- The Washington Times - Thursday, May 10, 2001

General Dynamics' bid for Newport News Shipbuilding has a better chance of being approved than Northrop Grumman's surprise offer, defense analysts said yesterday, even though the Northrop deal would mean more competition in the shipbuilding industry.

"I think it's the case of 'Better the devil you know than the devil you don't know,' " said Paul Nisbet, a defense analyst with JSA Research in Newport, R.I.

"The Navy is very familiar with General Dynamics they've dealt with them for eons, probably, as a shipbuilder. And Northrop Grumman is a name that nobody until a couple of months ago associated with the shipbuilding industry," added Mr. Nisbet, referring to Northrop's acquisition of shipbuilder Litton Industries last month.

Northrop announced its bid Tuesday night, two weeks after General Dynamics, of Falls Church, said it would buy the Newport News company.

Both companies offered the same amount for the only builder of nuclear-powered ships $2.6 billion, or $67.50 per share. Both bids include the assumption of Newport News' debt of $500 million.

The difference is that Northrop is offering to pay 25 percent in cash and 75 percent in stock, while General Dynamic's offer is an all-cash transaction.

The boards of General Dynamics and Newport News approved the transaction and are waiting for approval from the Defense and Justice departments, which have to sign off on the deal to be completed.

The three companies are among the few survivors after years of consolidation among defense contractors. While General Dynamics is the largest shipbuilder for the Navy, Northrop is its largest provider of electronics.

The General Dynamics deal "raises very significant and serious antitrust and anti-competition issues," Albert Myers, Northrop's treasurer and vice president, said yesterday. "It will create new monopolies in the business, eliminate competition in both production and technology development."

General Dynamics issued a statement Tuesday night saying, "We're disappointed that Northrop Grumman has chosen to interfere" by bidding for Newport News.

Defense Department officials did not return calls yesterday.

But one reason analysts speculate in favor of General Dynamics' bid is because President Bush has nominated Gordon R. England, 63, to be secretary of the Navy. Mr. England retired in early March as executive vice president of General Dynamics after 30 years with the company. The Senate must confirm his nomination.

If General Dynamics and Newport News unite, the combined companies would be the sole U.S. builder of nuclear-powered ships and submarines, with a strong hold on the market for Navy destroyers, support ships and commercial oil tankers. The competition would be Northrop Grumman.

If Northrop buys Newport News, it would add nuclear shipbuilding capabilities and become General Dynamics' competitor for contracts with the shipbuilding industry's main client, the Navy.

"Virtually all Navy-funded engineering for shipbuilding would be done by General Dynamics [if it buys Newport News]. Very little would be done by Northrop," Mr. Nisbet said.

"And if it goes to Northrop Grumman, they would be able to build anything the Navy wants. But it would be a somewhat more even split between General Dynamics and Northrop."

There are no other major players in the industry.

"Personally, I think the General Dynamics-Newport News deal is problematic," said Tom Burnett, president of Merger Insight, a New York group that studies mergers from the shareholder point of view.

"But I think it's going to be totally political. Northrop jumped in here to make sure it makes life difficult for General Dynamics, to force them to pay more or to crater the deal," he said. "But I don't think they care. They say, 'We think it's monopolistic and it highly violates antitrust, but if [General Dynamics] is going to be allowed to bid, then we should too.'

"It's 'Let's go back to the status quo, or give us a chance to buy the company.' "

"They are both bidding because it's a potential strengthening move," said Christopher Mecray, an analyst with Deutsche Banc Alex. Brown in New York. General Dynamics' "bid is a friendly bid that's been carefully thought out and discussed and approved by both boards. And Northrop is recognizing that most results could help them they've got nothing to lose and plenty to gain if it went their way."

But Mr. Mecray said it is unlikely for regulators or the board of Newport News to approve Northrop's bid. "I don't see a likelihood that it's going to go through," he said. "It's not a better offer. There is nothing to entice Newport News to them.

"I think the friendly offer tends to always have a better chance."

General Dynamics bid for Newport News in 1997, but the smaller company saw the bid as too low and the Pentagon rejected the bid for anti-competitive concerns.

Jerri Dickseski, a Newport News spokeswoman, said yesterday that the company advised its shareholders "not to take any action on the Northrop bid until the board makes a recommendation." She did not know when the board would vote on Northrop's bid.

Newport News' stock rose 4 cents to $64.04 yesterday. Meanwhile, shares of Northrop Grumman fell $3.50 to $88 and General Dynamics slipped 15 cents to $78.15. All three companies trade on the New York Stock Exchange.


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