Post-Cold War Defense Contracting Consolidation: Survival Strategies

P OST- C O L D W AR D E F E N S E C ONTRACTING C ONSOLIDATION L EADERSHIP AND SURVIV AL STRATEGIES U S E D B Y T O D A Y ’ S LARGEST DEFENSE CONT RACTORS

Master of International Business Thesis

Submitted by LAURENCE NGUYEN SPRING 2011

© 2011 LAURENCE NGUYEN

http://fletcher.tufts.edu

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The thorny relationship between the military industrial complex and American society has been a topic of contention for the last fifty years. From the Cold War to the fall of the Berlin Wall, the defense contracting industry has had to reinvent itself to adapt to different cycles of war(i). With the homeland attacks of 9/11 and the paradigm shift in the approach to and execution of war, defense contractors have consistently had to meet new procurement demands. Given the current state of the US economy and fiscal pressures faced by the Obama government, defense contractors will also have to address shareholder expectations by being prepared for an era of multilateral budgetary compressions.

The US defense budget for 2010 was $693.4 billion, and the 2011 Budget for the Department of

Defense only provides a 3.4 percent increase over the 2010 enacted level1. On the global level, the post-1990s industry consolidation has left a highly regulated playing field, vastly dominated by American industrialists. Today, four of the top five largest ranking defense contracting companies in the world are headquartered in the US2 and hold a total of market capitalization exceeding $125 billion3. In fact, the level of concentration in the industry is such that forty five percent of total arms sales is generated by five defense contracting companies4.

As the geopolitical space of the battlefield and the nature of war shifts from offensive-defensive to asymmetrical and preemptive, defense contracting companies need to rethink once more the way they operate and strategize their activities to remain competitive and responsive to the new realities and requirements of their major off-taker, the US government.

(i) See Summary Chart: Chronology of Wars, Defense Doctrines and Defense Spending in the US post-WWII on page 4 1 FY2010 Enacted: $US660.4 billion, FY2010 Supplemental: $US33.0 billion; Source: White House Office of Management and Budget, Department of Defense, available at http://www.whitehouse.gov/omb/factsheet_department_defense/ 2 SIPRI Fact Sheet, April 2010, The SIPRI Top 100 Arms Producing Companies, 2008, Susan T. Jackson and The SIPRI Arms Industry Network (Appendix 1) 3 The four companies being Boeing (BA), Lockheed Martin (LMT), Raytheon (RTN) and Northrop Grumman (NOC); Source: Symbol lookup from Yahoo! Finance, in date of February 4, 2011 4 Home Search Database Publication SIPRI Yearbook Library Media Blogs About SIPRI, Concentration in the Arms Industry, Changes in concentration ratios, SIPRI Top 100 companies, 1990 – 2005 (Appendix 2)

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

Under President Barack Obama, the American military will most likely experience another drawdown cycle of military spending. In 2010, Secretary Gates announced a $100 billion defense budgetary cut over five years5 and in 2011, President Obama pronounced a “fundamental review” of US military missions and capabilities in a bid to cut $400 billion over 10 years6.

Current US government policy is to gradually disengage in Iraq and Afghanistan and reform the

Department‟s institutions and processes to only buy weapons that are truly needed. Under the latest Quadrennial Defense Review Report of the Department of Defense (QDR) published in

February 2010, redirecting resources includes plans to end the production of the F-22 fighter and

C-17 airlift aircraft, respectively produced by Lockheed Martin and Boeing, restructuring

General Dynamics‟ procurement of the Zumwalt-class destroyer (DDG-1000), and the Air Force substantially reducing its fleet of older fourth-generation fighter aircraft.7 Therefore, US-based defense contractors will need to be prepared with solid plans to ensure a sustainable stream of revenue.

By way of background, a Summary Chart detailing significant US related defense policy development since the end of World War Two is provided on page 4. The chart illustrates US defense related budgetary spending in dollars of 2009 relative to different administrations from

Truman to Obama, and juxtaposes national and international security related commitments undertaken by the US during that same timeframe. An interesting observation is the sinusoidal motion of the American defense budget, illustrating the cyclical nature of the industry. This of course has consequential commercial impact on top and bottom lines of defense suppliers and other stakeholders, especially when taking into account the monopsony nature of the market.

