General Dynamics continues to rebuild

GTE electronics units purchased for $1 billion

Defense industry

June 23, 1999|By Greg Schneider | Greg Schneider,SUN STAFF

Striving to rebuild itself to its former glory, defense stalwart General Dynamics Corp. has agreed to pay $1.05 billion in cash for three information technology units of GTE Corp., the companies said yesterday.

The McLean, Va.-based General Dynamics is in the midst of a shopping spree that includes a $5 billion deal announced in May to acquire business jet maker Gulfstream Aerospace Corp., as well as failed attempts to buy Newport News Shipbuilding Inc. and, in 1997, United Defense LP.

The latest deal is expected to add $1.2 billion a year in revenue to General Dynamics' bottom line, bringing its annual earnings to $9 billion and effectively reversing the dismantling that the company undertook earlier this decade when it faced a shrinking defense marketplace.

"They were a $10 billion company in 1990, and then two years later they were a $3 billion company. This puts them back to where they were," said Stuart McCutchan, who publishes the Defense Mergers & Acquisitions newsletter.

In the early 1990s, General Dynamics sold its commercial aircraft unit -- Cessna -- to Textron Inc. and its fighter plane factory to what is now Lockheed Martin Corp. The company pared itself down to two basic business units: armored tanks and military shipbuilding.

It remains the country's only tank builder and one of only two makers of nuclear submarines -- Newport News Shipbuilding is the other.

General Dynamics began reassembling itself in 1995, and the process included starting a defense electronics group last year. That group is where the GTE purchases will fit.

"With this acquisition, we more than double the size of the group and tremendously expand its capabilities," said Nicholas D. Chabraja, General Dynamics chairman and chief executive officer. "We are committed to our defense customers and see significant growth opportunities in the defense electronics market."

The three business units -- the GTE Communication Systems Division, Worldwide Telecommunications Services and the Electronic Systems Division -- produce military command and control systems, information systems and defense electronics. They have a total of 6,200 employees, mostly in Massachusetts and California.

"This actually is a good strategic fit with [General Dynamics'] existing information systems and technology business," said financial analyst Sam Pearlstein of ING Barings in New York. "Overall, it's a good idea . . . and it is accretive to earnings."

General Dynamics said the businesses should add to earnings as soon as the deal is completed, expected to be within 60 days. The three business units have a total backlog of $900 million worth of work.

The boards of directors of both companies have approved the transaction.

GTE said it was selling the businesses to streamline itself and focus on the core expertise of telecommunications services. With the deregulation of the telecommunications industry, such companies have been unloading defense businesses, which have comparatively low profit margins, McCutchan said.

Defense companies, on the other hand, have been eager to snap up electronics businesses because military electronics is the fastest-growing segment of the defense industry.

Analysts said there should be little reason for federal antitrust regulators to object to the marriage because the businesses do not significantly overlap.

Pub Date: 6/23/99

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