Sometimes you don't have to win to succeed.
That seems to be the strategy that Northrop Grumman Corp. is pursuing with the hostile $2.1 billion bid it launched last week to acquire Newport News Shipbuilding Inc.
Northrop's stock-and-cash bid is widely viewed as inferior to the all-cash deal being offered by General Dynamics Corp. The potential cost savings resulting from the Northrop deal are widely viewed as less than the savings possible through a GD deal. And the integration of GD and Newport News is seen as smoother, since those two companies have been jointly designing nuclear submarines for years.
Northrop, on the other hand, is resting its entire case on the argument that its offer is more likely to gain government approval a dubious assertion, industry observers say. But Northrop's bid, while widely viewed as inferior in virtually every respect, could raise just enough antitrust doubts to scuttle GD's deal. And that could be Northrop's aim from the start.
"What Northrop is doing, which is quite smart, is trying to play spoiler," said Jon Kutler, president of Quarterdeck Investment Partners Inc. in Los Angeles. "In other words, while GD and Newport News I'm sure have covered all their bases with the Pentagon on this deal, they will have to bring it to the Justice Department to be approved. There's some possibilities that, given a well-crafted story, which I'm sure Northrop will help with, they (Justice Department officials) could object to the merger or acquisition."
But Northrop might be hard pressed to make its case that a GD/Newport News merger would be monopolistic.
While Northrop's Chairman, President and CEO Kent Kresa argued last week that such a marriage would put Northrop at a competitive disadvantage and leave the entire nuclear shipbuilding business under one roof, GD spokesman Kendell Pease pointed out that the nuclear shipbuilding and submarine business has been effectively closed to competition since 1991. And Northrop has dominated the large-deck surface ships since buying Litton.
"Northrop Grumman has stated that they are the dominant surface warfare shipbuilder in the market," Pease said. "They became that with the acquisition of Litton. This present proposal by them would also make them the dominant nuclear shipbuilder in the market."Northrop a newcomer
Another factor in GD's favor is that it already has established rapport with U.S. Navy officials, said Paul Nisbet, defense analyst at Newport, R.I.-based JSA Research Inc.
Northrop, on the other hand, just entered the market with last month's completion of its acquisition of Litton.
"There are reasons why the Navy might not be as delighted with having Northrop as the preeminent shipbuilder rather than GD," Nisbet said. "They know GD; they've dealt with them for years and decades. Northrop is a 'Johnny Come Lately.' Better deal with the devil you know than the one you don't."
Yet another factor in GD's favor is that Northrop is saddled with a high debt load created by recent acquisitions, mostly from its acquisition of Litton.
A fourth drawback for Northrop is the cost savings associated with a GD-Newport News deal. GD executives said in their original bid that they could save the U.S. Navy $2 billion with the merger, mostly because the two companies have synergistic businesses.
Northrop, on the other hand, has not touted any specific dollar amount it could save the government by merging with Newport News. And acquiring Newport News would involve integration costs.
Kresa said Northrop is undertaking due diligence to determine the amount of cost savings resulting from its deal, and the costs of integrating both companies are "non-recurring costs" that are negligible in the long term, he argued.
Meanwhile, in the short run, Northrop surprise attack has forced antitrust regulators at the Pentagon back to the review tables.
The cost savings from a GD-Newport News merger were not great enough to sway the U.S. Navy in 1999, when GD originally offered to buy the company.
But times have changed and so have U.S. presidential administrations.
While under the Clinton administration, the U.S. Department of Justice turned down the merger of Northrop and Lockheed Martin Corp. and the attempted acquisition of Newport News by both GD and Litton Industries.
The Bush administration, however, is more supportive of big business and will likely turn down fewer mergers, Nisbet said.
But even if the White House stymies Northrop on the Newport News deal, by approving GD's acquisition, the Bush administration may prove profitable to Northrop on another front.
In a recent projection of Bush defense requests in the coming years, Nisbet's firm concluded that the new administration would express a need for doubling the B-2 fleet and that the Air Force would strongly support such a move. If approved, B-2 work could keep Northrop too busy to dominate the shipbuilding business.
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