Loral, IBM Swept Up in New Wave of Consolidation : Defense: IBM’s sale of its Federal Systems unit reflects a trend among conglomerates to sell off such units. Aerospace firms are buying.
Loral Corp.’s agreement to buy IBM Corp.’s defense computer business for $1.58 billion illustrates how mergers are accelerating again in the aerospace industry as continued Pentagon budget cuts intensify the pressure to consolidate.
The pact between Loral and IBM, announced Monday, is only the latest of several sales unveiled recently. General Dynamics Corp. is also said to be trying to sell its space rocket business in San Diego to Martin Marietta Corp.
Industry observers say companies such as Hughes Aircraft Co., Lockheed Corp. and Northrop Corp. are also likely candidates to buy defense assets in the months ahead, as they try to grow by acquisition to counter the slide in military spending.
Indeed, Los Angeles-based Hughes was one of the losing bidders to Loral for IBM’s Federal Systems unit, which sells computer systems and communications devices to the Pentagon and other U.S. agencies. New York-based Loral makes missiles, aircraft avionics, cockpit simulators and other defense electronic systems.
So far, the merger wave has not involved the buying and selling of entire companies, because a sharp rise in the price of defense stocks this year has made most takeover candidates too pricey, merger advisers said.
“I expect merger activity at the big-company level to be relatively slow for the next 12 months,” said Jon B. Kutler, president of Quarterdeck Investment Partners, a Los Angeles investment banker that specializes in defense companies.
Rather, the deals occurring involve defense-related subsidiaries being unloaded by large, diversified companies looking for stronger growth elsewhere. For instance, General Electric Co. and Ford Motor Co. sold their aerospace lines in recent years to Martin Marietta and Loral, respectively.
As that trend continues, it raises the prospect of other conglomerates such as ITT Corp., Textron and Westinghouse Electric Corp. divesting their defense lines, analysts said.
The Loral-IBM pact “is a continuation of the process we’ve been seeing, particularly among the multi-industry firms, which are finding that defense as a sideline is not one they wish to keep,” said Paul Nisbet, an analyst with the aerospace consulting firm JSA Research in Newport, R.I.
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The Pentagon is also anticipating more mergers. According to Deputy Defense Secretary William J. Perry, the Defense Department does not have a policy to protect certain firms from being gobbled up--even though it does want to protect critical technology.
“We clearly expect many defense companies to go out of business,” Perry told reporters in September. “And we will stand by and see that happen.”
Nor do takeover experts see the Clinton Administration challenging many defense mergers on antitrust grounds.
Other experts noted that the merger-minded defense companies, whose stock values are rising, have a reason to strike quickly if they plan to use their securities to finance the acquisitions.
Loral, however, said it will pay cash for IBM Federal Systems, a business that will expand Loral’s size by about a third to $6 billion in annual revenue. Loral has grown rapidly in recent years via acquisitions. Besides the Ford Aerospace deal, it last year bought LTV Corp.’s missile business.
Hughes Chairman C. Michael Armstrong, like other executives, won’t reveal which potential targets his company is evaluating. But Hughes “will continue to make investments in defense,” he said.
“I don’t believe one can sit on the sidelines as the industry consolidates,” Armstrong said in an interview last month.
Hughes reportedly waged an intense campaign in its losing bid for the IBM division. Hughes spokesman Ray Silvius declined to comment.
But by losing, Hughes will avoid one headache. The IBM division has a $3.6-billion contract to develop a new computer system for U.S. air traffic control, and the project is already $1 billion over budget and three years behind schedule.
David R. Hinson, the head of the Federal Aviation Administration, said Monday that he has ordered a “top-to-bottom” review of the project to stem the problems.
Lockheed, meanwhile, has already shown its desire to expand by acquisition. The Calabasas-based firm bought the F-16 fighter jet business from General Dynamics early this year for $1.5 billion, and Lockheed Chairman Daniel Tellep said last week that the company is reviewing other prospects.
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McDonnell Douglas Corp., whose financial health has improved markedly this year, also might be looking.
“McDonnell is beginning to be asked what it’s going to do with its excess cash,” said Wolfgang Demisch, aerospace analyst with BT Securities Corp. in New York.
Litton Industries, the Beverly Hills-based contractor that makes Navy destroyers and Air Force navigation systems, is also expected to go shopping after it divests its commercial businesses at year’s end.
At the moment, many defense operations are profitable and throwing off lots of cash, thanks to the companies’ severe cost cutting in response to the military budget cuts.
But Kutler said those profits will rapidly narrow within the next year as Pentagon programs continue to diminish.
“I’ve been telling people that in nine months to a year from now, as these companies get further into today’s (Pentagon) procurement dollars as opposed to yesterday’s backlog, the bloom will be off the rose,” he said. “Then the consolidation will take place.”
THE SHUFFLING OF DEFENSE FIRMS Following a quiet period, mergers and acquisitions in the aerospace and defense industries are expected to pick up again in 1994. Here are some of the largest deals in recent years.
Business Buyer Seller Year GE Aerospace Martin Marietta General Electric 1992 IBM federal Loral IBM Pending systems unit F-16 fighter Lockheed General 1993 jet division Dynamics Ford Aerospace Loral Ford Motor 1990 General Dynamics Hughes General 1992 missile division Aircraft Dynamics Hughes aircraft Thomson-CSF Hughes Pending simulator unit Aircraft Rosemount BF Goodrich Emerson Pending Aerospace Electric LTV missile Loral LTV 1992 division
Business Price (million) GE Aerospace $3,050 IBM federal 1,575 systems unit F-16 fighter 1,525 jet division Ford Aerospace 750 General Dynamics 484 missile division Hughes aircraft ND simulator unit Rosemount 300 Aerospace LTV missile 261 division
ND: Not disclosed Source: Securities Data Co.; company reports
