Pentagon Opposes Shipbuilder Merger

WASHINGTON —  Defense Secretary William S. Cohen on Wednesday said the Pentagon opposed the $1.95-billion bid by General Dynamics Corp. for rival shipbuilder Newport News Shipbuilding Inc., ending the acquisition attempt as General Dynamics immediately withdrew its offer.

Cohen said proposed savings from the merger did not outweigh concerns about the size of the deal or the loss of competition in the industry. The Pentagon’s decision was expected in the industry and in Congress, where there was strong opposition.

This was the second time in a year that a merger between two major defense competitors had been rejected by the Pentagon. Last July, Lockheed Martin Corp. of Bethesda, Md., abandoned its proposed $12-billion acquisition of Northrop Grumman Corp. following government opposition. The Defense Department opposed that deal because it would have resulted in too much concentration in key weapons programs.

Cohen said the Pentagon considered “the considerable potential savings made possible by the proposed merger” but believed it could achieve the same result by pressing Newport News to be more efficient. Other cost benefits from the merger were “not now so great as to override the management and competitive challenges we could face from the merger.”

The Pentagon’s analysis found that if the two companies were to merge, the new entity would account for 95% of the Navy’s research spending and would have also left the Navy with only one supplier capable of building nuclear-powered warships, Cohen said.

The decision clears the way for Newport News to proceed with its acquisition of Avondale Industries Inc., a Navy shipyard based in New Orleans.

Nicholas D. Chabraja, chairman and chief executive of General Dynamics, said that his company’s offer for Newport News showed the Pentagon there were ways to save the Navy money, but said he was satisfied with the way the decision had been reached.

Chabraja said the company would continue to seek acquisition targets in its main areas of business--shipbuilding, manufacturing armored vehicles and defense information technology.

As part of its announcement, the Pentagon said it had agreed to a series of cost reductions with Newport News that would save the Navy $360 million over the next five years.

Newport News’ chairman and chief executive, William P. Fricks, said the company would move forward with its purchase of Avondale.

General Dynamics made its unsolicited bid in February, offering $38.50 a share and the assumption of about $600 million in Newport News debt. Because Newport News was already in the process of buying Avondale for $470 million, the company said it would not consider General Dynamics’ offer until it received a ruling from the Pentagon.

The announcement came after the stock market closed. Falls Church, Va.-based General Dynamics rose $2.50 to close at $69.56, and Newport News fell 25 cents to close at $27.75 on the NYSE.