5 Office of the Under Secretary of Defense, Memorandum for Acquisition Professionals, September 14, 2010 6 Brannen Kate, Obama's Plan: Cut Defense Spending by $400B by 2023, Defense News, available at: http://www.defensenews.com/story.php?i=6229773 7 Robert M. Gates, Quadrennial Defense Review Report, Department of Defense, February 2010. Pages: Preface (pp. i - xvii); available at http://www.defense.gov/qdr/images/QDR_as_of_12Feb10_1000.pdf

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

The elongated slope ranging from the second term of the Reagan administration to the Homeland

Security Attacks of 9/11 shows the military budget cutback efforts of governments after the substantial build-up of the early 1980s.

It is during that time period that the face of the American defense industry underwent a severe makeover, marked by high level of consolidation between industry players, letting place to what is now known as the Prime Contractors. The group is America‟s leading and largest five defense contractors (by military sales). It includes The Boeing Company, General Dynamics, Lockheed

Martin Corporation, Northrop Grumman Corporation, and Raytheon Corporation (see company operations and details in Table 1, page 5).

This paper explores the strategies and maneuvers used by today‟s largest US-based defense contracting companies, which have kept them alive, when their industry was crumbling. How did the consolidation escapees of the Post-Cold War period (1990-2000) become today‟s industry leaders?

A particular interest is paid to the figurehead of these companies to provide further colors to the understanding of the composition of today‟s military industrial complex.

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

Summary Chart: Chronology of Wars, Defense Doctrines and Defense Spending in the US post-World War Two

1945 1953 ‘61 ‘64 1969 ‘74 ‘77 ‘81 1989 ‘93 2001 2009

Coming of Flexible NSA ‟47 SecDef Aspin‟s $800 Military Industrial Resp. 07/47 Complex: Last Supper Policy 12/93 Surge in $700 NSC-68 Warning Goldwater-Nichols Act: „61 Afghanistan 04/50 01/61 US Military “jointness” Patriot Act bringing US troop $600 New Look 10/86 „01 to ≥100k men Defense Policy 12/09 $500 Berlin First Blockage 01/54 Partial „48-„49 Test $400 Strategic Defense Dept. of Homeland Defense Banning Helsinki Security Massive Retaliation Initiative on Anti- Budget $300 Treaty Accords Ballistic Defense 03/02 Cut Doctrine (Air Force 07/63 NATO 07/75 System US$100bn $200 Funding ↑) SALT I SALT II 04/49 01/54 03/83 over 5 yrs „69-„72 „77-„79 $100

Truman Eisenhower JFK Johnson Nixon Ford Carter Reagan Bush Clinton Bush Obama

Vietnam War Soviet War in Greek Civil Korean War ‟64-„75 Afghanistan War „50-„53 ‟79-„88 „50-„53

Israeli War on Suez Canal Operation Cuba Arab Israeli Ramadan / Operation Operation Operation Operation Operation Homeland Independence Crisis Blue Bat Missile Six Day Yom Kippur Urgent El Dorado Just Deliberate Allied Security Attack 05/48 10/56 (Lebanon) Crisis War War Fury Canyon Cause Force Force 9/11/01 07/58 10/62 06/67 10/73 (Grenada) (Libya) (Panama) (Bosnia) (Kosovo) 10/83 04/86 12/89 08/95 03/99

Gulf War I Operation Gulf War II Budget for National Defense, FY 1948-2009 „90-„91 Enduring 03/05 (in billions of constant FY09 dollars; includes war & nuclear funding) Freedom (Afghanistan) 11/01 US related national security commitment s Operation Restore Hope International conflicts affecting the US (Somalia) 12/92-05/93 “Game changers” in global security affairs

Cold War Global War on Terrorism 1947-1991 ‟00-present

Laurence Nguyen Page 4

Note: Budget line adapted from information provided by The Centre for Arms Control and Non-Proliferation, Current U.S. Defense Spending vs. Spending Since 1948, available at http://armscontrolcenter.org/policy/securityspending/articles/022609_fy10_topline_growth_since48/ Post-Cold War Defense Contracting Consolidation: Survival Strategies

Table 1: Snapshot of US Top Five Defense Contractors

Boeing Co. (The) General Dynamics Corp. Lockheed Martin Corp. Northrop Grumman Corp. Raytheon Co. NYS: BA NYS: GD NYS: LMT NYS: NOC NYS: RTN w w w .boeing.com w w w .generaldynamics.com w w w .lockheedmartin.com w w w .northropgrumman.com w w w .raytheon.com

