General Dynamics Corp., the giant defense contractor, will acquire Cessna Aircraft Corp., the largest U.S. manufacturer of private airplanes, the two companies announced yesterday.
The acquisition comes as no surprise, as the two companies already have a financial relationship and Cessna has been rumored to be a takeover candidate for some time. General Dynamics has told analysts it is interested in making acquisitions that will enable it to diversify from the defense-contracting business.
General Dynamics will pay $30 per share in a tender offer that will begin immediately, the companies said. The offer is conditioned on receiving at least 11.18 million shares of Cessna's common stock. Added to the 500,000 shares of Cessna that General Dynamics already owns, the transaction would give General Dynamics at least a 50.1 percent stake in Cessna. Cessna has 19.7 million shares outstanding, so the deal could cost as much as $591 million.
"For Cessna, this puts big smiles on the faces of shareholders," said Laurence W. Lytton, aerospace analyst for Drexel, Burnham, Lambert. "Six hundred million dollars is a lot of money, and it's nicer to have cash than Cessna stock these days. For the company, it gives them the backing of a parent with deep pockets." And, he added, it gives Cessna additional support while it waits for the moribund private-airplane market to pick up.
General Dynamics, Lytton said, will be able to diversify away from defense, on which it is heavily dependent. However, Lytton said he expected the acquisition to reduce General Dynamics' anticipated earnings by about 5 percent in the short term.
The market seemed to echo that analysis. Cessna -- the most actively traded stock on the New York Stock Exchange yesterday with 3.3 million shares changing hands -- closed at $29.50 per share, up $1.25 from Thursday's trading. General Dynamics fell $1.87 to $73.37.
The companies said Cessna's board of directors has approved the offer and will recommend that shareholders tender their shares to General Dynamics. General Dynamics currently owns 2.5 percent of Cessna's stock, and David S. Lewis, chairman and chief executive officer of General Dynamics, is on the Cessna board of directors.
Cessna Chairman Russell W. Myer Jr. and President R. W. Van Sant will remain in their current positions, the companies said.
In 1984, Cessna had net earnings of $949,000 on revenue of $694 million, while the much larger General Dynamics earned profits of $382 million on revenue of $7.8 billion.
The acquisition of Cessna is one of a series of buyouts in the general-aviation manufacturing industry, which includes all types of airplanes except military aircraft and commercial jets. In the last few years, Chrysler Corp. has acquired Gulfstream Aerospace Corp., Lear Siegler Inc. has bought Piper Aircraft Corp., and Raytheon Corp. has acquired Beech Aircraft.
The market for general-aviation aircraft remains depressed. In 1978, the industry shipped 17,811 planes. This year, estimates Christopher Demisch, vice president of First Boston Corp., shipments will total less than 2,000 planes.
"These are crummy results," Demisch said, noting that the dollar volume of sales has declined as well. "The industry is in a severe slump despite the fact that we have a decent economy. We're down almost by a factor of 10."
Several reasons account for the decline, Demisch said, including overproduction in the late 1970s, competition from foreign manufacturers and the increasing complexity of the air traffic control system, which makes it more difficult for private pilots to fly.
In Cessna, General Dynamics gets a company that manufactures airplanes ranging from small trainer planes to Citation business jets. The company does not, however, produce the kind of turboprop aircraft often purchased by commuter airlines -- the only segment of the general-aviation industry showing much sign of life.
Cessna has said it is interested in producing more military aircraft, and has submitted a proposal to the Air Force to modernize the T-37 jet trainers it manufactured more than 30 years ago.
Fairchild Industries Inc., headquartered in Chantilly, Va., has been developing a new jet trainer for the Air Force but has come under sharp criticism from Air Force officials for poor manufacturing processes and may lose the contract.
That could leave the Air Force with no modern jet trainer, although it is not clear Cessna could move into the breach, analysts said.
Besides diversifying away from defense, General Dynamics will get the chance to use some of its military-manufacturing skills and technology on Cessna's line of jets, Lytton suggested. The companies' announcement said the merger "should bring substantial benefits to both companies in the important areas of aircraft design and engineering as well as improved production efficiencies."
Demisch of First Boston said the move is a wise one for General Dynamics despite the vagaries of the small-plane market because the company is getting Cessna after the company has gone through a painful transition and adjusted to the smaller market.