A Giant Holds on by Going to Pieces

FORT WORTH – When there was a Soviet Union, General Dynamics F-16s, Trident submarines, Abrams tanks and cruise missiles were major players in America’s defensive strategy against its superpower foe.

Now that the Berlin Wall has crumbled, the Soviet Union is shattered and U.S. defense spending is being pared, GD is shrinking.

If GD sells all the assets it has put on the block, it will go from an $8.75 billion company (by 1991 sales) to a $6 billion company - if its remaining businesses continue at their current sales rate, which is unlikely in today's defense spending climate.

If GD sells all the assets it has put on the block, it will go from an $8.75 billion company (by 1991 sales) to a $6 billion company – if its remaining businesses continue at their current sales rate, which is unlikely in today’s defense spending climate.

The defense giant has begun whittling itself down, selling off divisions that aren’t atop their field or have poor financial potential.

Those moves have allowed GD to reap $1.25 billion, boosted its stock past $70 per share and been praised by some on Wall Street. They have also fueled speculation that the nation’s No. 2 defense contractor will liquidate itself completely.

One analyst envisions GD selling off or merging its Fort Worth Division, which currently employs 20,000 in Tarrant County and makes the F-16 fighter for the Air Force.

GD executives say there is no liquidation effort, only a plan to produce a lean survivor in an industry that depends on a shrinking defense dollar. Former astronaut and GD chief executive William Anders said the new GD will focus on four core businesses: military aircraft, tanks, submarines and space launch vehicles.

But Paul Nisbet, a respected defense analyst with Prudential Securities, said there’s a strong possibility that Anders will whittle GD to its Fort Worth Division alone.

The 50-year-old facility, for years the leading engine in Tarrant County’s economy, could then be merged with another aircraft maker, such as Lockheed, Boeing or Northrop, Nisbet said.

“There are no plans to do that,” said Gordon England, general manager of GD’s Fort Worth Division.

“We are making ourselves very competitive. We are improving our quality, getting our costs down so that we will be very competitive in the domestic and world market.

“I don’t know what’s going to happen in future defense budgets, but at this point we intend to have F-16s sales domestically and internationally for a long, long time.”

Nisbet, quoting industry sources, said in a June 17 report that GD has offered all its core businesses – including the Fort Worth Division – for sale at “one time or another.”

“If GD is not liquidating, its move to focus on the four product segments . . . puzzles us to say the least,” Nisbet’s report said.

“Three represent product areas in which the Department of Defense has almost no production monies ticketed in the current five-year plan. The other is what we would term a predominantly high-risk space venture.”

Nisbet said that Anders and GD’s board may be implementing a plan aimed at allowing the Crown family, the firm’s largest stockholder, to take its money and run.

“I think they are getting the Crown family out of the stock and whatever means by which they can do that, so be it,” Nisbet said.

Chicago’s Crown family, reportedly worth nearly $2 billion, bought into GD in the 1950s when they sold their construction products company. They now own 22 percent of GD.

In a recent filing with the Securities and Exchange Commission announcing a GD stock repurchase plan, the company said that the Crowns want to reduce their ownership to about 15 percent.

Analysts say the Crowns could pocket $370 million from selling that much GD stock.

Nisbet said the sell-off by the Crown family is just the tip of a liquidation iceberg.

In November, Anders peddled the company’s computer operations – its Data Systems Division – to Computer Sciences Corp. of El Segundo, Calif., for $200 million. CSC is operating the unit for GD as an outside contractor.

In November, Anders peddled the company’s computer operations – its Data Systems Division – to Computer Sciences Corp. of El Segundo, Calif., for $200 million. CSC is operating the unit for GD as an outside contractor.

“I don’t think the market is expressing what is going on here correctly,” he said. “I think the Crown family is anxious to divest itself of its holdings now that they can get a good price on the stock.”

He also expects a major portion of the shares that GD buys back to come from its employees.

“If indeed I’m right, then the current price on the stock is crazy,” Nisbet said.

GD officials denounce Nisbet’s theories.

They say the company is shrinking to stay alive in a highly competitive market that has far fewer customers with far fewer dollars to spend.

One high-ranking GD official, who requested anonymity, said Nisbet has “gone out on a limb” with his predictions.

“He’s out there all by himself,” the official said. “There’s no one else predicting the kind of drama that Nisbet is.”

