Lockheed Vaults to Top of Jet Fighter Business : Aerospace: The company’s $1.5-billion acquisition of General Dynamics’ military aircraft division in Texas puts new pressure on the weaker players in a shrinking industry.
Lockheed, the airplane builder that created the nation’s first operational jet fighter half a century ago, reclaimed leadership of the shrinking military aircraft industry by announcing Wednesday that it will buy General Dynamics’ fighter jet division for $1.5 billion cash.
Aerospace companies are being forced to make hard choices between investing heavily in acquisitions or exiting the business amid lean times brought on by eroding Pentagon budgets. Lockheed’s purchase of the General Dynamics division, based in Ft. Worth, will intensify the pressure on weaker players as the status quo of the U.S. aircraft industry unravels, analysts said.
“This is the spark that ignites the powder keg,” said John Harbison, who heads the aerospace practice of consultant Booz Allen & Hamilton. “Lockheed was probably in the best position to go it alone, and that they are saying they had to consolidate to do it sends a strong signal to everybody else.”
The five remaining military aircraft manufacturers--including longtime industry leader McDonnell Douglas--are vowing to be survivors in the industry meltdown, but the Lockheed deal could quickly alter their thinking.
If Calabasas-based Lockheed can use its expanded business base to cut costs and underbid rivals in future programs, it would exert an intimidating new force in the industry. To meet that challenge, weaker players may have to quickly pick their own partners or leave the game. That could leave only three or four producers.
Traditionally, the Pentagon has spread its contracts among manufacturers to maintain a healthy base of suppliers and satisfy political interest in Congress. It could theoretically continue to tip the scales to support weaker firms but, with lower Pentagon spending, it will have fewer new programs to parcel out.
The only major new program on the horizon is the Navy’s AX attack jet program. Lockheed Chairman Daniel Tellep said in an interview Wednesday that as a result of the General Dynamics deal, Lockheed is on four of the five teams competing for that job.
Already, the acquisition gives Lockheed a majority share of the Air Force’s new F-22 Stealth jet fighter program, which had been divided in thirds between Lockheed, General Dynamics and Boeing, and the high-volume F-16 program, for which General Dynamics is the prime contractor.
Although the 25-year-old F-16 program has sometimes been viewed as having an uncertain future, Tellep said there are “high potential” orders for 564 airplanes and he expects another 1,000 aircraft ultimately to be produced.
In October, President Bush approved the sale of F-16s to Taiwan, adding $2.3 billion to General Dynamics’ business backlog. The company’s aircraft-related sales in 1991 were $2.2 billion. Tellep said the Lockheed-General Dynamics deal would generate $6.5 billion in sales, about equal to McDonnell Douglas’ military aircraft sales.
“They are the premier business in the fighter business now,” said Jack Modzelewski, an analyst at PaineWebber in New York. “This ensures the future of Lockheed to be in the fighter business well into the 21st Century.”
The positive reaction from Wall Street was evident as Lockheed’s stock rose $3.50 a share Wednesday to close at $55.75, a 6.7% gain. General Dynamics’ stock was up $2.875 to $103.875.
General Dynamics said it expects to realize a net gain of about $650 million from the sale of the division.
While Lockheed was a major force at the dawn of the jet age with its P-80 fighter, it has not produced a high-volume combat plane since the 1960s. Rather, it built a reputation on exotic aircraft produced at its “Skunk Works” factory in Palmdale, and on lower-volume aircraft such as the C-130 cargo plane, which it builds in Marietta, Ga. General Dynamics, by contrast, is known for its ability to mass-produce its low-cost F-16.
The General Dynamics business also provides Lockheed with greater opportunities to build synergy with its defense electronics business. If Lockheed moves Ft. Worth production to its Georgia facility at the end of the F-16 program, it could reduce its overhead costs.
Tellep said Wednesday in Washington that his company’s purchase of General Dynamics’ combat plane business will add 50 to 75 cents a share to 1994 earnings, and more than $1 a share to earnings in 1996 and beyond.
Tellep also predicted that the purchase would increase Lockheed’s cash flow per share by $3 in 1993 and $4 in 1994. This will enable the company to reduce the ratio of debt to total capital to 33% from the current 48% within three years, he said.
“This will make Lockheed the No. 1 low-cost fighter producer in the United States,” Tellep said.
Such a scenario does not bode well for Lockheed’s competitors in the military aircraft business.
Northrop, which waged a bidding war with Lockheed for the General Dynamics division, still must stake out a claim for itself in the contracting market after its B-2 bomber program is completed in the mid-1990s.
Boeing, Grumman and Rockwell, all once formidable forces in the industry, are also running out of future products.
McDonnell Douglas is the strongest of the bunch, but its sales are likely to drop as the Air Force winds down the F-15 program and expands the F-22 program that Lockheed is expected to dominate.
The Lockheed-General Dynamics deal is the second big move among defense giants in less than three weeks. On Nov. 23, Martin Marietta Corp. said it would buy General Electric Co.’s aerospace division for $3.1 billion, making Martin Marietta the industry’s largest supplier of defense electronics and taking GE out of defense altogether except for the sale of jet engines.
And General Dynamics, finding itself unable to reach the “critical mass” that company Chief Executive William A. Anders had said was necessary to remain in the aerospace business, has been selling off bits and pieces of itself since last year.
Times staff writer Jube Shiver Jr. in Washington contributed to this report.
Biggest Deals in Aerospace
Lockheed’s proposed acquisition of General Dynamics’ military aircraft division ranks among the largest ever in the defense-aerospace industry.
Companies Amount Paid Year General Motors/Hughes Aircraft $5.2 billion 1985 Allied/Signal $4.9 billion 1985 Martin Marietta/Lockheed $3 billion 1992 Gulf Stream/Lear Seigler $1.7 billion 1986 Lockheed/General Dynamics $1.5 billion 1992 Lockheed/Sanders Associates $1.2 billion 1986
Stocks Surge
Many defense company shares rocketed on Wednesday, as the industry’s consolidation took another giant step with Lockheed’s acquisition of General Dynamics’ jet fighter unit. How key stocks fared:
Wed. close Stock and change Lockheed 55 3/4, +3 1/2 General Dynamics 103 7/8, +2 7/8 Northrop 33 3/8, +2 1/8 United Technol. 47 1/4, +1 1/4 Raytheon 48 3/8, + 7/8 E-Systems 39 1/4, + 3/4 McDonnell Douglas 45 7/8, + 5/8
