They Don't Let Just Anyone Buy A Defense Contractorby
Alain Gomez, the dapper chairman of France's Thomson-CSF, lined up some of the best string-pullers money can buy to help acquire bankrupt LTV Corp.'s missile business. The defense-electronics giant, 58%-owned by the French government, joined with the Carlyle Group, a well-connected Washington investment bank whose vice-chairman is former Defense Secretary Frank C. Carlucci. For public relations, Gomez tapped Carter Administration Press Secretary Jody Powell's high-powered spin-shop, Powell Tate, as well as a legion of K Street lawyers.
But the pricey talent couldn't overcome the volatile politics of selling sensitive U.S. defense assets to foreigners, particularly in an election year. On July 5, Thomson withdrew its $450 million joint bid with Carlyle to buy LTV's missile and aircraft businesses. Small wonder. The U.S. defense Establishment carried out a blistering behind-the-scenes assault on Thomson over its status as a French government holding and its past business dealings with Iraq.
HARD SELL. The flap won't help testy U.S.-French relations. And displeasure with the U.S. reaction goes beyond Paris. One European Community official warns of "serious consequences for the trans-Atlantic investment climate." Another possible casualty could be U.S. arms sales in Europe. "This will obviously send a signal," says Bertrand de Fouchier, Thomson vice-president for North America.
Thomson is now scrambling to salvage something from the deal. Gomez' dream for his $7 billion colossus was to dovetail LTV's world-class missiles systems with Thomson's strong position in electronics. By grabbing LTV, Gomez also hoped to gain entry into the U.S. market as a prime contractor. Now, though, he will be lucky to end up with a minority interest in the company.
The trick will be winning the good graces of the Committee on Foreign Investment in the U.S. (CFIUS)--an interagency group that advises President Bush on foreign purchases of U.S. assets. Before Thomson withdrew its offer, the Treasury Dept.-led panel was leaning against the sale because of its concerns that LTV missiles might end up in the wrong hands.
A Thomson official confirmed the company is talking to Northrop Corp. about leading a new bid, with the French as minority partners. Thomson has talked with Raytheon Co. and Loral Corp. as well--and a new offer could emerge any day.
Still, that may be "wishful thinking" says Alan Batkin, LTV's financial adviser on the missile sale and vice-chairman of Kissinger Associates. One reason is that time is short. The bankruptcy judge overseeing the sale of LTV assets has set a July 31 deadline to close the Thomson deal.
Even if Thomson can pull together a new proposal, it will still face heated opposition from Martin Marietta Corp. and Lockheed Corp.--whose rival $385 million offer lost out to the French in April. Martin Marietta Chairman Norman R. Augustine objects to Thomson's taking even a minority stake. Augustine has friends in high places: He was on Bush's short list of potential Defense Secretaries back in 1988.
Marietta's--and Lockheed's--reasons for opposing Thomson aren't at all high-minded. Both want LTV's missile technology. Its medium- and long-range mobile rocket launchers performed well during Operation Desert Storm. And LTV's ERINT missile-defense system is considered by many to be more accurate and reliable than Raytheon's Patriot.
That's why Pentagon officials are so edgy about a Thomson takeover. Indeed, hard-liners in the military demanded that the company set up a "voting trust" manned by U.S. representatives to vet decisions involving missile technology. "You're talking about a company LTV that's 95% classified," says one Administration official. "The French have been known to borrow technology and spread it." A July 2 report that the Customs Service is investigating whether Thomson illegally diverted U.S. lasers to Iraq can only fuel those fears. Thomson says the lasers were French-made and the sales approved by regulators in Paris.
Ironically, Thomson's association with the Carlyle Group also hurt the deal. Roughly one-third of the $150 million Carlyle planned to put up for LTV's aircraft unit was bankrolled by state-backed Credit Lyonnais. So the group was viewed as "a front" for the French government, says an Administration source. Such rough treatment speaks volumes about the U.S. defense industry's inevitable post-cold-war consolidation. Foreigners serious about buying their way in had better be combat-ready.