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Martin Marietta buys Grumman

Published Oct. 6, 2005

The defense industry, still coping with reduced military spending, shrank further Monday with Martin Marietta Corp. agreeing to buy Grumman Corp. for $1.9-billion.

The deal would wrap up a Martin Marietta shopping spree that doubled the company's size in the past year and ends Grumman's independence after a slide from pre-eminence as the chief maker of Navy warplanes.

With less federal money being spent on jet fighters, tanks and helicopters, the companies that make weapons and the sophisticated electronics behind the guns have been either buying competitors or retrenching.

The buyout news sent Grumman's stock soaring Monday and lent confidence to the rest of the stock market.

With its purchase of General Electric's aerospace business last year and General Dynamics' space division, Martin Marietta had already shown itself as the most aggressive of the defense contractors trying to grow while the rest of the business contracts.

"We looked at every company in the industry," said Norman R. Augustine, Martin Marietta chairman and chief executive. "It was very important to be among the first to select. . . . We wanted first-round draft choices."

Defense industry observers agree that despite the flurry of recent mergers and spinoffs, the consolidation of the business is just getting started. Lockheed bought General Dynamics' F-16 fighter business and Hughes bought its missile subsidiary, but there is still too much capacity, analysts said.

"The industry is ripe for consolidation in a number of segments as Martin Marietta is proving," said Jerrold Lundquist, a partner at management consultant McKinsey & Co. "We're just getting into the heat of it right now. The bold moves by Martin Marietta continue to remind the industry just how much further there is to go."

Martin Marietta was in a hurry to nail down a deal with Grumman. Augustine and Grumman chairman Renso Caporali met a month ago near Grumman's Bethpage, N.Y., headquarters where the old friends, who each have Princeton engineering degrees, agreed to pursue a buyout.

The deal was put together with bank loans rather than a stock offering to speed its consummation, Augustine said.

Further Pentagon spending cuts could lead to job losses, but the companies haven't decided whether the takeover will result in layoffs, Augustine and Caporali said.

The acquisition is not expected to have any impact on Martin Marietta's plant in Largo, company spokeswoman Shirley Cheatham said. However, she said if additional job openings occur as a result of the acquisition, there might be opportunities for Pinellas employees to apply for transfers. The Largo plant, which makes parts for nuclear weapons, is scheduled to close.

The two executives agreed there is some overlap between their companies and opportunities to save money, but said the buyout was not undertaken to cut jobs.

"It isn't like we're both working on the same things," said Caporali, who will remain chief executive of Grumman as a Martin Marietta subsidiary and will join the parent company's board. "I don't see anything there to throw away. But we've only been working on this for a month. When we get into the nitty gritty we might find some duplication."

Grumman has already started a restructuring that would close a third of its factory and warehouse floor space and reduce its work force by 500 jobs, or 3 percent. Martin Marietta said last year it would cut 3,500 jobs, 2,000 resulting from the purchase of GE Aerospace, by the end of 1994.

The Grumman buyout is subject to Justice Department approval, but the companies said they don't foresee any antitrust problems. Augustine, who had been mentioned in Washington as a possible successor to Defense Secretary Les Aspin, said the Pentagon has given the impression it would encourage more consolidation in the industry.

The Martin Marietta offer, which the companies rushed to announce a week early because Grumman's stock surged 8 percent on Friday, offers Grumman shareholders $55 per share. Grumman stock soared $14.12{ to $54 per share by late trading Monday on the New York Stock Exchange. Martin Marietta's stock was up $1.12{ at 45.87{ on the NYSE.

Martin Marietta has lined up $2.4-billion in bank loans to pay for the offer. Augustine said the company is considering selling $400-million to $500-million worth of stock, but stressed the stock offering would not be tied to the Grumman purchase.

Augustine said that the money from an offering would be used to pay off debt and that Martin Marietta does not plan more significant acquisitions in the near future.

Martin Marietta's expansions have not always brought good fortune to the company. Three Martin Marietta satellites built by GE have gone awry, including the $1-billion Mars Observer. The company also had to pay $6.7-billion to the government to settle claims a GE division double-billed the government.

Grumman made the Hellcats that were used extensively in the Pacific during World War II and more recently sent its STARS radar system, while still in development, to the Persian Gulf war.

Martin Marietta makes the Titan IV, the biggest expendable American rocket.

_ Staff writer Helen Huntley contributed to this report.