Pentagon OKs Northrop Bid for Newport
The Pentagon endorsed Northrop Grumman Corp.’s bid to acquire Newport News Shipbuilding Inc. on Tuesday, dealing a stunning blow to a rival offer by General Dynamics Corp.
In a separate move that all but assured Northrop would win the bid for the Virginia shipbuilder, the Justice Department said it filed an antitrust lawsuit Tuesday to block the deal between Newport News and General Dynamics.
Newport News, maker of nuclear submarines and aircraft carriers for the Navy, agreed to be acquired by General Dynamics in April in a deal valued at $2.1 billion. But just two weeks later, Century City-based Northrop matched the offer, hoping to derail the deal by its archrival to create the nation’s largest military shipbuilder.
If Northrop acquires Newport News, it would put the company on a virtually even footing with General Dynamics, now the dominant military shipbuilder.
On Tuesday, both the Defense and Justice departments said they were concerned that the General Dynamics merger would eliminate competition for nuclear submarines. General Dynamics and Newport News are the only makers of nuclear submarines, and Newport News is the only builder of nuclear aircraft carriers.
“This merger would give General Dynamics a permanent monopoly in nuclear submarines and would substantially lessen competition in surface combatants,” said Charles A. James, assistant attorney general in charge of the Justice Department’s antitrust division. The merger “would reduce innovation and ultimately the quality of the products supplied to the military.”
Northrop said in a statement that it was “pleased with the Department of Defense’s statement today,” which allows the company “to go forward with its proposed acquisition of Newport News.” A spokesman for General Dynamics said the company was not prepared to comment. But Newport News said it will continue merger talks with Northrop.
The decisions surprised analysts who just weeks earlier anticipated that the Bush administration would let both bids move forward, leaving the choice to Newport News shareholders.
But Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles-based investment bank specializing in defense companies, said the “landscape changed dramatically after Sept. 11.”
Before the terrorist attacks, the U.S. government was more focused on saving costs, which General Dynamics argued was the primary reason for the merger, he said.
But now with calls for a military buildup in light of the terrorist attacks, the Pentagon is more concerned with maintaining the defense industrial base, Kutler said.
The General Dynamics deal would have placed the nation’s nuclear shipbuilding under one roof, and Northrop’s offer would keep the country’s two main nuclear shipyards separate.
“This will have reverberation throughout the industry,” Kutler said. “All of a sudden, the argument for preserving the industrial base, which they had paid lip service to, is suddenly significant.”
Indeed, Pentagon officials said Tuesday that it was endorsing the Northrop-Newport News pact because it would maintain competition in military shipbuilding.
The Northrop acquisition “will provide two strong companies in shipbuilding capable of competing for most classes of ships that the Navy will acquire in the near and long term,” Pentagon spokesman Glenn Flood told Bloomberg News.
Moreover, Northrop’s offer became more enticing as investors drove up the price of the company’s shares in anticipation of a defense buildup. That raised the value of Northrop’s deal, which involved a mostly stock transaction, beyond General Dynamic’s all-cash offer of $2.1 billion.
As a result, Newport News directors this month began merger talks with Northrop, although they had initially kept Northrop at arm’s length because they had agreed to a deal with General Dynamics.
“This is an unintended consequences of Sept. 11,” Kutler said.
Although the Justice Department filed suit to block the deal between General Dynamics and Newport News, it must still complete a review of Northrop’s rival bid, an agency spokeswoman said. But analysts said the department generally follows the recommendations of the Pentagon.
Shares of Northrop fell $5.50 to $100 in trading on the New York Stock Exchange, as Newport News shares fell 73 cents to $69.11 and General Dynamics dropped $3.04 to $81.76.
