GD to Cut Corporate Staff 80% : Aerospace: The downsizing defense contractor also plans to pay shareholders $618 million in surplus ‘Cold War’ cash.

General Dynamics, once the world’s largest arms maker, announced Thursday that it will depopulate its corporate headquarters staff by 80% and pay shareholders $618 million in surplus cash not required for its dwindling defense business.

“The fact of the matter is that the Cold War is over, the defense industry has to consolidate and we don’t think it is responsible to waste the assets that investors initially put in to build up for the Cold War,” company Chairman William Anders said in an interview. “Therefore, we believe the assets ought to be returned to them to decide where they invest it, not for us military-oriented guys to decide. So the corporation has to get smaller.”

Since Anders established a bold retrenchment strategy two years ago--contrasting sharply with other defense firms’ efforts to diversify--the company has shrunk much faster and to a much larger degree than was ever anticipated. It has dispensed its jet fighter business to Lockheed and its missile business to Hughes Aircraft.

The lucrative deals have left it fat with $2.1 billion in cash, prompting securities analysts Thursday to speculate that further cash distributions are inevitable this year. On Thursday, the company said it will pay out $20 per share--causing its stock to jump $1.25 per share to close at $118.25 in New York Stock Exchange trading.

Under a sweeping reorganization disclosed Thursday, General Dynamics will eliminate 200 jobs at its headquarters--including Anders’ own job--leaving 50 people in charge. Anders will remain as a non-employee chairman of the board after May. James R. Mellor, president of the Falls Church, Va.-based company, will be the new chief executive and chief operating officer, while three other senior executives will retire.

In an annual ranking of contractors released Thursday, the Pentagon said General Dynamics had dropped from the second- to the fourth-largest, displaced by Northrop in second place and Lockheed in third. McDonnell Douglas remains No. 1.

Despite the industrial shrinkage and massive layoffs sweeping the nation’s defense firms, Anders said there remains too much industrial capacity--driving up overhead costs and leaving the Defense Department paying a penalty in inefficiency.

Robert Paulson, director of the aerospace practice at McKinsey & Co., said General Dynamics has played a deft hand. A McKinsey study found that 70% of the projected savings in overhead and manufacturing efficiency that occurs in consolidations of defense firms has gone to the companies selling defense operations, rather than to the buyers.

Paulson said further defense consolidation has become a public policy issue rather than a business problem.

“The sand in the gears is the political will to get on with it,” he said. That is particularly true with General Dynamics’ electric boat division, which produces nuclear submarines.

Anders acknowledged: “On the submarine side of things, there isn’t enough business for two shipyards. There isn’t even enough for one. I look at it as a problem the nation has to address. It is too big for any one of the suppliers to address on their own.”

General Dynamics has offered to sell Tenneco its electric boat operation, but Tenneco--the only other remaining U.S. submarine manufacturer--has spurned the offering price, industry sources said. Anders declined comment.

The company is “not in a panic” to sell off more of itself, but is “not size-oriented,” Anders said, meaning that no policy precludes a total liquidation of the firm.

“We frankly didn’t expect to end up in quite this configuration,” he said. “We really thought we would be in the fighter business a long time.