Lockheed Martin Corporation is a global The Boeing Company, together w ith its Raytheon Company operates in defense, security company that primarily researches, subsidiaries, develops, produces, and markets General Dynamics Corporation is a diversified Northrop Grumman Corporation is a global homeland security and other government designs, develops, manufactures, and commercial jet aircraft, as w ell as provides defense company. The Company offers a broad security company. The Company provides markets. The Company provides electronics, integrates advanced technology products and related support services to the commercial portfolio of products and services in business systems, products, and solutions in aerospace, mission systems integration in the areas of Company Description1 services. The Company's businesses span airline industry w orldw ide. The Company also aviation, combat vehicles, w eapons systems and electronics, information systems, shipbuilding and sensing, effects, command, control, space, telecommunications, electronics, researches, develops, produces, modifies, and munitions, shipbuilding design and construction, and technical services to government and commercial communications and intelligence systems, information and services, aeronautics, energy, supports information, space, and defense information systems, technologies and services. customers w orldw ide. and mission support services. Raytheon and systems integration. Lockheed Martin systems, including military aircraft, helicopters provides products and services w orldw ide. and space and missile systems. operates w orldw ide.

May 1925 , NJ, United States May 1939 , CA, United States Incorporation Date2 1916 , WA, United States August 1994 , MD, United States 1922 , DE, United States Reincorporated: July 1934 , DE, United States Reincorporated: February 1952 , DE, United States Reincorporated: June 1985 , DE, United States

1. Commercial Airplanes 1. Integrated Defense Systems 1. Aerospace 2. Boeing Military Aircraft 1. Aerospace 1. Aeronautics 2. Intelligence and Information Systems 2. Electronic Systems 3. Netw ork & Space Systems 2. Combat Systems 2. Electronic Systems 3. Missile Systems Business Segments3 3. Information Systems 4. Global Services & Support 3. Marine Systems 3. Information Systems and Global Services 4. Netw ork Centric Systems 4. Shipbuilding (Boeing Defense, Space & Security) 4. Information Systems and Technology 4. Space Systems 5. Space and Airborne Systems 5. Technical Services 5. Boeing Capital Corporation 6. Technical Services

domestic and international customers w ith Domestic and international customers, U.S. military, other government organizations, the Commercial airline industry w orldw ide, and products and services that have defense, civil, US government customers and other international principally as a primary contractor on a Customer Market3 armed forces of other nations, and a base of principally, US, Canada and Australia and commercial applications, principally customers portfolio of defense and related programs corporate and individual buyers of business aircraft agencies of the U.S. Government. for government customers

Guided missiles and space vehicles (SIC* Search and navigation equipment (SIC* Search and navigation equipment (SIC* 3812) 3761); Guided Missile and Space Vehicle 3812); Search, Detection, Navigation, Aircraft (SIC* 3721); Aircraft Manufacturing Aircraft (SIC 3721); Aircraft Manufacturing (NAICS Search, Detection, Navigation, Guidance, Industry2, 3 Manufacturing (NAICS** 336414) and Guidance, Aeronautical, and Nautical (NAICS** 336411) 336411) Aeronautical, and Nautical System and Instrument Ammunition (except Small Arms) System and Instrument Manufacturing Manufacturing (NAICS** 334511) Manufacturing (NAICS**332993) (NAICS** 334511)

Command and control systems, large-scale intelligence information systems, missile defense Weapon systems (missiles, smart munitions, systems, advanced radar systems, civil Global strike systems, global mobility systems, Combat vehicle, w eapons systems and close in w eapons systems, projectiles), government and public public safety, information rotorcraft systems, airborne surveillance and munitions,ship buiding desigh, repair & construction, Electronics and information systems to kinetic kill vehicles, unmanned ground, air Featured Military systems, conventional and nuclear pow ered reconnaissance aircraft4 information systems technologies & services7 missiles, aircraft, and spacecraft6 and space systems, cybersecurity Arsenal3 naval ships, satellites, system sustainment, (See Appendix 5: Boeing Defense, Space and (See Appendix 6: General Dynamics Military and (See Appendix 7: Lockheed Martin products) systems, netw ork centric systems5 logistics support and training, high-energy laser Security product capabilties) Defense related products) (See Appendix 9: Raytheon products and systems, unmanned aerial vehicles8 services) (See Appendix 8: Northrop Grumman products capabilities)

Number of Employees2 157,100 91,700 140,000 120,700 75,000 (12/31/2009)

