Foreign firms cloud future for aerospace

Aftermath: Most firms face restructuring and reconfiguring after mergers.

January 23, 2000|By Greg Schneider | Greg Schneider,Sun Staff

The 400 executives and reporters dining on filet mignon in a ballroom at the Capital Hilton showed no outward signs of duress. There was no despair in the keynote speech, either, at last month's year-in-review luncheon of the Aerospace Industries Association.

But appearances can deceive. Many aerospace and defense contractors were not pleased with 1999.

"Last year was the most disappointing year for the defense industry in a decade, in terms of stock performance and general industry outlook," said Loren Thompson, an expert with the Lexington Institute think tank in Arlington, Va.

The year was marked by failures in space shots, setbacks in military aircraft programs and near-disaster on Wall Street for some of the nation's most powerful companies.

To complicate things further, all that came as corporations tried to orient themselves after massive consolidations in the 1990s.

"The mega-mergers of this decade have kind of set the stage for the next phase of the industry's consolidation, in which the big companies basically clean house, look at what they have and decide what businesses they really want to be in and sell off others," said Stuart McCutchan, who publishes the Defense Mergers & Acquisitions newsletter.

Both Raytheon Co. and Lockheed Martin Corp. -- which, with Boeing Co., form the Big Three of American defense and aerospace contractors -- are in the midst of a painful period of reconfiguration that will continue in 2000, McCutchan said.

In the meantime, stock values fell last year faster than an errant missile. Shares in both Raytheon and Lockheed Martin lost more than 53 percent of their value over the course of 1999. Lockheed Martin hit a 52-week high of $46 a share last May, only to flirt with $16 a share in October. Raytheon reached a high of $75.375 in July, then scraped $21.25 in October.

But the industry also enjoyed a record level of sales last year, bringing in $155 billion by AIA estimates. Military aircraft and commercial space sales spurred the increase, and led to record profits of $10.8 billion, the association said.

The outlook for 2000 is flat for aerospace as a whole. Asian economic woes have hurt the commercial aircraft business. What's more, Europe's Airbus Industrie has hammered Boeing of late in competitions for international contracts, shrinking the number of airliners that U.S. companies will work on this year.

Space, missile and military aircraft sales should offset that dip by being up slightly in 2000, the association said.

With defense spending on the rise for the first time in years -- especially for weapons -- association President John W. Douglass was upbeat about contracting.

The main issue that worries the industry, he said, is being able to compete with foreign companies for contracts around the world. For instance, Congress hurt the industry by requiring the State Department to review foreign sales of space satellites instead of the more business-oriented Commerce Department, he said.

"Commercial satellite sales, since that happened, are down by 40 percent," Douglass said.

His organization is working with all the current presidential candidates to have the next administration set up a commission on the future of the industry. Douglass said he wants to emphasize the need to relax export controls, which he said are "really becoming a national scandal."

But while industry leaders are looking abroad for future growth, much work remains to be done at home.

Three essential problems undercut the outlook for defense contractors, said Thompson, the consultant:

First is the need to organize the bulked-up companies more efficiently by selling extraneous units. Lockheed Martin, for instance, has announced plans to sell about $1.8 billion worth of businesses, including its highly regarded Sanders military electronics unit.

Second is the industry's relationship with its primary customer: the U.S. government. Last year's attempt in Congress to gut funding for the F-22 fighter plane -- a major program for Lockheed Martin, Boeing, Pratt & Whitney and hundreds of smaller companies -- has exposed a fundamental instability, Thompson said.

Last is the depressed value of industry stock. "Last year we learned, to our dismay, that a significant part of the industry share valuation during the mid-1990s was based on speculative fever surrounding industry consolidation," Thompson said.

Now that the large-scale merger spree is over, "the speculative premium on some of these stocks has drained out and we see that the underlying value as perceived by the market is not very high," he said.

Some of Wall Street's disfavor could be offset if the companies show that they can become efficient again, experts say.

That process will be a boon to smaller companies, which will pick up some of the castoff units and gain work as subcontractors.

"I see the next decade as being a period where the companies focus very rigorously on what they do best and outsource everything else," said McCutchan, the mergers and acquisitions expert. "So far, it has been surgery with a meat ax. Now they are going to get back into the mainstream."

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