McDonnell Douglas Considers Purchasing Hughes' Defense Units from GM

12/10/96

The St. Louis Post-Dispatch has reported that St. Louis-based McDonnell Douglas Corporation is a prime candidate to buy Hughes Electronics Corporation's military and aerospace operations, when Hughes' parent company GM puts them on the market. Aerospace industry analysts have said that the auction of Hughes' missiles, radar, and electronics businesses will illustrate the length McDonnell Douglas is willing to go to remain the nation's No. 2 military contractor. Analysts like Paul Nisbet of JSA Securities Inc. in Newport, R.I. predict that Hughes' defense units might go for up to $8 billion. Nisbet added that McDonnell is the defense giant most likely to be able to afford a deal that big. Speculation about the possibility of the purchase drove Hughes' stock up $3.25 to $56.37 1/2 on Wall Street last week.

Analysts say that McDonnell's principal rivals for the Hughes businesses are Raytheon Co. and Northrop Grumman Corp. Boeing Co. has been expanding its involvement in the defense business and also may bid, said Wolfgang Demish, an analyst for BT Securities Corp. in New York. McDonnell refused to comment on possible mergers or acquisitions, but President Harry C. Stonecipher told analysts and investors in New York on Thursday that the company was committed to expanding its defense electronics capabilities. If McDonnell does purchase the Hughes businesses, it would recapture the Tomahawk cruise missile program, which it lost to Hughes two years ago.

Raytheon might be considered a better match for the Hughes units, as it makes similar products and is a partner with Hughes in two missile ventures. Raytheon also makes appliances and aircraft, and has been on a defense electronics buying spree for over a year. It bought Chrysler Corporation's defense subsidiary for $475 million in June, paid about $2.3 billion for E-Systems Inc. in April 1995. Raytheon has said it will do what it can to keep its defense business competitive with Lockheed Martin Corporation.

Mcdonnell President Stonecipher has publicly lamented McDonnell's failure to acquire E- Systems and recent activity suggests that McDonnell may be trying to buy all or part of Raytheon.

GM's possible sale of the Hughes defense units would represent a further consolidation of the U.S. defense industry, which began with the end of the Cold War. The deal also would further GM's plans to focus its corporate energies on on cars, and would leave GM with Hughes' auto parts operation, its satellite manufacturing operation, and its quick-growing DirecTV satellite television service.

Paul Dever -- The Auto Channel