Number of Shareholders: 222,498 Number of Shareholders: 14,000 (approximate Number of Shareholders: 37,713 (record) (as Number of Shareholders: 34,020 (approx.) (as of Number of Shareholders: 35,971 (as of (approximately) (as of 02/01/2010) record) (as of 01/31/2010) of 01/31/2010) 02/05/2010) 02/16/2010) Market Cap: 50,587,676,800 Market Cap: 26,914,260,000 Market Cap: 26,523,427,200 Market Cap: 19,393,909,380 Market Cap: 17,942,806,460 Revenue: 65,693,000,000 Revenue: 31,763,000,000 Revenue: 45,978,000,000 Revenue: 33,902,000,000 Revenue: 24,965,000,000 Finanial Data Overview 2 Net Income: 3,411,000,000 Net Income: 2,509,000,000 Net Income: 2,770,000,000 Net Income: 2,090,000,000 Net Income: 1,885,000,000 Dividend: 1.68 Dividend Yield: 2.4362 Dividend: 1.64 Dividend Yield: 2.3018 Dividend: 2.64 Dividend Yield: 3.5845 Dividend: 1.84 Dividend Yield: 2.7703 Dividend: 1.5 Dividend Yield: 3.0475 EPS Basic: 4.7 EPS Diluted: 4.66 EPS Basic: 6.54 EPS Diluted: 6.47 EPS Basic: 7.49 EPS Diluted: 7.41 EPS Basic: 6.94 EPS Diluted: 6.85 EPS Basic: 5.01 EPS Diluted: 4.95 PE Ratio: 14.735 PE Ratio: 10.9615 PE Ratio: 10.3296 PE Ratio: 10.2658 PE Ratio: 10.384

1 Source: Bloomberg Company Description 2 Source: Mergent Online General Company Information, available at Laurencehttp://www.merge Nguyen ntonline.com.ezproxy.library.tufts.edu/companynews.php?compnumber=5271&pagetype=recent&area=detail&storyid=376461220 Page 5 3 Source: LexisNexis, available at http://www.lexisnexis.com.ezproxy.library.tufts.edu/hottopics/lnacademic/ *SIC: Standard Industrial Classification **NAICS: North American Industry Classification System Post-Cold War Defense Contracting Consolidation: Survival Strategies

The graph below shows the US GDP growth rate from January 1989 to December 2010

Available at: http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=USD

1990 in Review:

The US economy real rate of growth in 1990 slowed to an estimated of 0.9% from 2.5% in 1989.

The August 2 invasion of Kuwait by Iraq pressed an already uncertain economy, as concerns on the future price of oil, associated with potential international economic sanctions on Iraq and unclear outcomes of possible military engagement worried financial analysts.8

In the final quarter of the fiscal year, the GNP fell an estimate annual rate of 2.1%. Significant layoff in Q2 caused unemployment rate to climb and by year end, the US Department of Labor reported that the unemployment rate was 6.1%, the highest since June 1987. The annual average for 1990 was 5.5%.9

The dollar volume of completed merger and acquisition transactions fell by 34.8%, from $256 billion in 1989 to $166.9 billion in 1990. Leverage buy-outs were down 69%.10

8 NYSE Fact Book, 1991 9 Ibid. 10 Ibid. Laurence Nguyen Page 6

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Market activity:

The bull market that began in August 1982 finally ended mid-July 1990 as the DJIA reached a peak of 2,999.75, from where it retreated to hit a low of 2,365.10 in October. The Dow was off

4.3% from its year-end 1989 level. On the NYSE, trading volume was 39.7 billion shares, a drop of 4.9% from 1989‟s level. Average daily volume fell from 165.5 million shares to 156.8 million, the lowest level since1986. 11

Stock prices:

Q1 of 1990 was marked by economic uncertainty, but as hopes grew that the Fed would be able to avert a major recession, stock prices gained strength. The NYSE Composite Index reached an all-time high of 201.13 on July 16. However, continuing nervousness about the economy and the

Middle East caused it to retreat. Oil prices jumped after the invasion of Kuwait, confidence in the

US economy weakened, and consumer spending dropped sharply. Both stock and bond prices fell. 12

The NYSE Composite Index reached its low for the year of 162.20 on October 11, and ended the year at 180.49, down 7.5% from 1989. Of the index components, financial and transportation stocks declined sharply, down 21.8% and 20.7%, respectively. 13

The DJIA closed the year at 2,633.66, down almost 120 points. The S&P 500 Index decreased

6.6%.

