Lockheed sells 2 units for $450 million General Dynamics is purchaser

November 08, 1996|By Greg Schneider | Greg Schneider,SUN STAFF

Lockheed Martin Corp. of Bethesda continued its weight-loss program yesterday, shedding a pair of out-of-state business units that employ about 3,250 people in a $450 million sale to General Dynamics of Falls Church, Va.

The Defense Systems unit in Pittsfield, Mass., and the Armament Systems unit in Vermont and Tennessee both make parts for tanks and armored vehicles. Lockheed Martin is on a quest to focus on electronics and military aircraft, and is carving off units that don't fit the mission.

"These two operating units are outside of the corporation's core business and technology thrusts," Chief Executive Officer Norman R. Augustine said in a news release. Both "have a greater likelihood to prosper as part of General Dynamics, which has a strong business focus in product areas more closely aligned with these businesses."

General Dynamics is the only tank maker in the United States. Industry analysts hailed the transaction as an ideal move for both corporations.

"Both sides, I think, will be satisfied," said Wolfgang Demisch of BT Securities in New York.

The move is a sign of new times in the merger-smitten defense industry.

"I don't think it's just 'bigger is better' anymore. It's, 'where do these parts really belong.' We're kind of going from consolidation to rationalization," said Byron Callan of Merrill Lynch.

General Dynamics is paying cash for the companies from a $1.1 billion pool of acquisition reserves.

Demisch said the purchases are almost a "backward integration" into existing General Dynamics product lines, allowing the company to offer a full range of heavy- and light-duty armored vehicles.

General Dynamics CEO James R. Mellor said he expects the units to improve his company's earnings immediately. The two units are expected to produce $500 million in revenues this year, and Mellor expects even higher returns in the next few years.

Callan said he expects General Dynamics to see a 25-cent jump in stock values in 1997 because of the transaction. "I'm very happy with it," he said.

At the same time, the loss of revenue is likely to cut into Lockheed Martin's performance, analysts said.

Both Defense Systems and Armament Systems came under Lockheed Martin's Electronics Sector, which for the first nine months of this year reported $3.3 billion in net sales.

The sale "probably slightly dilutes their earnings, but it does allow them to pay down some debt and gives them some flexibility going forward," Callan said.

Demisch agreed, saying the loss of a few cents per share was less important than the chance to reduce debt in the wake of this year's acquisition of most of Loral.

The sales price was generous, Demisch said, but not reckless on the part of General Dynamics because the new acquisitions offer such immediate earnings benefits.

The sale will be closed at the end of the year and is subject to government approval.

Lockheed Martin sliced off another noncore business just last month when it completed a stock exchange to rid itself of Martin Marietta Materials, a Georgia company that produces rocks for construction work.

A company spokesman said more streamlining is on the way before the end of the year.

"I think we can expect to see some other changes made in a couple of different sectors in the corporation," spokesman Jim Tierney said.

General Dynamics shares rose $1.25 to $68.50 yesterday. Lockheed Martin shares fell 62.5 cents to $89.75.

Pub Date: 11/08/96

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