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Northrop Grumman Goes Ahead with Plan to Exit Shipbuilding

Last year Northrop Grumman (NOC) one of the last two major companies building ships and submarines for the U.S. Navy announced that it would explore separating that part of their corporation. Based on their analysis of future Navy plans for building ships they decided that it would not make sense for them to stay in that business. Management had said that they might sell the whole unit to another company and some other bidders did emerge.

It was felt by some analysts that if Northrop did divide their corporation this way it would set the remaining core company on a path of potential merger with another large contractor such as Boeing (BA). This began to spark concerns that another major round of consolidation was about to happen leading to further shrinkage of the U.S. industrial base. This in turn led to the Department of Defense to state that they would prefer this kind of move not to happen and that the big defense contractors who provide most of the hardware to the U.S. military remain.

Northrop has decided in a way to partly to mollify these concerns to spin off their shipyards into a new company owned by its shareholders. The establishment of Huntington Ingalls Industries would mean that twenty percent or so of Northrop would now reside in the new company. This follows the letting go of TASC two years ago due to Conflict of Interest concerns which had represented another $1.8 billion of business for Northrop and had been a growth area for the company.

The decision to set up the new company rather then sell it to a rival was coordinated with the Navy and is considered by them one way of maintaining both competition and the industrial base in their supporting builders.

Right now the Navy is limited in what they are buying with the largest program in number of ships being the Littoral Combat Ship (LCS) program which is built in smaller yards managed by Mariette Marine and Austal America. The new Huntington will compete for destroyers, submarines and aircraft carriers the number of which ordered will be very small for the foreseeable future.

If the U.S. defense spending does decline in the next few years there will be some consolidation in the defense industry. There has already been a great deal of smaller companies involved in M&A and it would not surprise anyone if one of the larger ones did combine with another. There are only so many programs out there and competition will be fierce for them. The budgetary pressures that the U.S. faces with the current deficits means some sort of cuts will be made especially once the troops return from Afghanistan and Iraq.

Photo from Kevin Burkett’s flickr photostream.

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Filed under: BNET 

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