FLYING OUT OF THE COLD WAR

WALTER BOYNE

US aircraft makers found new ways to survive
when it was time to slim down.

An ironic consequence of the sudden end of the Cold War was that the very defense industries that had helped to engineer the US triumph over the Soviet Union became vastly oversized overnight, and were foundering on the verge of obsolescence. Corporations that for decades had worked with the military services to create the weapons needed to deter a Soviet attack now heard just two words. They were “peace dividend,” not “thank you.”

The transformation of the playing field, however, did not come as a complete surprise. Defense leaders had sensed the Soviet Union was in a critical state and that the level of US arms production almost certainly would have to be reduced. Major reductions in defense spending had been delayed because of a concern that in the incipient break-up of the USSR, some hot-head might precipitate a nuclear exchange in order to hang on to power. Fortunately, the political system of what President Ronald Reagan had called “the Evil Empire” expired with a whimper instead of a bang—or multiple, mutually shared bangs.

Industry leaders also had anticipated an eventual reduction in the level of defense spending, but few thought the reductions would be so large or come so quickly. In 1992, former Secretary of Defense William Perry had briefed industry officials in what became known as “The Last Supper,” a dinner meeting at which he forecast the coming decline in defense expenditure, and suggested that far fewer defense contractors would be needed in the future.

There were few palatable alternatives for an industry that had lived so well for so long on large defense spending, but among them were two rather obvious choices. The first was to turn from defense contracts to competing in the civilian sector, and the second was to seek compatible mergers that would make the best of the reduced military budgets to come. In meaner terms, companies would combine to try to get a larger piece of the diminished pie.

The reduction in the available pie, computed in constant fiscal year 1999, was drastic. Defense spending declined from $413.1 billion in 1988 to $302.0 billion in 1995, a drop of about 27 percent. The reduction in the number of competing companies was more dramatic, with famous names like Vought, General Dynamics, Grumman, and Rockwell changing suddenly from major competitors to acquisition targets.

THE MAKING OF FIASCOS

Leaders of the major corporations making up the country’s aircraft industry were grateful for Perry’s candor, and began to assess the alternatives. In the past, aircraft manufacturers had not done well in their efforts to diversify into commercial products. Boeing had a very bad experience after the First World War, failing in an attempt to build furniture. After World War II, the company ventured outside the world of aircraft again, attempting, among other pursuits, to build light transportation systems for municipalities. The company’s failure was on a notably grander scale than the furniture fiasco. After World War II, Grumman Aircraft Engineering Corporation attempted to build canoes and other commercial products. While it turned out magnificent canoes, it did so at ruinous cost. The company pulled in its horns and returned to its stock in trade, building Navy aircraft.

North American Aviation, builder of the famed P-51 Mustang and B-25 Mitchell bomber, entered the civil aviation market with the now classic Navion four-place aircraft, the commercial equivalent of the Beech Bonanza. The story is told of a friend of Dutch Kindleberger, then president of North American, who asked Dutch if he could buy one of the Navions at cost. Since the cost to the company was roughly twice the retail selling price, Kindleberger was delighted with the offer. There were many other similar, and equally dismal, examples.

The general concept of mergers held some appeal, although there always was concern about getting approval from the Justice Department, which generally had opposed such combinations in the past. Further, the track record of aircraft company mergers was not the best. The Depression years had been studded with failed aviation conglomerates, including Detroit Aviation, the Aviation Corporation, United Aircraft & Transport Company, and several others.

In 1943, Consolidated Aircraft Corporation had merged with Vultee Aircraft to become Consolidated Vultee Corporation. The firm, later known as Convair and then General Dynamics, had done very well, primarily because Consolidated was the dominant partner. In marked contrast, McDonnell Aircraft Corporation acquired the venerable but troubled Douglas Aircraft Company in 1967 to form McDonnell Douglas Corporation, a honeymoonless, unhappy marriage—and a corporate mid-air disaster.

McDonnell and Douglas had totally different corporate cultures, starting at the very top with their respective founders. Irreconcilable differences extended well down into the ranks in both enterprises. There was a great deal of resentment by Douglas personnel of McDonnell’s dominant position. McDonnell’s St. Louis organization was more than a little condescending in dealing with the Long Beach, California, engineering and business methods employed by Douglas. The failure to remove the friction contributed in no small way to McDonnell Douglas eventually being acquired by Boeing. That, too, is an acquisition that is still being evaluated, because Boeing’s corporate culture is perceived to be even less like that of McDonnell Douglas than McDonnell’s had been to Douglas.

Despite such examples, the post-Cold War aircraft industry took Perry’s words to heart, and each of the major contractors began to examine how they might best handle their new situation. Almost overnight, a series of courtships began, some short, some prolonged, but all encumbered with the complex legal and psychological considerations that even a discussion of merger involves. These include confidential ity agreements, due diligence reports, independent audits, and furtive meetings of top executives.

For many of these meetings, key personnel often used assumed names and met in neutral locations to avoid giving the media notice of the game that was afoot. Often in this clandestine process, unimaginably painful hardships of planning a merger were brought into sharp focus. There were instances in which corporate jets could not be used to visit a potential partner’s city for fear of disclosure, and travel had to be by commercial airlines! There were other times of corporate cultural horror when stretch limos were not available, and dinner had to be take-out Chinese.

Yet the cloak-and-dagger stratagems of a merger are important for many reasons, including employee morale, the price of stock, and keeping potential competitors in the dark. All of the effort can be undone by a reporter who tracks the movements of the top executives in two corporations and prematurely reports the possibility of a merger.

