The appointment of Stanley C. Pace as vice chairman of General Dynamics Corp. brings the troubled defense contractor some badly needed credibility, analysts said yesterday, as well as giving it an executive who is expected to lead the company into diversification away from its current heavy emphasis on defense contracting.
Pace, who had been vice chairman -- and before that president -- of TRW Inc., is to ascend to the General Dynamics chairmanship "not later than" Jan. 1, 1986, the company said, replacing David S. Lewis, who has come under personal attack in recent months as revelations of the company's defense-contract abuses have mounted.
Lewis has long stated his intention to retire soon, and many analysts believed he stayed on longer than he planned so that he could see the company through its current crisis.
On Tuesday, Navy Secretary John F. Lehman barred two General Dynamics divisions from obtaining new military contracts until the company repays $75 million in overcharges and establishes a "rigorous code of ethics" for its executives. Lehman also canceled two current General Dynamics contracts worth $22.5 million.
Although Lehman declined to suspend Lewis and other top General Dynamics executives as part of the punishment, analysts said it was hard to see the announcement of Pace's appointment as coincidental. "I suspect there was probably . . . to some extent a desire to give the DoD the equivalent of a human sacrifice by making a change," said aerospace-industry analyst Wolfgang Demisch of First Boston Corp.
Because of his age -- 63 -- Pace is not expected to have a long reign as General Dynamics' chairman. But his tenure could be critical to the future of the $7.8 billion company, which, despite the current controversy, is considered by analysts to be in good shape financially.
"It frees the company up to look other places now, not to be totally involved in this confrontation with the Defense Department," said David J. Smith, an aerospace-industry analyst at Sanford C. Bernstein & Co.
Pace's first task will be to restore General Dynamics' tattered reputation, something analysts said he will accomplish in part just by walking through the door. "His hands are clean, which is important," said Morton Langer, an analyst at Bear, Stearns who is familiar with both TRW and General Dynamics. "He's a strong executive and well respected by the industry and by the investment community."
"He's got a lot of credibility," Paine Webber analyst Eli Lustgarten said.
"The one thing he could represent is that TRW blew the whistle on itself when it found an internal audit problem on a government contract," Lustgarten said. "Consequently, it has tremendous respect in Washington."
That incident occurred last year, when Pace was still president of TRW. Upon discovering illegitimate overruns on a contract to build jet engine parts, TRW quickly refunded the money to the government.
Langer said he expected Pace, once he takes control of General Dynamics, to "take a look and check their overhead costs and billings to the U.S. government and make sure that everything is in sync so the company can go back to its business of manufacturing weapons systems."
But Pace's role is likely to go beyond that, other analysts said. Although TRW did nearly $1 billion in defense work last year, its primary orientation is toward industrial and commercial markets, and Pace comes from that side of the business. "It's sort of interesting to note that his background at TRW is in the industrial side rather than in the defense side," Smith said. "It would indicate General Dynamics is looking for an acquisition on the industrial side."
General Dynamics executives have made no secret in recent years of their desires to diversify the company. Military contracts -- for such armaments as the F16 fighter aircraft, tanks, missiles and ships -- now account for more than 90 percent of General Dynamics' revenue, making the company vulnerable to ebbs and flows in military spending, and limiting profits because of restrictions placed on military contracts. "The real concern is the F16, the subs, the tanks, the various missiles are pretty much as good as they're going to get," Demisch said. "Practically, GD needs to find new fields."
Analysts expect the company to acquire some sort of industrial company to which it could bring some of its expertise as a manufacturer -- a broad prescription taking in anything from metalworking to automotive parts. Smith estimated that acquisitions of non-military operations could reduce General Dynamics' revenue flow from defense work to about 65 percent of its total revenue in the next few years.
"It would be outside the defense area, and I don't think it would be a consumer company," said Howard Mager, an analyst at DLJ Securities in New York. "To be meaningful it's got to be a $1-billion-or-more company."
Analysts said General Dynamics would have little trouble affording such an acquisition. Its backlog at the end of last year was an impressive $22 billion, and Mager estimated that the company should be able to generate something in the neighborhood of $1 billion in cash from its operations over the next couple of years.
Pace's background is expected to add to General Dynamics' ability to run a non-defense business, strengths that also will apply to the company's military work.
But Smith warned that even with Pace's talents, General Dynamics could face problems diversifying. Other major defense contractors that have attempted similar diversifications in recent years have met with mixed success, he said, after finding that the skills it takes to do government work don't necessarily transfer to the private sector.
"Any company that has been primarily into defense that has moved into the civilian sector hasn't had much success; it's cost them a lot of money," Smith said, noting that General Dynamics a few years ago ended diversification forays into telecommunications equipment and electronics because they weren't paying off.
"It's a different management philosophy, different cost structure, a different spirit, certainly different markets," he said. "When you are in the civilian side of the house, you really have to be more aggressive."
Nevertheless, the analysts said Pace will provide General Dynamics the leadership to attempt such a transition, as well as to escape its current woes.
"I think basically the company is, one by one, getting rid of the clouds over its head," Smith said