Divestitures Could Bring About Rapid Growth in New Directions
An expansion-minded Rockwell International Corp., armed with $3 billion or more from the sale of its defense and aerospace units, would be a formidable force in the marketplace if it chooses to grow through an aggressive acquisition campaign.
Logical targets for the company would be large technology-intensive manufacturing firms with operations in automated machinery, automotive parts and electronics businesses, analysts say. Those are the businesses that Rockwell would have if it sheds aerospace and defense.
Rockwell Chairman Donald R. Beall and other company executives have refused to comment on reports that the company is looking for buyers for the units, which have 23,000 employees and $3.5 billion in annual revenue.
Rockwell watchers suggest, however, that Beall could go after businesses operated by companies like Allied Signal, a big automotive parts producer that has demonstrated a willingness to deal. Allied recently sold its antilock brake systems business.
One analyst mentioned Honeywell, a $7-billion leader in automation and control equipment, as a possible candidate if Rockwell decided to look for a merger partner.
“You’ve just got to look at what they have and at their last two major acquisitions to see where they might be going,” said another industry specialist, aerospace analyst Kent Newcomb of A.G. Edwards & Sons in St. Louis.
The company acquired Allen-Bradley Co. of Milwaukee in 1985 and fast became a leader in industrial automation. It added electric motor maker Reliance Electric of Cleveland last year to form one of Rockwell’s fastest-growing operations, its automation business unit. The two businesses accounted for 28% of the company’s nearly $13 billion in sales last year.
Rockwell also has pumped up its semiconductor business, which has responded by quadrupling its sales and capturing a commanding lead in the telecommunications products segment of the industry.
The company has outperformed semiconductor giant Intel Corp. in that part of the industry, said analyst Wolfgang H. Demisch of investment banker BT Securities in New York. “You can expect that they would want to reinforce their successes.”
Ironically, in its search for high-tech industry leadership, the Seal Beach-based corporation is turning itself into a modernized version of what it was 30 years ago.
Back then it was Rockwell-Standard Corp., a Pittsburgh industrial machinery maker with a yen to grow. It acquired Southern California’s North American Aviation in 1967, renamed itself North American Rockwell and moved its headquarters to El Segundo.
Now Rockwell wants to shed virtually all the operations that have sprung from its acquisition of North American.
The company is following the lead of others that have been ditching big defense operations that they added during the 1960s and ‘70s, said Richard Pettibone, an aerospace analyst with business consultant Forecast International in Connecticut. Loral Corp., for example, announced in January that it was selling its defense electronics unit to Lockheed Martin.
Rockwell executives “are now deciding that they don’t want to be in defense and aerospace because they can’t be the biggest players and it is getting tough to compete without being the biggest,” Pettibone said. “So they are getting out and concentrating on their core businesses.” Rockwell ranked 15th in the nation in defense contracting last year.
A post-defense Rockwell would be a $9.5-billion corporation concentrated in industrial automation, telecommunications, electronics and automotive and heavy truck parts. And it would be looking for ways to increase its reach and profitability. Beall repeatedly has said he expects each of the company’s units to grow at a rate of at least 12% a year--a goal he usually achieves.
In fiscal 1995, aerospace and defense revenue dropped by 5.3%.
But automation revenue was up 82%; the semiconductor unit posted a 131% increase and automotive was up 11%--all keepers in Beall’s book.
In addition to its aerospace and defense operation, Rockwell also is trying to unload its graphics systems unit--the nation’s leading manufacturer of offset printing presses for the newspaper and commercial printing industries. That unit accounted for almost $700 million in sales last year, a 6% gain that apparently didn’t measure up to Beall’s expectations.
The company is deep in negotiations to sell the unit and has said it expects to close a deal later this year.
Even if Rockwell eschewed cash and sold the businesses in complicated stock swap transactions to minimize taxes, the net result, including the elimination of tens of million of payroll and equipment maintenance expenses, would boost Rockwell’s bottom line tremendously.
Not every industry specialist is wild about the idea that the company would immediately begin a buying binge, however.
“It is a scary notion that they would feel some need to fill the hole in revenues” left by the sale of the business units, said R. Jackson Blackstock, a conglomerates specialist with New York brokerage Donaldson Lufkin & Jenrette Securities Corp.
The tax penalties and market premium Rockwell would have to pay “to buy something sexy in industrial automation” could dilute the value of the company’s shares, he said.
“The better course of action for them might be to focus on return. Perhaps to use the proceeds to buy up Rockwell stock and shrink the company [and operate] with a mix of business that might be rewarded” with stock that is worth more in the open market, said Blackstone.
Besides, he added, Rockwell--which hasn’t commented on reports that it is actively shopping its aerospace and defense business--probably let the word leak out to test investors’ reaction to the idea. And so far “the market hasn’t been wild about it,” Blackstone said.
Rockwell’s common stock fell 50 cents a share in mild New York Stock Exchange trading Thursday to close at $59.50 after climbing $1.50 a share Wednesday on word of the proposed sale.
