Boeing hints at interest in buying Northrop

The aerospace industry is bracing for major consolidation among contractors, and Boeing could lead the way in a colossal merger with Northrop Grumman that would create the world’s largest defense contractor.

The possibility of such a combination arose last week after a Boeing executive disclosed that the Chicago aerospace and defense contractor is actively looking at potential acquisition opportunities amid prospects of sharp cuts in defense spending.

Los Angeles Times’s W. J. Hennigan writes that defense industry analysts said a possible merger of the two makes financial sense for Boeing. Government approval of such a deal, however, would be far from certain, they said.

Speculation was fueled by public comments last week from Dennis Muilenburg, chief executive of Boeing’s defense, space and security division. He said the company was targeting purchases of such businesses as unmanned aircraft, cyber security, and intelligence and surveillance systems. Northrop already is a key player in those markets.

“We continue to see acquisitions as an opportunity area for us,” Muilenburg said at the Reuters Aerospace and Defense Summit in Washington. “It’s one of the tools that we use to grow.”

Hennigan notes that after nearly a decade of double-digit growth in Pentagon spending, Defense Secretary Robert M. Gates has said the overall Pentagon budget would climb only about 1 percent annually over the next five years. With U.S. combat operations ending in Iraq, many in the defense industry believe contractors will be scrambling for work in the coming years.

“If you let market forces function in the coming downturn in defense spending, then one or two of the biggest companies will exit the business through mergers,” said Loren Thompson, a military policy analyst for the Lexington Institute, a think tank in Arlington, Virginia. “This is consistent in what we’ve seen in the past.”

After the cold war ended two decades ago, military budgets were slashed. The excess capacity in the defense industry resulted in a barrage of mergers.

In 1993, then-Deputy Defense Secretary William Perry held the so-called “last supper” and warned the defense industry’s top suppliers that the budget was going to shrink and that consolidation was essential to their survival.

The number of aircraft makers dropped to three from eight, and the thirteen missile manufacturers were reduced to four.

“Mergers and acquisitions are the strategic moves that companies make in a major downturn like the one we are about to enter,” Thompson said. “Boeing needs to broaden its business while positioning itself for the future.”

Unlike Boeing, which is known for building such conventional military hardware as cargo planes and fighter jets, Northrop specializes in developing more high-tech products, such as cyber-security and unmanned aircraft systems — and analysts see the Pentagon focusing more of its dwindling funds on those areas.

“From a strategic standpoint, the deal makes a lot of sense,” said Rick Phillips, managing director at Janes Capital Partners, an Irvine aerospace and defense investment bank. “But I don’t think it’s happening.”

This is mainly because federal regulators would raise antitrust issues, he said. Boeing and Northrop are the nation’s second- and third-largest defense contractors, behind Lockheed Martin Corp. A merger would put about half of defense work with one giant company, he said.

Hennigan writes that in addition, the deal may not be so attractive to Northrop and its new chief executive, Wesley G. Bush, who took over in January. Bush is reorganizing the company. Bush has cut some of Northrop’s top executives and has said the company would consider abandoning its $6-billion-a-year shipbuilding business.

“He just got the job and has a vision for the company,” Phillips said. “I’m not so sure he wants to be working for Boeing all of a sudden.”

It comes down, though, to money and stockholders, Phillips acknowledged. “If given enough dollars, the stockholders could be bought out at a premium,” he said. “What’s going to happen is anybody’s guess.”