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Potential Sale of Northrop’s Ship Yards Signal First Major Shakeup of U.S. Defense Contractors

by: Matthew Potter
October 18, 2010

Category: Acquisitions, Boeing, Business Line, Companies, Congress, Contract Awards, Department of Defense, Events, Federal Budget Process, grumman, Industry Analysis, logistics, northrop grumman, Northrop Grumman Corp., production program, Restructuring, Services, States, U.S. Navy, Virginia | RSS 2.0

On Friday Northrop Grumman (NOC) one of the biggest U.S. defense contractors filed paperwork with the Securities Exchange Commission (SEC) that lays the ground for selling their shipbuilding assets. As early as June the company had said that they were considering this move.

As we wrote several weeks ago the U.S. Navy is looking at a severe reduction in planned ships and ship construction:

“With the pressures on the defense budget caused by the fighting in Iraq and Afghanistan for the last nine years as well as the high cost of new ships the number of orders each year has been reduced. On top of that the Obama Administration canceled or restructured planned programs by ending the DDG-1000 and substituting current DDG-51 class ships as well as ending a plan to have two designs produced for the new Littoral Combat Ship (LCS) and have a competition.”

So far at least one company, Cleveland Ship, has said that they intend to purchase Northrop’s yards. There are also reports that several private equity companies are exploring the purchase. Many smaller defense contractors or parts of larger ones have recently been purchased by equity companies including the sale of Northrop’s SETA arm, TASC, to one in 2009.

There have been rumors that the then smaller Northrop would consider a merger with Boeing (BA) to maximize the similar product lines and capabilities.

In the Nineties as the defense budget declined due to the “Peace Dividend” there was major contractions in the number of defense contractors mainly through M&A activity. The expected decline in the next decade will have the same effect as the number of programs and contracts decline.

Northrop’s ship yards in Louisiana and Virginia make aircraft carriers, destroyers and amphibious war ships. The Newport News facility is the only place that aircraft carriers are made as well as doing major refit work on them. Its operation is critical to the support of the U.S. Navy which is built around these ships.

The yards are also major employers for these states and their closing or reduction would be severe blows to the local economy. Keeping them open and working is critical to not only the industrial base but also the economy during a recession.

Unfortunately the Department of Defense is looking at improving efficiencies in their defense contracting. Keeping sites open just to have jobs is inefficient and costly. This may mean money for other programs may have to be used to maintain this industrial base capability. The balancing act will only get harder as defense budgets decline.

The U.S. may be entering a time when it cannot afford or build enough ships to support its current industry and while ship construction is first it may spread to other sectors of the defense economy such as aerospace and vehicle development and production.

Any loss of industrial base this time around will be expensive and time consuming to recover when the U.S. is facing economic and budgetary difficulties.

Photo from cybaea’s flickr photostream.

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One Comments

  1. Defense M&A Continues | Defense Procurement News on December 15th, 2010 3:28 am

    […] biggest deal that is hanging out there is what Northrop Grumman (NOC) wants to do with its ship building group. Previously they have […]

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