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DEFENCE: MERGER FEVER REACHES NEW HIGHS
by Karl SchwarzThe concentration process in the defense industry continues undiminished. "The environment for mergers and takeovers in the US defense industry is still almost perfect" was a statement by Stuart McCutchan from Defense Merger & Acquisitions, a branch information service, in its balance for 1996. The first days of the new year showed just how right he is: Raytheon hit twice and took over parts of Texas Instruments and Hughes Electronics.
"We have always said that we want to continue playing in the first league of the defense industry", stated Raytheon head, Dennis J. Picard, reasoning the $12 billion investments. Once both transactions are completed in a few months, the company with its forecasted turnover of $21 billion will definitely become one of the real big concerns.
Raytheon will pay $2,95 billion for the Texas Instruments Defense Systems & Electronics Group - a high price according to experts. The $9,5 billion for Hughes Aircraft are no less expensive. However, this deal is a bit more complicated.
The new combination, which has almost no overlappings in single areas, will acquire a strong position in the electronics and guided weapons market. There will even be a monopoly in some parts the latter business - for example in the air-to-air missile sector.
The most recent fusioning wave probably marks a preliminary end to the billion-dollar transactions. However, according to McCutchan from Defense Mergers & Acquisition, several small fusionings and company sales will be in line for the next phase of the industry's restructuring process.
In one respect because the small and medium-sized companies must bank on a growth process. Furthermore, the new mega-conglomerations will expel company parts which don't fit the concept. Lockheed Martin was a trailblazer in this respect also, by selling two weapons factories to General Dynamics.
Obviously, the industry's activities are watched with goodwill by the administration in Washington. In McCutchan's point of view the Pentagon and the industry have successfully carried their conviction that today's mega-fusionings will lead to a higher efficiency and significant cost savings in the future.
The low debts of the companies proves advantageous also, allowing larger acquisitions for cash. As an alternative, fusionings are often accomplished by exchanging stocks. This has tax advantages and is making use of the current opportune quotation of aerospace stocks on Wall Street.
The companies are trying to secure their share of the shrinking defense budgets by forming larger company structures, such improving their position against competitors. "The defense business is very capital-intensive and involves high technological risks. The companies must be in a position to invest millions of dollars in programs which won't generate good profits for decades", says Stuart McCutchan.
While the restructuring process is in high gear in the USA, Europe is significantly lacking behind. Last year's takeover from SEP by Snecma only made it to rank 14.
More activities can be expected for this year. After a missed start the privatization of Thomson-CSF is due in France. The fusioning of Aérospatiale and Dassault will probably be accomplished also, in spite of the initial resistance. Moreover, Airbus Industrie has finally begun the difficult process of restructuring the consortium into a "real" company with a corporate structure.
From page 48 of FLUG REVUE 3/97
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Last updated February 13, 1997