Martin Marietta to Buy Out Grumman Corp. for $1.9BBy Ralph Vartabedian
Los Angeles Times
In a swiftly negotiated deal that would dramatically accelerate the consolidation of the aerospace industry, Martin Marietta Corp. said Monday that it will pay $1.9 billion for Grumman Corp., a fading Long Island, N.Y., aircraft builder undone by the post-Cold War aerospace bust.
The acquisition would elevate Martin to the top ranks of the U.S. defense industry, with $13 billion in annual sales, bringing it at least even with better known rivals, McDonnell Douglas Corp. and Lockheed Corp.
"What we have here is a combination that will allow us to become a formidable competitor in increasingly difficult times," Martin Chairman Norman Augustine said Monday. "We have a team made up of all gold medalists."
The deal marks the latest chapter of an industry consolidation that is fast creating a few monolithic defense suppliers that will dominate the global arms market and exert new political clout.
In the process, dozens of plants and tens of thousands more jobs will be eliminated around the country. Analysts estimated that the Martin-Grumman merger would eliminate 10,000 to 15,000 jobs in states from Colorado to New York, though hard-hit California would be spared because neither company has large operations there.
Martin has been among the most aggressive buyers of other companies in the past year, acquiring General Electric's defense business concentrated in Pennsylvania and agreeing to buy General Dynamics space booster business in San Diego.
Just a few years ago, Martin was down the list of major contractors and its emergence at the top demonstrates how rapidly the aerospace industry is changing.
As Martin has increased its clout, Grumman has seen its fortunes wither. Once the premier builder of Navy carrier aircraft, the company's airplane programs have died one-by-one and last year it formally acknowledged that it was exiting the business of building new military airplanes.
Nonetheless, Grumman will give Martin a strong position in the crucial market for aircraft modification and updating, as well as leading technology for airborne surveillance systems that Grumman has recently developed.
Grumman Chairman Renso Caporali said Monday that the company faced a future in which it would have increasing difficulty competing against larger companies and that it had sufficient size to compete in only a few markets.
"What became apparent to us was that the world was going to get a lot tougher for people in our business and we were going to have to make some changes," he said.
Under terms of the deal, Grumman shareholders would receive 55 per share, a 37 percent premium to the company's price prior to the announcement. Grumman shares shot up 14\ to close at 54[ in trading Monday, while Martin shares gained 1\ to close at 46.
Against that backdrop, Caporali said he met with Martin Chairman Norman Augustine in Long Island a month ago and set in motion the merger that was formally approved by the boards of both companies Sunday.
Martin said it has arranged financing of $2.4 billion, providing a cushion for the $1.9 billion deal that is meant to warn off potential rivals that would start a bidding war, according to Robert Paulson, an aerospace consultant at McKinsey & Co. The two companies also agreed to an accelerated timetable that would close the deal in only one month, making it difficult for an outsider to mount a competing bid.
Augustine and Caporali, former classmates in aeronautical engineering at Princeton University, said they have not yet worked out the details about which facilities may be closed or even what Caporali's new job will be.
Peter Aseritis, First Boston aerospace analyst, said the acquisition would position Martin about even with Lockheed and just behind McDonnell Douglas in defense sales. Martin would have $13 billion in total sales, but only $9 billion of that would be in defense.
McDonnell has about $10 billion in defense sales, while Lockheed has about $8.5 billion in defense sales, Aseritis said. But Gary Reich of Prudential Securities ranks Martin as the top defense companies by a wide margin, based on its estimated contract awards. Martin has 93,000 employees and Grumman 18,000 employees.