Guns, No Butter, At Martin Marietta

In Augustine's Laws, his 1983 book of management aphorisms, Martin Marietta CEO Norman R. Augustine advises fellow executives to try to control their destinies. "It is better to be the reorganizer than the reorganizee," he cautions.

No one seems more intent on heeding that advice than Augustine himself. As the wrenching defense restructuring continues, he is making it clear that Martin Marietta Corp., based in Bethesda, Md., intends to be a leading survivor. On Mar. 7, Martin launched a $1.9 billion friendly tender offer for the stock of Grumman Corp., a once proud maker of Navy combat aircraft that has struggled since military spending peaked in the mid-1980s.

While deep Pentagon budget cuts have prompted rivals such as Honeywell, Ford, and General Electric to retreat from some defense activities, and led others to diversify into civilian markets, Augustine is doubling his bets on military business.

PROMISING LINE. Even before the Grumman announcement, the 58-year-old former Pentagon official had agreed to spend $3.2 billion to acquire General Electric Co.'s aerospace division and General Dynamics Corp.'s rocket business. Those mergers--which give the company $13 billion in revenues and a backlog of $22.7 billion--make Martin Marietta the world's largest defense electronics company and one of the largest military contractors. Augustine dismisses the notion that defense is a dying business. Recent turmoil abroad "offers even more reason for a strong defense budget," he says.

While integrating yet another corporate culture into Martin is a daunting challenge, the acquisition of Grumman strengthens the company in a promising military line--defense electronics. Martin has historically supplied Army ground forces. Grumman bolsters the company's ties with the Navy, a likely beneficiary of a Pentagon push for a more nimble fighting force. The merger "broadens [Martin's] client base just as the military is moving toward the rapid-deployment strategy," says Thomas Meagher, defense analyst for brokerage Ehrenkrantz, King, Nussbaum.

Although Grumman, based on New York's Long Island, is all but out of the airframe business, it owns some lucrative contracts (table). One is J-STARS, an airborne surveillance system that uses modified Boeing 707s to detect and track enemy tanks, helicopters, and troops. Analysts say J-STARS could be worth up to $10 billion in revenues over 10 years.

The Grumman deal also positions Martin for a foray into such military-derived civilian markets as wireless communications and tracking systems for commercial aviation. Analysts believe that by melding the pieces acquired from GE, General Dynamics, and Grumman, Martin will become the only U.S. company that can build satellites, launch them, and operate them. "Martin Marietta is creating a monopoly--almost a cartel--in space systems," says Richard Bitzinger, an industry analyst for the Defense Budget Project, a Washington research group.

For Grumman, the merger closes the book on one of the most storied names in defense history. When the end of the cold war left the military with a glut of aircraft in the early 1990s, Grumman watched helplessly as the Pentagon halted production of its A-6 carrier-based bombers and F-14 interceptors and canceled the A/F-X, the company's next-generation attack plane. Grumman directors saw the company losing its critical mass. "This was going to make it very, very difficult to compete," says Grumman Chairman Renso L. Caporali.

ROSY VIEW. Merger talks between Grumman and Northrop Corp. fell apart as recently as late February when Northrop couldn't come up with enough cash, according to Grumman filings with the Securities & Exchange Commission. Augustine, by contrast, was flush. So he walked away with Grumman for a mere 58% of sales, says Morgan Stanley & Co. analyst Philip Friedman. In the 1980s, similar purchases fetched as much as two times sales. The depressed stock price--or inside information about the deal--led investors to buy up Grumman options and stock just before the merger announcement. The SEC is investigating.

For Augustine, the deal is a calculated gamble. The defense budget seems to have stabilized: While Pentagon spending on procurement and research has tumbled 39% from its 1987 peak to $91.2 billion this year, President Clinton recently pledged that he will not cut defense further.

But the future of post-cold-war defense budgets isn't assured, and even cheap assets could be no bargain. Augustine "has purchased some interesting properties, but they may have outlived their usefulness," warns one industry consultant.

Martin's chief remains sanguine about the prospects for the future. But he has to worry that his flurry of defense bottom-fishing doesn't violate his own 33rd law: "Fools rush in where incumbents fear to bid."

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