Raytheon Outbids Northrop To Buy Hughes From GM

LEXINGTON, Mass. - Raytheon will buy the defense operations of General Motors' Hughes Electronics division for $9.5 billion, creating America's third-largest aerospace and defense company.

Raytheon outbid Los Angeles-based Northrop Grumman for Hughes's missile and defense electronics businesses. Together, Hughes and Raytheon are expected to generate $20 billion in annual revenue.

The purchase will further GM's goal of focusing its resources on automaking, and help Raytheon compete against defense-industry leaders Boeingand Lockheed Martin for a share of a dwindling world weapons market.

"Raytheon is a guaranteed survivor. (The purchase) gives Raytheon the critical mass it needs," said Ken Herbert, a Frost & Sullivan analyst.

The Hughes agreement leaves Northrop a distance fourth in the defense industry, especially hurting the company in the business of making electronic parts for weapons, analysts said.

"Northrop Grumman has been relegated to a very small third position in defense electronics" behind Lockheed Martin and Raytheon, said Paul Nisbet, an analyst with JSA Research.

Stock's Key Role

GM announced the Hughes purchase late this afternoon, following a meeting of its board in New York held to choose between the Raytheon and Northrop offers.

The sale will leave the automaker with a big share of Raytheon's stock.

"It's a good deal for GM if the stock they get in Raytheon does well," said David Healy of Burnham Securities.

The deal was constructed "extremely awkwardly in order to minimize GM's tax bill," Healy said.

GM may now consider another unit sale or spinoff, Healy said, this time its Delphi Automotive Systems, the world's largest auto parts maker.

Stock in all three companies was halted. Before the halt in trading at midafternoon, Raytheon's stock was up $1 at $48 while GM's H Class stock, which represents its Hughes holdings, was up $1 at $63.625. GM's most widely held shares were off 12.5 cents at $60.

Stock in Northrop Grumman, which yesterday announced it would eliminate 755 jobs and shut four plants, was up 62.5 cents at $78.25.

Race to Bigness

The defense and aerospace industry has been consolidating since the Cold War ended in 1991.

Lockheed merged with Martin Marietta and Loral to create a company with an estimated $30 billion in annual revenue. Boeing said in December it would buy McDonnell Douglas for about $14 billion in stock, creating a company with more than $40 billion in revenue.

The Hughes purchase comes 10 days after Raytheon agreed to pay $2.95 billion for the missile and defense-electronics businesses of Texas Instruments.

Raytheon will become the second-largest maker of military radar and avionics systems as well as America's premier missile company, trailing only Lockheed Martin.

Raytheon will be the sole manufacturer of the AMRAAM, the world's most capable air-combat missile, and the Navy's standard ship self-defense system. It now shares production of both with Hughes. Raytheon will also develop and produce a new short-range air-combat missile, the contract for which it had lost to Hughes.

Analysts said Raytheon is paying top dollar for the Hughes businesses because other recent announcements of acquisitions have made it even more important for defense companies to get bigger.