Defense companies struggle to survive

DEFENSE INDUSTRY

April 02, 1994|By Ted Shelsby | Ted Shelsby,Sun Staff Writer

The struggle between Martin Marietta Corp. and Northrop Corp. for control of Grumman Corp. has become a complicated affair of tactical moves, bidding procedures and stock market rumors, but it boils down to a simple fight for survival.

As the post-Cold War Pentagon budget declines, there is increased pressure in the beleaguered defense industry for further consolidation.

Martin Marietta and Northrop were put on a collision course when both adopted a strategy of growth through acquisitions. Each hopes that becoming a bigger, more diversified company will enable it to grab a larger slice of the shrinking Pentagon budget pie.

The procurement part of the defense budget -- money used for the purchase of fighting machines like aircraft, tanks and rockets -- has dropped about 50 percent since its peak in 1985 and continues to decline.

This is the part of the budget that most affects weaponry development companies like Martin Marietta and Northrop, and it's been the big loser in recent years.

The Pentagon's procurement budget totaled $52.8 billion in fiscal 1993; this year, it fell to $44.5 billion, and it will drop again next year, to $43.3 billion.

Against that background, the government has canceled two helicopter programs, the UH-60 and the CH-53, along with the A/F-X, a planned fighter-attack plane.

And the trend is expected to continue. A recent research report by Prudential Securities provides a glimpse of what defense contractors will be up against.

Using government figures, the investment house points out that from 1985 through fiscal year 1995, procurement of ships will decrease 80 percent; aircraft purchases will be down 86 percent; procurement of tanks will be down 100 percent, going from 720 to none; and strategic missile procurement will be down 95 percent.

Defense outlays as a share of the gross domestic product are scheduled to decline from 6.3 percent in 1985, the height of the Reagan defense buildup, to 2.8 percent by 1999. The percentage is already at the lowest level since before World War II.

As a share of federal outlays, defense spending is projected to drop from 27 percent in 1985 to 13.2 percent by 1999.

A restructuring of the defense industry is therefore essential and probably imminent, Prudential concluded.

As for why Northrop is so aggressively going after Grumman, even though Bethpage, N.Y-based Grumman has expressed a preference for joining with Martin Marietta, analysts say that Northrop is "more desperate."

In recent years, Northrop has lost out in the bidding for General Dynamics Corp.'s fighter plane division, the missile division of McDonnell Douglas Corp. and the Bethesda-based Federal Systems division of International Business Machines Corp.

As the defense industry continues to consolidate, there are fewer companies from which Northrop can choose.

Martin Marietta, on the other hand, has been successful on the acquisition front. In recent years it has picked up General Electric Corp.'s aerospace division for $3.05 billion, and is about to close on the purchase of General Dynamics' Atlas rocket production arm for $208.5 million.

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