In a move that could possibly trigger the final slowdown in naval shipbuilding corporate asset consolidation, General Dynamics late last month made a $2.6 billion (a total which includes nearly $500 million of current debt takeover) bid to buy Newport News Shipbuilding. The move — while hardly a shock to defense insiders who have witnessed the proliferation of fewer, larger corporate entities serving the military markets — in essence provides the Pentagon a one-stop shop for the purchase of nuclear submarines and nuclear aircraft carriers.
Just two years ago a similar attempt by General Dynamics was thwarted, largely because the bid in 1999 was hostile in nature and because of concerns regarding a monopoly of nuclear newbuilding capability. Less than 24 months later, however, the picture has changed rather drastically.
First, and perhaps foremost, the demand for nuclear powered submarines is dwindling, and with only one customer to serve — the U.S. Navy — quite frankly there is not enough business to go around. "This deal is no loss for competition, because there is no competition (between the two shipyards,)" said William Fricks, chairman and chief executive of Newport News. According to Nicholas D. Chabraja, General Dynamics chairman and CEO, the two yards have not effectively competed against each other since 1991. For the past three years, in fact, the two have been cooperating in the joint building of the Virginia class submarines, a factor of familiarization that has helped to bring the newly proposed merger to fruition. "Our businesses are complementary, as opposed to competitive," said Chabraja. "These companies cry out to merge together. It's a natural phenomenon and a logical next step."
Another positive sign for the deal: the current offer is actually welcomed by NNS. "This acquisition will provide Newport News shareholders an attractive price, and our employees will benefit from being part of a larger, more diverse company," said Fricks.
In addition, the Bush administration is widely regarded to be more favorable to such consolidations, much more so than former president Clinton.
The deal would also not be setting precedent, General Dynamics' bid follows Northrop Grumman Corp.'s $3.8 billion purchase last year of shipbuilder Litton Industries. Finally, the merger now has the support of U.S. Sen. John Warner, chairman of the Senate Armed Services Committee. The Virginia Republican was a strong opponent of a General Dynamics-Newport News combination in 1999.
"Newport News is a solid, well-run company with sustainable revenues and earnings and strong cash flow. Our offer reflects its inherent worth, offers Newport News shareholders an attractive premium, and provides a wonderful opportunity to save significant amounts of money for the U.S. Navy while retaining both nuclear shipyards, " said Chabraja.
Chabraja would not set a target on total cost reductions from the deal. He stressed that there were no plans to close shipyards or reduce staff, which tempers labor concerns in Virginia, the home state of both companies. In, as Fricks pointed out, the recent review of the Navy business expressed a specific need for two nuclear-capable yards in the U.S.
General Dynamics, headquartered in Falls Church, Va., employs approximately 46,000 people worldwide and anticipates 2001 sales of approximately $11.5 billion. The company has leading market positions in business aviation, information systems, shipbuilding and marine systems, and land and amphibious combat systems. It currently owns three of the "Big Six" U.S. shipyards, Bath Iron Works, General Dynamics-Electric Boat, and NASSCO.
Newport News Shipbuilding, headquartered in Newport News, Va., designs and constructs nuclear-powered aircraft carriers and submarines for the U.S. Navy and provides life-cycle services for ships in the Navy fleet. The company employs approximately 17,000 employees and had 2000 revenues of $2.07 billion, and net income of $90 million.