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Boeing Buys Part of Rockwell For $3.2 Billion
News Boeing Co. announced August 1st plans to acquire Rockwell International Corp.'s aerospace and defense businesses for $3.2 billion. This would turn Boeing into the nation's third-largest military supplier and put it in the rapidly growing field of satellite production.
Analysis When Would An Acquisition Make Economic Sense? The objective of a manager is to maximize the wealth of shareholders by undertaking projects that create value.
Thus, an acquisition becomes viable if it creates additional value for shareholders. In an acquisition, value is created only if:
i.e.
By the same token, a company would be willing to sell part or all of its assets if they are valued more by someone else. In this case, Rockwell’s defense assets are worth more to Boeing than to Rockwell.
Where is Value Creation To Boeing Coming From? One benefit to Boeing is that it becomes a more viable player in the market for defense contracts. Being a small player in this market is not a viable option. Thus, Boeing has to either completely exit this market, or become a serious contender. Boeing has opted for the second option while Rockwell has obviously exited completely from this market.
A stronger position in the defense and space businesses could provide a cheaper alternative financing for Boeing’s risky development of new commercial aircraft, such as the $5-billion super-jumbo jet. Some analysts, according to the Los Angeles Times (August 2, 1996), believe that these jets are essential to Boeing if it is going to maintain its position as the world's leading aircraft manufacturer. The acquired aerospace divisions could get a financing boost from Boeing, turning it into a leader in the rapidly growing market for satellite communications, adds the Times. Phil Condit, the president and chief executive of Boeing, was quoted as saying that while he hopes there will be efficiencies by combing operations, Boeing expects only a minor impact on employment. "My desire is to absorb any necessary employment adjustments through normal attrition and by retraining employees," he said. Thus, Boeing’s value creation will come from better positioning itself within the defense industry and its ability to finance expansionary projects through internally generated funds. There seems to be little savings in operating costs.
Where is the Benefit To Rockwell? The major source of value creation to Rockwell is strategic. Now it’s able to concentrate on what it knows best. The value of the assets sold were priced at about one multiple of its revenue. "What's left over is a company with high-growth commercial businesses focused on technology where they have a clear leadership position, as opposed to having it weighed down by defense and aerospace that had no growth prospects," according to Roger Threlfall, a J.P. Morgan Securities analyst quoted by the Journal.
Financing The $3.2 billion deal has two components: $860 million is in tax-free Boeing stock and $2.165 billion is in Rockwell debt and retiree liabilities. Thus, this deal will leave Rockwell debt free. The complex deal is designed under a Morris Trust structure, whereby Rockwell pays no tax on the capital gains generated from the sale. Rockwell will technically spin off all its business except what is being sold to a new holding company, and sell the old holding company, along with $2.2 to $2.3 billion in debt. In exchange, Boeing will issue $860 million in stock to shareholders of Rockwell. That equals about $4 a share. Rockwell would have had to pay $1 billion or more in taxes if the company sold the businesses for cash, according to a WSJ estimate.
Market Reaction In composite trading August 1st on the New York Stock Exchange, Rockwell stock jumped $2.75, or .2%, to $55.25 on the news, while Boeing shares edged up 62.5 cents to $89.125. This suggests that the market, or average investor, believes that it’s a good deal for both companies.
Size of the New Boeing Including Rockwell's $3.2 billion of sales from defense and space, Boeing would have recorded total sales in these areas of $8.8 billion last year. That still amounts to about a third of the new industry giant, Lockheed Martin, which has made several big acquisitions in the past three years to build a company with sales estimated at over $25 billion this year.
Recent Consolidation in the Defense Industry May 1992: Hughes Aircraft Corp. agrees to acquire the missile operations of General Dynamics Corp. April 1994: Los Angeles-based Northrop Corp. buys Grumman Corp. for $2.2 billion. August 1994: Lockheed Corp., then based in Calabasas, and Martin Marietta Corp. announce an agreement to merge through a stock swap valued at $10 billion. January 1996: Northrop Grumman Corp. agrees to buy Westinghouse Electric Corp.'s defense business for $3 billion. Lockheed Martin Corp. announces plans to buy most of Loral Corp. for $9.1 billion. (source: LA Times) |
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