- The Washington Times - Monday, October 15, 2001

General Dynamics may have finally hit its peak.

Shares of the Falls Church defense contractor traded down for most of last week after hitting new highs last Monday following U.S. military assaults on Afghanistan.

The military action boosted General Dynamics at first. The company's price hit a 52-week high of $96 last Monday, but retreated during the week, closing at $87.90 on the New York Stock Exchange Friday.

America's war on terrorism will not be like the quick, all-out assault seen during the Persian Gulf war, and investors have responded accordingly, analysts say. But, they say a key reason for last week's slide was that some investors soured on General Dynamics' bid to acquire Newport News Shipbuilding, Inc. Now, some investors appear to favor a rival bid from Los Angeles-based Northrop Grumman.

Newport News, the nation's top military shipbuilder, agreed to be acquired by General Dynamics in April, before Northrop Grumman came forth with a hostile takeover bid two weeks later. Even then, General Dynamics, with its $2.6 billion cash-only bid, appeared to be the front-runner to acquire the shipbuilder. But following the Sept. 11 terrorist attacks, Northrop Grumman's stock rose more than 30 percent, giving the company's stock-and-cash bid greater value. Shares of Northrop Grumman closed at $104.25 on the New York Stock Exchange Friday.

About 14.5 million shares of Newport News were pledged to General Dynamics tender offer last week, a decrease of nearly 35 percent since Sept. 24.

Northrop Grumman's offer for Newport News is now worth about $5 more per share than General Dynamics'.

This boost in value caused Newport News to reopen negotiations with Northrop Grumman, a move analysts say helped push General Dynamics stock down.

"Investors tend to go with where they can go with the greatest deal," says Tom Meagher, an analyst with BB&T; capital markets.

General Dynamics has not changed its offer or indicated that it will offer a deal that involves more stock and less cash. It is a decision that Mr. Meagher says is "probably a smart thing on their part."

"You buy for cash flow," he says.

A fusion of General Dynamics and Newport News would combine the nation's only two nuclear shipyards. Some analysts say the Pentagon is expected to approve both bids. But analysts say they have favored the General Dynamics deal because it would save them nearly $4 billion through the consolidation of corporate and government facilities. The Pentagon's undersecretary for acquisitions, Edward "Pete" Aldridge, put off making a decision Friday.

Analysts also say the Justice Department may voice antitrust concerns with such a deal, because only one company would control all the nuclear shipbuilding in the United States. Both General Dynamics and Northrop Grumman have been extending their offers week-by-week to give regulators more time to review them.

"The whole issue is do you want General Dynamics to control all the [nuclear shipbuilding]. That really is … the issue, and that's what Northrop has argued," Mr. Meagher says.

Analysts say General Dynamics is in better financial shape to handle the acquisition than Northrop Grumman, because it has significantly less debt. General Dynamics will announce its third-quarter earnings on Wednesday. First Union Securities Analyst Sam Pearlstein wrote in a report that sales for the quarter will increase 17 percent to $2.9 billion. The report also noted that demand for General Dynamics' Gulfstream airplanes often used as private jets may increase in the wake of security and safety concerns.

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