improve its technological position in the industry, raising a tougher threat to such competitors as Hughes, TRW and Lockheed. Amid leaner defense budgets, bigger companies are seeking advantage by applying common technology to many different products--something the industry has not done well in the past, according to Booz Allen & Hamilton consultant John Harbison.
The industry already has started a shakeout process, in which Hughes Aircraft acquired the missile business of General Dynamics and Loral Corp. acquired the missile and satellite operations of Ford Motor Co.
The industry consolidation, while strengthening some contractors, has also resulted in tens of thousands of job losses in Southern California and other major defense industry centers--with no end in sight.
GE Chairman John F. Welch Jr. said his company considered the "liquidation option" for its aerospace business, which has 37,700 employees, before approaching Martin Marietta for a possible deal. "We believe you've got to be No. 1 or No. 2 in the global arena," Welch said. "If you are No. 1, you can control your destiny--if you are No. 4 and No. 1 sneezes, you get pneumonia."
Welch and Augustine began discussing a "combination" about six weeks ago, according to the GE chairman. "It became clear in the first three sentences that Martin Marietta would not be a seller," said Welch. "It was their intent to become a buyer."
Profits from the aerospace business have been flat for three years at about $600 million, Welch said. Revenues totaled $6 billion. Martin Marietta had earnings of $313 million last year on revenue of $6.1 billion.
Both companies advanced Monday on the New York Stock Exchange in response to the news, with GE closing at $82.125 a share, up $2.125, while Martin Marietta jumped $5.625 to close at $63.25.
Unlike earlier acquisitions, there is not a great deal of overlap in the Martin Marietta and GE product lines, several experts said. Both firms make spacecraft, for example, but Martin Marietta makes secret military satellites while GE produces commercial and weather forecasting satellites.
After acquiring RCA Corp. in the 1980s, GE never consolidated its own satellite business with RCA's. The addition of a third satellite operation means that Martin Marietta will have to make some difficult choices to close facilities if it wants to cut costs after the acquisition.
GE also makes radar and sonar systems, and produces components for missile and avionics systems.
The acquisition by Martin Marietta "has potential for consolidation in a number of key businesses, but the consolidation isn't going to be easy or immediate," said Robert Paulson, a partner at the consulting firm McKinsey & Co. "It is a sound deal, but I don't expect it to show its competitive effect until 1995 or 1996."
Paulson said the satellite business will be increasingly competitive on a global scale and that the market may not support all the American firms. Hughes, Lockheed, TRW, Rockwell International and Loral are all major spacecraft manufacturers in a market that is due to shrink for the first time in history.
The Martin Marietta deal will also heighten the pressure on remaining defense companies to join in the merger activity.
"It is going to force everybody to look and see if they can emulate this," said Wolfgang Demisch, aerospace analyst at UBS Securities. "The longer you wait, the fewer attractive partners will be left."
Analysts said the two companies are not disclosing much detail about the merger, making it difficult to judge the potential benefits for Martin Marietta. Defense electronics firms typically operate in hundreds of small markets with little technological overlap. Because a firm is bigger does not necessarily mean it will be more competitive.
Cai von Rumohr, aerospace analyst at Cowen & Co., said GE will not be selling its Americom communications business, a highly profitable operation that leases satellite transponders. Hughes, the world's leading satellite producer, has grown by combining its own communications business with its satellite manufacturing. Martin Marietta will not have that benefit.
"Martin got a good deal, but I am not sure it is a great deal," Von Rumohr said. "It is not like GE left a huge amount of money on the table."
Von Rumohr said GE's business is already well run, showing profit margins of 9% to 10%--suggesting that Martin Marietta is not likely to be able to improve earnings significantly.
Jack Modzelewski, a PaineWebber securities analyst, said "the big question is where are the synergies in this deal? There are a lot of big decisions Martin has--plant shutdowns and consolidations."
Martin Marietta's Augustine was noncommittal, saying, "I would love to promise we will not change facilities or people's jobs. But I can't make that promise."
The proposed acquisition will be submitted for a vote by shareholders in the first quarter of 1993, he said. The deal is subject to review by the Justice Department and the Federal Trade Commission for possible violation of the anti-trust laws. But Augustine said he does not expect any objections from the government agencies because there is little overlap in business activities.
Rosenblatt reported from Washington and Vartabedian from Los Angeles.
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Analysts speculate the merger could signal a new round of consolidation in the bloated aerospace sector. Wall Street cheered the announcement, sending the shares of both companies to 52-week highs:
THE DEAL AT A GLANCE
Martin Marietta . . .
1991 sales: $6.1 billion
1991 profits: $313 million
Obtains GE's Aerospace Unit
1991 sales: $5.3 billion
1991 profits: $655 million
Combined work force: 94,000 people, including 27,000 engineers and scientists
What Martin Marietta gains
The GE business in the transaction includes:
+ Radar and sonar systems
+ Simulation systems
+ Communications systems
+ Government technical services
Stock market reaction
Martin Marietta stock up $3.875 to $61.50
GE up $1.50 to $81.50
Next step: The deal has been approved by both companies' boards but is also subject to government review and Martin Marietta shareholder approval before completion, which is expected during the first half of next year.
Source: Times wire and staff reports