Abuzz Over Electronics : The Reason? Cost-Effective Upgrades of Weapons
Lockheed Martin Corp.'s agreement to acquire the defense electronics business of Loral Corp. for $9.1 billion affirmed what industry observers have been saying for years: There’s money to be made from the brains of modern weaponry as well as from the brawn.
The planned Loral acquisition would become the fourth major deal in the defense electronics industry in the last year, and its announcement comes only a week after Northrop Grumman Corp. said it would acquire the defense electronics operations of Westinghouse Electric Corp. for $3.6 billion. All but one of those deals--Loral’s own acquisition in March of the defense operations of Unisys Corp. for $862 million--are valued at more than $1 billion.
Defense analysts agree that the principal factor driving these transactions is that in an era of tight government budgets, electronics are a cost-effective way of upgrading existing weapons systems without buying new planes, ships or other material.
“There’s a very obvious shift toward ‘smart’ weapons,” said Robert Paulson, head of aerospace consulting at McKinsey & Co. “Buyers are saying that, given they can only afford a few planes and tanks [so-called platforms], they want to have as much electronics in them as possible.”
Aerospace specialist John Harbison at Booz Allen & Hamilton agrees. “The market is going to have a much greater electronics flavor to it than a platform flavor,” he said.
Electronics companies also provide products that can be sold commercially, not just to the U.S. government and its allies, thus opening up vast new markets. General Motors Corp.'s Hughes Electronics unit has been in the forefront of commercializing its defense electronics technology, with such products as its DirecTv satellite service.
The impact of these trends can be seen in the intensifying consolidation of the defense electronics industry, as big manufacturers acquire smaller companies and smaller companies try to grow by acquiring even smaller firms. Even with the commercial potential, the main asset they’re buying is the target’s government contracts, Paulson said.
“What’s really powerful is to put your contract in a factory I have that makes the same thing,” he said.
The epitome of the trend is Loral, which has itself been among the most aggressive acquirers in the industry.
Loral bought Ford Motor Co.'s aerospace division in 1990 for $750 million, followed that two years later with the missile division of LTV for $261 million, and within the year bought IBM’s defense systems unit for $1.575 billion.
Meanwhile, competition for these quarries was intensifying just as smaller, less profitable companies in the industry went out of business or got gobbled up, according to Harbison. The result had been a sharp run-up in prices.
Ford Aerospace was acquired by Loral for about 60% of its annual revenue; Northrop Grumman’s plan to acquire the systems division of Westinghouse for $3 billion represents about 120% of annual sales, and Lockheed Martin is going to pay 1.5 times Loral’s annual revenue.
Also lubricating the deal making among electronics manufacturers is the U.S. government’s benign attitude toward the mergers.
“The government has encouraged the defense supplier base to think these things will be looked on favorably,” said C. Donald Scales, vice president for aerospace and defense at the consulting firm of A.T. Kearney. “The Defense Department doesn’t need 30 suppliers for one chip.”
Instead, as long as some minimal competition is preserved, defense procurement officials believe they can buy the same products for as much as 30% less if mergers remove costly excess capacity--too much factory space and too many workers--out of the industry.
The absence of likely government roadblocks is a factor in the speed with which Lockheed hopes to complete the deal--by the end of February. By contrast, mergers and acquisitions in more heavily regulated industries often need six to nine months to clear regulatory roadblocks.
Companies with defense electronics operations, which could either be buyers or sellers in the vigorous market, include TRW Inc., Litton Industries, Texas Instruments and Boeing Co. A possible major buyer could be McDonnell Douglas Corp., which lacks a significant presence in this segment, analysts say.
“The incentive for further deals is still there,” said Paulson.
* DEFENSE DEAL
Lockheed Martin agrees to acquire Loral’s defense electronics business for $9.1 billion. A1
* BIG WINNER
Deal marks a triumph and new beginning for Loral Chief Executive Bernard Schwartz. D14
* MORE CHANGE
Loral’s workers in Orange County to get a third new boss in six years. D14
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In a move that would further consolidates the defense industry, Lockheed Martin Corp. announced that it will buy most of electronics maker Loral Corp. for about $9.1 billion. A brief look at the companies, which together would dominate the defense industry worldwide:
Lockheed Martin Corp.
Headquarters: Bethesda, Md.
Chairman: Daniel Tellep
Major product lines: Makes products in four industries: aeronautics, electronics, information and technology services, and space and strategic missiles. Known for the F-16 and F-22 fighters, the C-130 transport and the Titan rocket launcher.
1994 revenue: $22.9 billion
1994 profit: $1.0 billion
Earnings per share: $5.32
Monday stock price: $80.25
Fiscal year ends Dec. 31
Headquarters: New York
Chief executive: Bernard Schwartz
Major product lines: Designs and manufactures electronic systems such as radar detection and warning devices, training simulators, surveillance systems and military computers and software.
1995 revenue: $5.5 billion
1995 profit: $288.4 million
Earnings per share: $1.69
Monday stock price: $44.50
Fiscal year ends March 31
Top defense firms worldwide, ranked by 1994 defense revenue, in billions of dollars:
1. Lockheed Martin Corp.*: $19.6
2. McDonnell Douglas Corp.: $9.2
3. Northrop Grumman Corp.*: $7.9
4. British Aerospace: $7.3
5. Hughes Electronics Corp.: $6.3
6. Boeing Co.: $4.8
7. Thomson Group: $4.4
8. General Electric (Britain): $4.3
9. United Technologies Corp.: $3.8
10. Raytheon Co.: $3.5
*Includes pending acquisitions
Reduced Pentagon spending, which has encouraged a merger wave among defense contractors, has given the top weapons companies a widening share of a dwindling market.
Total contract*: $129 billion
10 largest contractors**: 29%
All others: 71%
Total contract*: $121 billion
10 largest contractors**: 32%
All others: 68%
Total contract*: $118 billion
10 largest contractors**: 38%
All others: 62%
*Defense Department prime contract awards and reflecting all completed or pending mergers
**Reflects all completed or pending acquisitions.
Note: The list of top 10 defense firms is based on Defense Department revenues.
Sources: Bloomberg Business News, Defense News. Researched by JENNIFER OLDHAM / Los Angeles Times
Because Lockheed Martin plans to purchase all of Loral’s defense business, revenues from both companies were combined.
Researched by JENNIFER OLDHAM / Los Angeles Times
Defense Shares Surge Again
News of Lockheed Martin’s planned purchase of Loral Corp. sent most defense shares soaring Monday, adding to substantial gains over the past year.
52-week Mon. close Mon. % Stock high/low and change change Loral $44.50/18.38 $44.50, +$8.25 +22.8% Logicon 32.13/15.00 28.38, +1.38 +5.1 Litton Industries 47.13/32.50 47.13, +1.75 +3.9 Lockheed Martin 80.38/50.00 80.25, +2.88 +3.7 McDonnell Douglas 95.75/47.13 95.75, +3.25 +3.5 Rockwell 54.75/35.38 54.75, +1.75 +3.3 Raytheon 47.88/31.50 47.38, +1.38 +3.0 Boeing 81.13/44.38 80.25, +1.75 +2.2 General Dynamics 63.00/42.38 60.63, +1.00 +1.7 TRW 82.63/61.75 81.00, +1.25 +1.6 United Technologies 97.75/62.75 94.13, +1.13 +1.2 Northrop Grumman 64.75/39.75 60.75, -0.13 -0.2
52-week high data updated to include Monday closing prices.