Defense Industry Goes with Guns, Not Butter Recent Merger of Two Defense Companies Fits Growing Trend

Article excerpt

RAYTHEON Company's acquisition of a military-electronics firm this week fits a pattern in the US defense industry: Though faced with fewer orders from the Pentagon, defense contractors aren't converting from tanks to toasters.

Instead, most firms remain heavily involved in defense work while aggressively cutting jobs, closing plants, and pursuing mergers and acquisitions.

"The cancellation or culmination of several existing or projected major-weapons systems has had, and will continue to exert, a profound effect on the defense industrial base," says a recent report by the Defense Budget Project, a nonpartisan research group in Washington.

Last year saw more than a dozen major mergers and acquisitions, a dramatic increase over years past, the report states.

The latest consolidation in the industry, a $2.3 billion deal between Raytheon, a defense contractor in Lexington, Mass., and Dallas-based E-Systems, a leader in military intelligence technology, will create a conglomerate with more than $12 billion in annual revenue.

Defense industry consolidation is about 60 percent complete, analysts say, and will continue for several more years.

"By the year 2000, fewer than half of the current aerospace/defense firms will remain as independent companies or as leaders in their field," says John Harbison, a vice president of Booz Allen & Hamilton, a management consulting firm in Los Angeles.

As much as "75 to 80 percent of contractors will be swallowed up by more aggressive industry leaders or simply exit the market entirely."

The end result, experts say, could be a dozen or so massive companies controlling the entire industry. In such sectors of military production as fighter jets, main battle tanks, armored vehicles, and nuclear submarines, there are already only one or two firms.

This hits defense workers hardest. Employment in defense-related firms has declined 26 percent since 1987, dropping from approximately 3.7 million workers to 2.7 million, according to the Defense Budget Project report. By the turn of the century, that number will drop another one million, estimates Richard Bitzinger, defense industry analyst for the DBP.

As the merger rush continues, the creation of additional mega mergers such as NorthropGrumman and Lockheed-Martin Marietta is what will be interesting to watch, Mr. …