11 NYSE Fact Book, 1991 12 Ibid. 13 Ibid. Laurence Nguyen Page 7

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Domestic and Economic Policy:

When President Bush Sr. took office in 1989, the new president inherited of a federal budget debt of $2.8 trillion, three times larger than it had been a decade earlier. The debt burden forced the President to adopt "a limited agenda" to preserve the status quo left by predecessors, which included volunteerism, education reform, and anti-drug efforts.14

Tied to his political campaign promises not to raise taxes, Bush was faced with the challenge of balancing the budget and reducing the deficit without imposing additional taxes to his constituents. The Republicans addressed the budget deficit with proposals of drastic cuts to domestic spending, which was met with opposition by a Democrat controlled Congress. In Q2 of

1990, the President had to go back on his “no taxes” pledge and in the last half of the year, was able to reach a compromise with Congress to pass a budget aimed at reducing deficit by cutting government expenditures and raising taxes, after a brief government shutdown15.

On top of the budget crisis, the 1989-1993 years were marketed by the Savings and Loans industry collapse. In February 1989, the President proposed a $100 billion bailout that added to the difficult financial framework that contributed to the volatility of the financial environment in the US.16

National Security:

As the 1990s progressed, the first three Chairmen were faced with responding to an unstable geopolitical environment marked by the first Gulf War and a number of regional military

14 Miller Centre of Public Affairs, University of Virginia, Gerald L. Baliles, Director, American President, An Online Reference Resource, George H.W. Bush (1924-), available at: http://millercenter.org/president/bush/essays/biography/4 15 Ibid. 16 Ibid. Laurence Nguyen Page 8

Post-Cold War Defense Contracting Consolidation: Survival Strategies operations. The Panama war on narcotraffic and humanitarian crisis in Somalia and Bosnia were fought while accommodating slowly declining financial resources and a one-third decline in force structure.17

Post-Cold War and the Military Industrial Complex

It was under this backdrop that in 1993, Bill Clinton‟s Defense Secretary Les Aspin, his Deputy

Secretary Bill Perry and Undersecretary of Defense for Acquisition John Deutch summoned the chiefs of the nation‟s largest fifteen defense contractors to a dinner at the Pentagon. The episode, now famously known as the “Last Supper”, recalls the final meal that Jesus shared with his

Twelve Apostles in Jerusalem and refers to the Department of Defense‟s appeal to defense industrialists to come together and reshape the structure of the defense industry. With the dissolution of the Warsaw Pact and the demise of the Soviet Union, the defense budget was now sliding below $300 billion, from a projected $600 billion five years earlier. The government did not have the means to support the industry under its current size18.

Following a “bottom-up review” of the Department of Defense, Aspin‟s budget proposal for

1994 was a mere $263.4 billion, a 4.5% decrease from previous levels. 19

To promote consolidation, the Department of Defense allowed companies to write off restructuring cost against military contracts.20 The administration‟s indulgence only came to a halt in 1997, when the Department of Justice intervened to block the megamerger of Lockheed

Martin and Northrop Grumman. Concerns over the potential strength of the new group, with a

17 Meinhart, Richard, Strategic Planning by the Chairmen, Joint Chiefs of Staff, 1990 to 2005,Strategic Studies Institute, April 2006, available at: http://www.comw.org/qdr/fulltext/0604meinhart.pdf 18 Augustine, Norman R., The Last Supper, Revisited, Meeting Ignited Inevitable Consolidation, Defense News, June 26, 2008 19 Les Aspin, January 21, 1993 - February 3, 1994, 18th Secretary of Defense, Clinton Administration, The Department of Defense, available at: http://www.defense.gov/specials/secdef_histories/bios/aspin.htm 20 SIPRI, Military Spending and Armament, Concentration in the Arms Industry, available at: http://www.sipri.org/research/armaments/production/researchissues/concentration_aprod, viewed on 10/21/2010 Laurence Nguyen Page 9

Post-Cold War Defense Contracting Consolidation: Survival Strategies projected control of twenty five percent of the Department of Defense's procurement budget, raised anti-trust issues.21

The resulting deal volume that spread through the industry caused not only structural changes in the competitive environment for the American defense procurement industry, but carried profound systemic changes that would affect the dynamics of surviving companies into the twenty first century.

Table 2 below provides empirical data to illustrate the change in concentration of the Top 100 arms producing companies for 1990 to 2005.

