Northrop Faces Hurdles in Bid for Newport News
Northrop Grumman Corp. is headed into choppy waters in its last-minute attempt to acquire Newport News Shipbuilding Inc. and spoil a bid by archrival General Dynamics Corp. to become the nation’s largest military shipbuilder.
In addition to convincing federal regulators that its $2.1-billion offer would pose fewer competitive concerns than the General Dynamics deal, Northrop must persuade Newport News to abandon its $50-million breakup agreement with General Dynamics.
Because Northrop’s offer is the same as that proposed by General Dynamics--$67.50 a share--the $50-million breakup fee could weigh heavily, analysts said.
Newport News directors plan to meet to review the Northrop offer, but a date has not been set, a company spokeswoman said Wednesday. The directors have a previously scheduled meeting May 18, before the company’s annual shareholders meeting.
The $2 billion in cost savings that General Dynamics anticipates if it acquires Newport News also gives the Falls Church, Va., defense contractor greater leverage to raise its bid, a move that Northrop probably would have a hard time matching, analysts said. Northrop is in the midst of digesting Litton Industries Inc., which it acquired last month for $3.8 billion.
Indeed, Standard & Poor’s Corp. said Wednesday that it is reviewing the possibility of downgrading the credit rating on Northrop’s debt, which would make borrowing more expensive for the company. S&P; said Northrop’s “financial flexibility” was already constrained before it made the offer for Newport News because of its acquisition of Litton.
“It’s a bold move, but Northrop has two strikes already against it,” said Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles-based defense investment bank.
Northrop’s success in bagging Newport News will depend largely on how federal regulators view the deal, analysts said. The Defense Department could act as de facto matchmaker by declaring which of the combined companies would be less likely to pose competitive problems.
With Newport News, Northrop, now the nation’s largest supplier of military surface ships, would gain entry into making nuclear-powered ships and submarines.
On the other hand, the combination of General Dynamics and Newport News would create the nation’s only builder of nuclear aircraft carriers and submarines.
“This has got very little to do with what the stockholders at Newport News want,” said Paul H. Nisbet, president of JSA Research Inc., a Newport, R.I., research firm. “It’s much more of what the regulators want.”
In a conference call with analysts Wednesday, Northrop Chairman Kent Kresa argued that the General Dynamics-Newport News combination would create a monopoly in nuclear-powered submarines and carriers. He fears that the bulk of Navy research and development investment ultimately would fall into the hands of one company.
“It is an unacceptable position for our government, for our Navy and for Northrop Grumman,” Kresa said. “It will create an unhealthy monopoly in numerous shipbuilding businesses.”
Pentagon officials declined to comment about the deals. Undersecretary of Defense E.C. “Pete” Aldridge Jr., who is in charge of approving defense industry mergers, said Wednesday that a review of both deals is “going to be very complicated, without a doubt.”
Some investors, noting that Northrop offered the same price for Newport News, believe that Northrop is merely trying to scuttle the deal. Companies typically propose a higher price in trying to undercut a rival.
Reaction to Northrop’s offer was tepid. In New York Stock Exchange trading Wednesday, Northrop shares fell $3.50 to $88, and shares of General Dynamics barely budged, dropping 15 cents to $78.15. Newport News shares rose 4 cents to $65.04.
“I don’t think they [investors] will be terribly upset if the Navy said neither one of you can have it,” Nisbet said.
That’s what happened two years ago when the same players attempted to buy Newport News but were rejected by the Pentagon. Both companies said things are different this time around, anticipating that the Bush administration will be more business-friendly.
Northrop officials said speculation that it is trying to play spoiler is “a real misconception.”
The company was mulling over a merger with Newport News and inquired about having discussions shortly after it completed the Litton acquisition last month, said Albert Myers, Northrop treasurer.
But General Dynamics struck an agreement April 25.
“This was clearly on our radar screen,” Myers said. “‘Obviously, if we had our choice about it, we would not having chosen this time to do it. Others may have taken advantage of the fact that we might have been a little distracted” with the Litton acquisition.
Even if the company is successful in acquiring Newport News, analysts question whether Northrop could digest three major purchases in one year. In addition to Litton, Northrop recently agreed to acquire GenCorp’s Aerojet business in Azusa for $315 million.
“They’ve got a full plate, and this [Newport News] would overflow it,” Nisbet said.
But Northrop officials said they have a good track record as one of the more active and successful acquirers of companies in the defense industry. Since the early 1990s, Northrop has purchased 12 companies, including aircraft makers Grumman and Vought.
“It’s hard work, but one thing we have in our favor is that we have done this before,” Myers said.
