U.S. Aerospace Firms to Marry for Money

For many reasons, good and bad, the aerospace industry will see a wave of mergers in the next several years that could reduce the number of military plane makers from seven to possibly four. That means that, from a list comprising Boeing, General Dynamics, Grumman, Lockheed, McDonnell Douglas, Northrop and Rockwell International, three companies will become part of other firms or leave the plane-making business.

Others will be acquirers themselves, buying smaller firms--especially in military electronics.

That’s not a prediction so much as a conclusion drawn from events, and it has almost nothing to do with T. Boone Pickens Jr. buying Boeing stock. Rather, consolidation in defense results from pressures and change in the business.

First of all, the Defense Department’s weapons budget, which has grown to $83 billion in the fiscal year beginning in October from $35 billion in fiscal 1981, is leveling off. That’s only the normal cycle of lean years after fat, but some companies will need partners to get them through it.

The more so because the Pentagon is forcing contractors to shoulder more costs. Responding to budget constraints and public outcries about waste, the Pentagon is slowing contract payments and demanding that contractors pay for their own factories. The government says it wants the industry to use more of its own money and less of the taxpayers’.

Which is the kind of sentiment that plays better for public consumption than in reality. Think about it. If you contract with a workman to paint your house, do you ask him to “share the cost”? Or hold back reimbursement if he buys the paint? Clearly, the government is playing games.

Must Play Along

But the industry--having no other customer--will have to play along. And that may not be easy because defense companies, traditionally working on government finance, typically have less capital backing than commercial industry. McDonald’s, the hamburger company, has capital equaling 64% of its total revenue, for example, while McDonnell Douglas, the aircraft company, has 25%. The upshot: Some contractors will marry commercial firms for capital.

There are other reasons for mergers, including the fact that there won’t be enough military orders in the next decade to support seven plane builders.

Also, the foreign market, in which European air forces flew U.S. planes, is drying up, says analyst Alan Benasuli of Drexel Burnham Lambert. The European countries, getting together militarily as they did commercially in Airbus Industrie, plan to build their own fighter plane--as does Japan’s Mitsubishi, which once made a plane called the Zero.

But mergers won’t be fire sales. Premiums are being paid for military electronics firms, explains analyst Michael Lauer of Oppenheimer & Co., because they provide the hardware and software for business prospects in space.

Who will be bought? Analysts tick off names, but nobody really knows. Grumman will have to find a home, it is suggested, and so may Northrop. Defense conglomerates--United Technologies, TRW, Litton Industries and Raytheon--will restructure to fend off a merger or be acquired for their electronics capabilities, analysts say.

Who will do the buying? Boeing and Lockheed are mentioned as acquirers or acquirees. Otherwise, Wall Street rounds up the usual suspects: General Electric, Westinghouse, Ford, General Motors.

Mergers may not eliminate $600 hammers, but they could help by creating a healthier relationship between independent companies and the government.

One problem with defense is that it has been neither fish nor fowl, government department nor private industry. Earlier national-purpose industries were different. With electric power, for example, we created local monopolies called utilities--and left electrical inventions to GE and Westinghouse. With telephones, we got the service of American Telephone & Telegraph’s national monopoly, and Bell Labs’ inventiveness to boot.

What everybody wants is clear: a defense and space industry as excellent as the old AT&T.; If the next few years produces that, more than the stock market will celebrate mergers in aerospace.