A source close to the Crown family said that Lester Crown, the family’s representative on GD’s board, has said privately that GD has no plans to get out of the military aircraft business.

Still, GD is selling assets and selling fast.

In November, Anders peddled the company’s computer operations – its Data Systems Division – to Computer Sciences Corp. of El Segundo, Calif., for $200 million. CSC is operating the unit for GD as an outside contractor.

In late January, GD sold Cessna Aircraft Co., a commercial airplane maker, to Textron Inc. of Providence, R.I., for $600 million.

Anders’ latest move came in May: a deal to send all of GD’s missile businesses to GM-Hughes for $450 million in stock that can be sold later.

Assuming that the missile business is sold, GD will have spun off 16,900 employees.

And the company said recently that it will sell other non-core businesses and subsidiaries, such as those involved in commercial aircraft components and material services, to raise cash.

If GD sells all the assets it has put on the block, it will go from an $8.75 billion company (by 1991 sales) to a $6 billion company – if its remaining businesses continue at their current sales rate, which is unlikely in today’s defense spending climate.

In its June 10 SEC filing, GD described itself as a company dealing with the realities of its market, shaping itself into a smaller but more competitive entity.

“The defense industry, which accounts for over 80 percent of the company’s sales, has undergone significant changes, accelerated by the collapse of the Soviet Union in 1991,” GD said in the filing.

“The most important of these changes has been a significant reduction in domestic spending, which (GD) management believes is both structural and long-term.

“These changes have required management to critically evaluate every aspect of the company’s business – both what the company does and how it does it – in an effort to position (GD) to compete more effectively in a rapidly changing marketplace and to build financial strength and flexibility.”

“Management viewed broad-scale diversification as a high-risk strategy and determined that its goals could best be achieved by focusing on those defense operations in which (GD) had developed strong market positions and extensive design and production expertise.”

Some top defense analysts agree with the path GD is taking. They say that it may be painful for laid-off workers, but that the company could not survive any other way.

“They have identified their four core businesses, and they are comfortable with that,” said Jerry Cantwell, a defense industry analyst with Wertheim Schroder in New York.

“I think they might actually add to those businesses if there was an opportunity.”

He notes that GD has acknowledged that it is discussing a joint venture for its Land Systems Division near Detroit.

GD insiders say the company is talking with FMC Corp. The plan reportedly would allow FMC, which makes armored vehicles for the Army, to share manufacturing space at the Land Systems facility in Sterling Heights, Mich.

As Air Force orders for the F-16 decline, Cantwell said, he would not be surprised if GD struck such a deal with another military aircraft maker to utilize space more effectively at its Fort Worth Division.

But Cantwell said he doubts that GD would ever sell the division without approving a merger agreement for the entire corporation.

“I think the probability is quite low,” he said. “But I would not go so far as to suggest that there is no possibility whatsoever. I think that General Dynamics, like any other company, would consider selling assets at the right price.

“In terms of F-16 production in Fort Worth, it would have to be some inordinately high price. I very much doubt anybody is going to be willing to pay what General Dynamics would want. I think General Dynamics values the F-16 program very highly.

“General Dynamics merging with another company is somewhat more likely. But I don’t believe that’s really in the cards either.”

Cantwell forecasts that GD’s sales will fall from $8.75 billion last year to $5.1 billion by 1995, most of the decline coming from down-sizing.

Profits, however, will grow somewhat, Cantwell predicted, moving from $234 million in 1991 to $278 million in 1995.

There are others on Wall Street who don’t suspect the moves of GD management.

Jack Modzelewski, a defense analyst with PaineWebber, is bullish on GD’s future in military aircraft.

The company is scheduled to deliver 400 F-16s to foreign customers between now and 1996 and Modzelewski believes that Congress is likely to keep buying the aircraft for the Air Force.

The F-22 Advanced Tactical Fighter for the Air Force, a joint project of Lockheed, Boeing and GD, should bring substantial work to Fort Worth.

And winning a new Air Force Multi-role Fighter contract, even if it means only building an upgraded F-16, would be a coup in the current defense era when companies are often forced to share new work with a partner.

Submarines are less stable, Modzelewski noted, but much of that depends on what action Congress takes. Even an order for one more Seawolf class sub would mean five years’ work for GD’s Electric Boat Division in Groton, Conn.

