GD Takeover of NNS Could Curb Competition Within U.S. Warship Construction

Wednesday, May 30, 2001
General Dynamics Corp.'s contested $2.1 billion plan to take over Newport News Shipbuilding Inc. could stifle competition in U.S. warship building, a congressional analysis released Tuesday showed. The new company would account for about 70 percent of U.S. warship revenues and 82 percent of the in-house designers and engineers, the non-partisan Congressional Research Service said in a May 22-dated report.

It also would get more than 95 percent of Navy research and development funds earmarked for the six private sector shipyards that build major U.S. Navy ships, based on 1999 Defense Department figures, the analysis said.

The already agreed, all-cash merger plan would "reduce the potential for competition in submarine construction and, perhaps more significantly, submarine design and submarine technology development," wrote Ronald O'Rourke, the report's author.

But General Dynamics, which is battling against a rival bid for Newport News from Northrop Grumman Corp., dismissed the congressional study as wrong-headed and based on outdated data.

"It doesn't reflect today, nor does it reflect the facts of competition," said retired Navy rear admiral Kendall Pease, a spokesman for Falls Church, Va.-based General Dynamics.

O'Rourke countered that the data on engineers dated from this year and had been provided by General Dynamics itself for his study. The share of the yards' revenues has been relatively stable for years and the makeup of the Navy's shipbuilding budget has not changed in a way that suggested that those shares would shift significantly, he added.

By contrast, the report said Northrop's proposed takeover of Newport News would account for about 58 percent of the combined revenues of the six major Navy shipbuilders, leaving General Dynamics the remaining 42 percent.

A Northrop-Newport News merger would bring together about 56 percent of the six yards' in-house designers and engineers on the basis of 2001 data, the study said. General Dynamics would have the remaining 44 percent.

The report did not cite a specific figure for the share of Navy research and development funds that would go to any future Northrop-Newport News combination.

But it said that in 1999, the Defense Department stated that more than 95 percent went to the shipyards that would be merged under the General Dynamics takeover bid, and "it might be reasonable to assume that a significant share of this" went to Newport News.

If so, a Northrop-Newport News merger "might result in a division of the Navy research and development funding directed to the shipyards that would be much closer to a 50-50 split than to a 95-5 split," O'Rourke wrote. - (Reuters)

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