General Dynamics Renews Bid to Buy Lone Carrier Maker
General Dynamics Corp. said Wednesday it will attempt to buy Newport News Shipbuilding Inc., a proposed merger rejected two years ago by the Pentagon because it would leave just a single supplier of multibillion-dollar aircraft carriers and nuclear submarines.
This time, the Navy’s largest shipbuilder said it is offering $2.1 billion in cash for one of the storied names in naval history, about a third more than the $1.4 billion it bid in 1999.
The acquisition, if approved, would leave the U.S. with only two major contractors for military ships and marks the latest in a renewed wave of consolidations within the defense industry. Just two weeks ago, Northrop Grumman Corp. completed its $3.8-billion acquisition of Litton Industries Inc., the only other major U.S. military shipbuilder.
General Dynamics said the boards of both companies have approved the deal and it has no plans to close shipyards or eliminate jobs. Analysts said the deal, which was rejected by Clinton administration officials in the Pentagon, could get a more sympathetic review from the Bush administration.
The deal would also once again make Falls Church, Va.-based General Dynamics one of the largest private employers in San Diego. After shedding much of its aerospace business in San Diego in the early 1990s, the company returned to the city in 1998 with the purchase of National Steel & Shipbuilding Co., the only major remaining ship construction yard on the West Coast.
With the Newport News acquisition, General Dynamics would pick up Continental Maritime of San Diego, which repairs aircraft carriers. Combined, the two San Diego units would employ about 3,500 people.
The deal would give General Dynamics a monopoly in the building and maintenance of nuclear-powered Navy vessels, as well as strong positions in building destroyers, support ships and commercial oil tankers.
It would operate four of the six major shipyards in the U.S.: Electric Boat division in Groton, Conn., which builds nuclear-powered submarines; Bath Iron Works, Bath, Maine, which makes surface combat ships; and National Steel & Shipbuilding in San Diego. It would pick up Newport News’ shipyard in Newport News, Va., where aircraft carriers and nuclear submarines are built.
Still, defense analysts said the deal is unlikely to create many competitive headaches for Northrop Grumman’s Litton unit, which is expected to maintain its dominance in the business of making nonnuclear warships. Litton operates the other two major U.S. shipyards: Ingalls Shipbuilding in Pascagoula, Miss., and Avondale Shipyard, New Orleans.
“The Navy may actually lean more towards Northrop in one area they do compete on, the destroyers, as to not put all the eggs in General Dynamic’s basket,” said Jon B.Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles-based investment bank. “It may force the Navy [to] be more considerate in the way it doles out the contracts.”
Analysts questioned however whether General Dynamics could be successful in its second attempt at acquiring Newport News.
“It’s a trial balloon to see how the Bush administration will react,” Kutler said. “They’re assuming that since it is a Republican cabinet it will have a better chance.”
Indeed. General Dynamics executives insisted Wednesday that they are confident of receiving the necessary approvals because this time it would be dealing with the Bush administration, which may view the takeover differently.
Also, in recent years, the Pentagon has pushed the two companies to work on projects jointly instead of competing with each other out of fear it would drive the losing company out of business.
The combination would result in “no loss in competition because there is no competition,” said William P. Fricks, chairman of Newport News.
General Dynamics withdrew the initial offer in 1999 after then-Defense Secretary William S. Cohen said the Pentagon opposed the deal because the potential cost savings that the companies cited fell short of outweighing concerns about the size of the deal and the loss of competition in the industry.
Under the proposed acquisition, which would require Defense Department approval, General Dynamics would also assume about $500 million in Newport News debt.
In addition to shipbuilding, the company makes tanks, high-speed guns for airplanes and Gulfstream business jets. The combined companies would have 63,000 employees and revenue of about $13.5 billion.
Meanwhile, one famous investor is expected to have a windfall if the deal is completed. Microsoft Corp. Chairman Bill Gates holds a 7.2% stake in Newport News through his investment firm Cascade Investment.
In trading on the New York Stock Exchange, Newport News shares surged $9.05 to $64.10 as General Dynamics shares fell $1.38 to close at $72.73.
