Martin Marietta to Acquire Grumman for $1.9 Billion : Defense: Buyer of once-formidable aircraft builder would rise to the top ranks of the industry.

In a swiftly negotiated deal that would further accelerate the shrinking of the aerospace industry, Martin Marietta said Monday that it will pay $1.9 billion for Grumman Corp., a fading Long Island, N.Y., aircraft builder undone by the post-Cold War aerospace bust.

The acquisition would elevate Martin to the top ranks of the U.S. defense industry, with $13 billion in annual sales, bringing it at least even with better known rivals, McDonnell Douglas and Lockheed.

“What we have here is a combination that will allow us to become a formidable competitor in increasingly difficult times,” Martin Chairman Norman Augustine said Monday. “We have a team made up of all gold medalists.”

The deal marks the latest chapter of an industry consolidation that is fast creating a few monolithic defense suppliers that will dominate the global arms market and exert new political clout.

In the process, dozens of plants and tens of thousands more jobs will be eliminated around the country. Analysts estimated that the Martin-Grumman merger would eliminate 10,000 to 15,000 jobs in states from Colorado to New York. Hard-hit California would be spared because neither company has large operations there.

Martin has been among the most aggressive buyers of other firms in the past year, acquiring General Electric’s defense business concentrated in Pennsylvania and agreeing to buy General Dynamics’ space booster business in San Diego.

Just a few years ago, Martin was way down the list of major contractors, and its emergence at the top demonstrates how rapidly the aerospace industry is changing.

As Martin has increased its clout, Grumman has seen its fortunes wither. Once the premier builder of Navy carrier aircraft, the firm’s airplane programs have died one by one, and last year it formally acknowledged that it was exiting the business of building new military airplanes.

Nonetheless, Grumman will give Martin a strong position in the crucial market for aircraft modification and updating, as well as leading technology for airborne surveillance systems that Grumman has recently developed.

Grumman Chairman Renso Caporali said Monday that the company faced a future in which it would have increasing difficulty competing against larger firms and that it had sufficient size to compete in only a few markets. “What became apparent to us was that the world was going to get a lot tougher for people in our business and we were going to have to make some changes,” he said.

Against that backdrop, Caporali said he met a month ago with Augustine, his former classmate in aeronautical engineering at Princeton University, at a hotel restaurant in Long Island and set in motion the merger that was formally approved by the boards of both firms on Sunday.

Under terms of the deal, Grumman shareholders would receive $55 per share, a 37% premium to the firm’s price before the announcement. Grumman shares shot up $14.25 to close at $54.125 in trading Monday on the New York Stock Exchange, while Martin shares gained $1.25 to close at $46.

Martin said it has arranged financing of $2.4 billion, providing a cushion for the $1.9-billion deal that is meant to warn off potential rivals that would start a bidding war, according to Robert Paulson, an aerospace consultant at McKinsey & Co. The two companies also agreed to an accelerated timetable that would close the deal in only one month, making it difficult for an outsider to mount a competing bid.

Augustine and Caporali said they have not yet worked out the details about which facilities may be closed or even what Caporali’s new job will be.

Peter Aseritis, First Boston aerospace analyst, said the acquisition would position Martin about even with Lockheed and just behind McDonnell Douglas in defense sales. Martin would have $13 billion in total sales, but only $9 billion of that would be in defense.

McDonnell has about $10 billion in defense sales, while Lockheed has about $8.5 billion in defense sales, Aseritis said. But Gary Reich of Prudential Securities ranks Martin as the top defense firm by a wide margin, based on its estimated contract awards. Martin has 93,000 employees and Grumman 18,000 employees.

The emergence of Martin as an industry leader marks the first time an electronics and software company will outrank the major aircraft manufacturers.

For decades, aircraft builders have been undisputed leaders of the business, but now companies that can integrate sophisticated battlefield information systems are making huge inroads in grabbing defense dollars from so-called “metal benders.”

Although Grumman is out of the aircraft business, its technology is highly regarded. The firm’s biggest program is the Joint STARS, a system that allows sophisticated radar images gathered aboard a Boeing aircraft to be broadcast to commanders on the battlefield.

In recent years, Martin, Grumman and the GE unit that Martin acquired were the top three recipients of Defense Department research funding, according to First Boston’s Aseritis.

“You have a tremendous research capability in that one company now,” he said.

Nonetheless, Martin has been stung by a series of major embarrassments. Three satellites built by the former GE unit failed after launch last year. And the firm agreed to pay $1 million to NASA following an investigation into irregularities at the Johnson Space Center.

Another trend highlighted by the rise of Martin is the extent to which mainstream American corporations have withdrawn from the defense business.

General Electric, Ford Motor, IBM and Goodyear have all sold their defense units in recent years, reflecting frustration with the low profits, bureaucracy and vulnerability to federal fraud charges that accompany Pentagon contracts.

Aerospace analyst Jack Modzelewski of Paine Webber said an industry controlled by just a handful of pure weapons contractors will raise important new political and economic questions for the Pentagon. As the Pentagon has fewer suppliers for its weapons, the industry may be in a position to demand higher prices, he said.

The Martin deal is certainly likely to act as a catalyst for additional acquisitions.

“It is going to start a whole other round of deals,” McKinsey’s Paulson said. “They need to be done. There is still too much capacity, and it isn’t being reduced quickly enough. It is the right time. There is still a lot of cash left from the end of the Reagan era contracts.”