The Land Systems Division could expand profits if it enters a joint venture with FMC. The company’s foreign sales of M-1A1 Abrams tanks are expected to grow, and being able to cut production costs would be a boon for GD, Modzelewski said.

He said the only suspect member of the four core businesses is the Space Systems Division in San Diego. The unit makes the Atlas launch vehicle, which has heavy international competition.

“The commitment to Atlas is lukewarm,” Modzelewski said. “There has been a lot of money spent there, and that makes it harder to walk away from.

“The problem going forward is that there is a lot of launch capacity out there now and it’s only going to grow. You not only have McDonnell Douglas with the Delta and Martin-Marietta with the Titan, but there’s the NASA shuttle, the Russians, the Chinese, the French, and even the Japanese want a piece of the action.”

Nisbet, however, is not convinced.

He said that GD’s dramatic cuts in research and development spending – expenditures dropped from $438 million in 1989 to $162 million in 1991 – demonstrate management’s lack of commitment to the future.

He may be right, said a company insider, who pointed to GD’s capital expenditures’ falling from $411 million in 1989 to $82 million last year.

“If they are not selling off this company, why are they not investing in it?” asked the GD manager, who requested anonymity. “Is the goal to survive and be strong, or to merge and pay off the Crown family?

“I have a hunch we’ll find out in the not-too-distant future.” ===================================================================== ==

Selling pieces of General Dynamics

General Dynamics Corp. has sold three major division and is attempting to sell other parts of the company. Here is a look at the companies that make up GD:



Data Systems Division

Sold to: Computer Sciences Corp., El Segundo, Calif.

Function: Provided computer services to GD nationwide

When: Nov. 4

Price: $200 million

Employees: 2,500, including 900 in Fort Worth

Cessna Aircraft Co., Wichita, Kansas

Sold to: Textron Inc.

Function: Leading builder of business jets and utility turboprop


When: Jan. 20

Price: $600 million

Employees: 5,400

GD Missiles business, San Diego and Rancho Cucamonga, Calif. Sold to: GM-Hughes Aircraft

Function: One of the world’s largest manufacturers of tactical


Terms: Sale includes all of GD’s Air Defense Systems Division and

part of its Convair Division that makes cruise missiles When: Agreement announced May 11. Deal not yet complete. 1991 sales: $1.3 billion

Price: $450 million in stock to be sold later

Employees: 9,000 total from both divisions.

—————————————————————– On the block:

(Wall Street analysts estimate total value of these companies at $500 million)

Electronics Division

San Diego

Function: producer of avionics test equipment and maintenance

information systems for the Air Force.

Employees: 2,400

American Overseas Marine Corp.

Quincy, Mass.

Function: Operates a fleet of ships that were used in Operation

Desert Storm to transport military supplies and equipment for the

Marine Corps.

Employees: 248

Material Service Corp.


Function: producer of aggregates, ready-mix concrete and concrete


Employees: 1,750

Marblehead Lime Co.


Function: Lime for construction, environmental and paper industries. Employees: 500

Freeman United Coal Mining Co.

Marion, Ill.

Function: Mines coal. 1 million tons of competitive production

capacity for spot markets.

Employees: 900

Convair Division

San Diego

Function: Cruise missile production is being sold to GM-Hughes. But

company also wants to peddle remaining aircraft business that

produces fuselage for McDonnell Douglas MD-11, among other projects. Employees in aircraft business: 3,500

——————————————————————— What’s left:

Space Systems Division

San Diego, Calif.

Function: Makes Atlas space launch vehicles and conducts satellite

launch programs from Cape Canaveral, Fla.

Employees: 4,200

1991 sales: $363 million

Fort Worth Division

Fort Worth

Function: Produces tactical military aircraft, including F-16

Fighting Falcon for the Air Force. Division has piece of several

future major programs, but Congress must fund aggressively to keep

employment stable.

Employees: 20,000

1991 sales: $2.7 billion

Land Systems Division

Sterling Heights, Mich.

Function: Makes M-1A1 tank for the U.S. Army and foreign military


Employees: 6,850

1991 sales: $1.1 billion

Electric Boat Division

Groton, Conn.

Function: Makes Seawolf submarines for the U.S. Navy.

Employees: 19,000

1991 sales: $1.8 billion




Source:  General Dynamics Corp. and the individual companies

Photos courtesy of GD


This article is accompanied by a series of sidebars.

Fort Worth Star-Telegram, July 5, 1992
Author: Michael D. Towle