A MERGER OF EQUALS

Arguably, the most successful of the various aircraft industry mergers to date has been that of the Lockheed Corporation and Martin Marietta, which became Lockheed Martin in 1995. At the time, the deal was described publicly as “a merger of equals,” and privately as “a marriage made in heaven.” There are many reasons for Lockheed Martin’s apparent success. The merging firms were roughly the same size and did about the same amount of business with the government. The product lines of both giants were roughly compatible. There was some overlap that would require hard decisions about who and what parts of the businesses would be retained, but for the most part the firms fit together as neatly as adjacent pieces in a jigsaw puzzle. Yet, there was another critical ingredient in making the merger succeed. It was the men who ran both companies.

Lockheed and Martin had worked together in 1993 in what would have been the simultaneous acquisition of parts of the LTV Corporation. The deal was not consummated, but the leaders of the firms came to know each other in the process. The two chairmen, Lockheed’s Dan Tellep and Martin Marietta’s Norman Augustine, cemented a friendship, though they did not at the time contemplate a merger of their companies.

On the surface they are very different. Tellep’s manner is quiet, but it belies a very strong, detail-oriented personality. Many were surprised at his pugnacious defense of the company during two hostile take-over attempts. In one of them, Harold Simmons, a Texas businessman who had purchased a great deal of Lockheed stock, demanded control of the board of directors. Tellep not only planned his defense carefully, but he undertook bold moves that first rattled Simmons and then effectively shut him out of the fight. It was a triumph Tellep still savors. He was concerned that Simmons would break up the company.

Augustine, the Martin Marietta chairman, has a much more outgoing personality and, while he is also a master of detail, he is characterized generally as being more of a “big picture” man. He became CEO in 1986 and masterminded the 1992 marriage of Martin Marietta and General Electric’s Aerospace division. That merger was accomplished with blinding speed, moving from conception to completion in just 27 days. The speed was in part due to the confidence that Augustine had in G.E.’s chairman, the redoubtable Jack Welch, a confidence that Welch reciprocated.

Tellep was himself no stranger to the idea of strengthening Lockheed by bold moves. The most important of these had been the 1993 acquisition of General Dynamics’ Fort Worth division, where the F-16 fighter was built. Apollo Astronaut William Anders headed General Dynamics, and was simultaneously meeting Perry’s call for downsizing and attending to stockholder interests by selling off much of the firm.

Tellep and his staff adopted a strategy of strengthening Lockheed with further acquisitions, and prepared more than two dozen portfolios on prospective buys. None seemed to fit, and on March 19, 1994, the basic concept of acquisition was replaced with that of a merger. Martin Marietta seemed immediately to be the best prospect, and Tellep called Augustine to initiate the process.

If not truly a “marriage made in heaven,” the merger was certainly made in Wall Street, for everything that could have been a major problem was resolved with relative ease. It was immediately apparent that there were many genuine cost savings possible and that the two firms would be much stronger in the increasingly rigorous arena of international competition.

In many mergers the decision as to who will be the new firm’s chief executive is a difficult problem. At the time of the merger, Tellep, at 64, was senior in age to Augustine by four years, and had been contemplating retirement. It was decided that he would be the chairman and CEO for the first year, then retire, first as CEO, and a year later as chairman. Augustine was happy with this arrangement, and surprised everyone in 1997 with an announcement of his own pending retirement.

Many minor matters that bedevil mergers were handled with skill. The firm’s new name became Lockheed Martin rather than Martin Lockheed or Lockheed Martin-Marietta simply because the top executives thought it sounded better. The old Martin Marietta headquarters campus became that of the new corporation because it made economic sense.

The most difficult aspect of the merger was the inevitable reduction in personnel to avoid duplication. An immense amount of preparation went into this downsizing effort, and the hardships were minimized as much as possible. Top executives were sent to each location where force reductions were to take place. Redundant employees were given professional help in obtaining jobs elsewhere.

THE SECRET INGREDIENT

Much of the success of the merger was due to the long professional experience of both Tellep and Augustine, and to their shared belief that the merger was necessary for the sake of both companies. Both men took care to attribute the success of the merger to the members of their staff who did the necessary leg work. Tellep and Augustine continued to work together closely during the entire process, becoming viewed as something of a “Mr. Inside” and “Mr. Outside” combination in the way they took on responsibilities. They presented a genuine collegial front, and continually stressed that theirs was a merger of equal partners.

There was another lesser-known factor that accounted for the smooth process of the merger, for the subsequent coordinated effort of the new company, and for its ability to begin functioning on the very first day. The secret ingredient is the fact that both men are artists as well as businessmen. Augustine was well known for his best-selling writing and for the wisdom of what became known as Augustine’s Laws, a staple of discussion at corporate retreats. Less widely known is the fact that Tellep is an outstanding water colorist whose beautifully executed paintings are attracting increasing attention at West Coast art shows.

Their artistry showed through in the deliberate and thoughtful way they managed to suppress corporate egos, find formulas for mutual satisfaction, and care for the well being of their employees. It showed in the decor of the new corporation’s headquarters and even in the way the offices were allocated.

But perhaps the clearest expression of their artistry came in the creation of a new Lockheed Martin logo. Both men knew what they did not want—anything that would indicate the primacy of either “heritage” company. Many ideas were put forward, but the one that Tellep and Augustine approved symbolized the effect their artistic talents had on the company. The new logo used two vector symbols to indicate the thrust, forward and upward, of the new firm and the principal ingredients previously used in the insignias of both companies. The new logo was simple, effective, and artistic.

Just like Tellep and Augustine.

Walter Boyne (CC ‘83) is a historian, former director of the National Air & Space Museum, and the author of 30 books, both fiction and non-fiction. His activities include consulting for the aircraft, publishing, and television industries.

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