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This Deal Could Send Martin Marietta Into Orbit

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The deal that created America's newest defense giant began at the clubby Homestead resort in Hot Springs, Va. When top chief executives gathered to golf and schmooze at a meeting of the Business Council in October, General Electric Co. Chairman Jack Welch approached an old friend, Martin Marietta Corp. Chairman Norman Augustine, with a stunning proposal: why not buy GE's aerospace division?

Intrigued, Augustine met Welch two weeks later to thrash out the transaction over dinner at GE's Fairfield (Conn.) headquarters. By Nov. 22, they had a deal that rocked the industry. In the biggest defense consolidation to date, the Bethesda (Md.) company will become the world's largest maker of defense electronics by buying GE's aerospace unit for $3.05 billion, mostly in cash, stock, and assumed debt.

CATAPULTED. Giant GE sheds what was never more than a peripheral business, while Martin nearly doubles in size, to annual revenues of $11 billion. Martin, until now mainly a supplier of weapons subsystems, will catapult into the top tier of military prime contractors. "It's a remarkable combination," says Julian Scheer, senior vice-president of LTV Corp., which recently shed its missiles and aerospace unit. "It's as if General Motors bought the biggest rubber, glass, and steel companies." One difference from GM: Cost-conscious Martin Marietta is likely to stay lean and profitable. The markets loved the deal: Both companies' stocks jumped after the sale was announced on Nov. 23.

GE prefers businesses in which it can be No. 1 or No. 2. "While GE Aerospace is a world leader in technology," says Welch, it is "not of the scale to be unique in the changing global arena." Selling out to Martin also provided a graceful way out of a sagging business that generates 10% of its $60 billion revenues. GE will now be flush with cash--and well-positioned to acquire nondefense assets that troubled companies are eager to dump.

For Martin Marietta, too, the deal was strategic. It joins Loral Corp. and GM's Hughes Aircraft Co. in the small group of defense contractors that are defying the shift to a peacetime economy by expanding through acquisition (table). In contrast, GE and General Dynamics are dumping units, while McDonnell Douglas and Grumman are shrinking existing operations and may try to sell some. "In this business, everyone is looking at whether to combine or get out," says Loren B. Thompson, a national security specialist at Georgetown University.

Electronics--Martin Marietta's chosen focus--is the safest corner of a shrinking industry. Faced with buying fewer planes and ships, military planners are loading up existing weapons systems with the latest surveillance, command-and-control, and computer gear.

`JIGSAW PUZZLE.' GE's arsenal complements Martin's. GE is a major supplier to the Navy, while Martin's biggest customer is the Army. GE builds satellites, while Martin makes rockets; the new company could package them. GE supplies the radar that guides Martin Marietta-built missiles for the Aegis fleet air-defense system. "There's very little overlap," says a defense specialist close to the negotiations. "It's almost like two pieces of a jigsaw puzzle."

The two companies are similar, though, in ways that could help smooth the acquisition. Run by engineers, both have reputations for financial discipline. A shared corporate culture will help, since GE will become Martin's biggest investor: To clinch the deal, cash-short Martin had to offer $1 billion in preferred stock, convertible into up to 23.5% of its common shares.

Martin faces some big challenges in making the deal work. It's assuming $750 million of GE Aerospace debt, boosting debt from 27% of its total capitalization to 46%. And swallowing GE Aerospace will tax senior management.

Still, although defense budgets are shrinking, the Pentagon spends $100 billion a year on research and procurement. "Weaker companies will shrink and sink," Augustine concedes. But, he adds: "there's room for strong survivors." He's betting $3 billion that Martin Marietta will be one of them.



General Dynamics sells its profitable Cessna commercial jet business to Textron for $600 million

MAY, 1992

General Motors' Hughes Aircraft agrees to spend $450 million for General Dynamics' missile division. The move is aimed at Hughes rival Raytheon, maker of the Patriot

AUGUST, 1992

Loral and Carlyle Group, a Washington investment bank, outbid Martin Marietta with a $475 million offer for the missile and aerospace units of bankrupt LTV


Martin Marietta agrees to pay $3.05 billion for General Electric's aerospace division. The deal will make Martin the world's biggest defense electronics company

DATA: BWAmy Borrus, with Tim Smart, in Washington

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