Case studies of merger activity in the defense industry since 1993.
Zegley, Gary R.
Louvau, Gordon E.
Moses, Douglas O.
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o cope with a shrinking defense budget, the U.S. defense industry has undergone an unprecedented wave of consolidation. Since 1993, Moody's Investors Service has counted over 20 defense industry mergers and acquisitions. Reasons given for the consolidation include achieving critical economies of scale and combining complementary resources in a bid to remain competitive in a capital intensive industry. This thesis examines the financial impact of three merger/acquisition events: Northrop's purchase of Grumman, Lockheed's merger with Martin Marietta, and Raytheon's acquisition of E-Systems. Analysis is conducted to assess financial condition as revealed in an examination of financial ratios and financial prospects as revealed in an examination of market value and market returns. Financial condition of the firms was marked a decline in relative profitability and a degradation in solvency for those that made purchase type acquisitions. Despite negative impacts to many financial performance measures, stocks of these companies achieved total returns in excess of the Standard and Poor's 500 index in the year of the merger event. Price earnings ratios also increased in relation to the S&P 500 P/E, showing that investors may have looked past short term costs of restructuring for longer term gain as a result of the consolidation
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