The newest partners have paired off in the defense industry's consolidation waltz, with Raytheon Co. announcing a $2.95 billion cash deal yesterday to purchase the defense operations of Texas Instruments Inc.
Analysts said the pickup gives Massachusetts-based Raytheon an advantage in the drive to assemble one more big defense company in the shadow of the industry's two superpowers, Lockheed Martin Corp. of Bethesda and Boeing Co. of Seattle.
The next to be sold should be GM Hughes, which is on the block at a reputed price of $8.5 billion. A Raytheon-Hughes deal would create a company within sight, at least, of the operatic scale of the Big Two.
"Recent events in the industry have redefined what it now means to be a leader," Raytheon's Chief Financial Officer Peter D'Angelo said yesterday in a conference call with reporters.
D'Angelo declined to talk about Hughes, but he said that "it's important to underscore that this transaction in no way precludes us from pursuing other opportunities."
Analysts have been looking for merger activity in the second tier of the defense industry since Boeing's announcement Dec. 15 that it would buy McDonnell Douglas Corp. to create the world's biggest aerospace firm and compete directly with giant Lockheed Martin.
Raytheon's purchase got good reviews from analysts, who liked the combination of the Texas company's precision-strike missiles and air-to-ground radar capabilities with Raytheon's expertise in missiles and ground radar.
"Raytheon has just shown a pattern of buying companies that are very technologically rich and well-managed," said Stuart McCutchan, who publishes Defense Mergers & Acquisitions, an industry newsletter.
Raytheon bought E-Systems in 1995 and has left itself poised to go after Hughes next. Analyst Paul Nisbet of JSA Research Inc. speculated that Raytheon might have spent cash for Texas Instruments to prepare for the all-stock deal that General Motors prefers for Hughes.
Raytheon also paid a premium for the Texas Instruments unit -- nearly $3 billion for a company with $1.8 billion in annual sales.
"We believe this is justified by the fact that Texas Instruments is a highly profitable business relative to the rest of the industry," D'Angelo said.
Left somewhat singed by yesterday's deal was Northrop Grumman Corp. of Los Angeles, which apparently tried and failed to buy Texas Instruments and now finds itself the underdog in bidding for Hughes.
In terms of complementary operations, Hughes and Texas Instruments actually make the best match of all, McCutchan said. "The question becomes how do you combine Hughes and TI, and maybe the answer is: Raytheon does it," he said.
Even without Hughes, Raytheon will be a stronger rival to Northrop Grumman in defense electronics and radar. Northrop Grumman has committed to a fundamental redirection over the last few years, turning away from its heritage as a warplane builder and emphasizing electronics -- culminating with the purchase last year of Westinghouse Electric Corp.'s Linthicum-based electronics division.
A Northrop Grumman spokesman declined yesterday to comment on the situation.
D'Angelo said electronics was the sector of defense business that was growing the most, and that Raytheon was determined to lead the pack.
The boards of both Raytheon and Texas Instruments have approved the deal, which is scheduled to close during the second quarter of this year.
The new company will have total annual sales of about $15 billion, D'Angelo said.
Lockheed Martin has annual sales of about $30 billion, and the new Boeing -- which is negotiating the acquisition of McDonnell Douglas -- will have projected revenues of $48 billion.
D'Angelo said that despite Raytheon's disadvantage in overall size, it would now carry $8 billion in annual sales in defense electronics and would compete strongly with Lockheed Martin.
"This clearly positions us after Lockheed Martin as the largest competitor, if you will, in the defense electronics business," D'Angelo said. "$8 billion per se is enough critical mass to compete effectively."
Pub Date: 1/07/97