Table 2: Changes in Concentration Ratios (% of combined total of SIPRI Top 100 Companies, 1990 – 2005 Arms Sales Total Sales

Company Section 1990 1995 2000 2005 1990 1995 2000 2005

5 Largest Companies 22 28 41 43 33 34 43 45

10 Largest Companies 37 42 57 62 51 52 61 62

15 Largest Companies 48 53 65 69 61 64 71 73

20 Largest Companies 57 61 70 74 69 72 79 81

Source: SIPRI, Military Spending and Armament, Concentration in the Arms industry, Changes in concentration ratios, SIPRI Top 100 companies, 1990 – 2005, available at http://www.sipri.org/research/armaments/production/researchissues/concentration_aprod/ratios At the end of the Cold War (1990 column), the top 5 largest defense contracting companies accounted for twenty two percent of total arms sales. The concentration of their total sales was fifty percent higher than that of their arms sales, at thirty three percent, an indication of moderate level of military specialization.

21 Wayne, Leslie, Lockheed cancels Northrop merger, citing U.S. stand, The New York Times, 07/17/1998 Laurence Nguyen Page 10

Post-Cold War Defense Contracting Consolidation: Survival Strategies

By 2000, the concentration level for the five largest arms producing companies accounted for forty one percent of the industry‟s total sales, representing an increase in market share of close to one hundred percent in the space of a decade. Total sales attributed to non-military products for the same companies registered a mere thirty percent increase, suggesting that larger contractors opted for more specialization in arms sales.22

Expanding the above consideration from the top five to the largest ten defense contractors, the top ten defense companies went from commanding a benchmark of over one third of the total arms sales market to controlling close to sixty percent of the same industry in 2000. Total sales for the same period only saw an increase of eighteen percent.23

Appendix 3 from SIPRI Military Expenditure and Arms Production Project reports one hundred and forty merger and acquisition transactions in the US between 1998 and 2003. Those transactions were undertaken by over forty buying companies, totalizing well over $60 billion in transaction activity. Fifteen of the reported deals were above $1 billion, with the largest deal between Allied Signal and Honeywell valued at $14 billion in 1999. L-3 Communications led the offerors‟ group, registering twenty eight transactions totaling $3.3 billion, followed by General

Dynamics with thirteen acquisitions totaling $6.3 billion. Northrop Grumman came out with the highest value in deal sizes, with a combined value of $14.3 billion worth of acquisitions, spreading over 12 deals.

Table 3 below further illustrates a decade‟s worth of industry contraction, with the number of prime contractors to the US Department of Defense dissolving from sixty four to thirty two,

22 SIPRI, Military Spending and Armament, Concentration in the Arms Industry, available at http://www.sipri.org/research/armaments/production/researchissues/concentration_aprod 23 Ibid. Laurence Nguyen Page 11

Post-Cold War Defense Contracting Consolidation: Survival Strategies effectively halving the number of players in the space of a decade. In the tactical missiles sector, consolidation affected seventy five percent of contractors.

Table 3: Number of prime contractors to the US Department of Defense, 1990 and 2000

General Electric Aerospace merged with Martin Marietta, which combined with Lockheed.

McDonnell Douglas joined Boeing. Grumman joined Northrop. When the dust had cleared, there were only a few firms left standing.24 (See Appendix 4 for USA aerospace industry consolidation,

1990–1998).

Empirical studies conducted by Flamm (1998) have demonstrated that fewer companies do not necessarily mean less capacity and suggests that large weapons systems may require a minimum level of R&D on a functional and operational level.25 Although fewer companies might lead to greater efficiencies (Lockheed alone saved the government over $3 billion per year by

24 SIPRI, Military Spending and Armament, Concentration in the Arms Industry, available at http://www.sipri.org/research/armaments/production/researchissues/concentration_aprod 25 Flamm, Kenneth, US Defense Industry Consolidation in the 1990s, in Susman and O‟Keefe, The Defense Industry in the Post- Cold War Era, Corporate Strategies and Public Policy Perspectives, Pergamon, 1998, ch.4 Laurence Nguyen Page 12

Post-Cold War Defense Contracting Consolidation: Survival Strategies consolidating its businesses 26 ), the tradeoff can be acute specialization and less innovative companies.27

Similar to other commercial firms, many strategies are available to defense contractors striving to fight top line erosion. Reducing the cost of goods sold, sourcing new revenue streams, and financial re-structuring are examples of common ways to preserve margins. By shrinking the asset base and exploring new products and unrelated markets, firms can also respond to external forces pushing on their business operations.

Susman and O‟Keefe (1998)28 identified four ways in which defense contracting firms responded to the new industry contraction and concentration challenge:

1. By remaining in the defense business but diversifying into related commercial

businesses (horizontal diversification)

2. By remaining in the defense business but selling non-core business (sale of asset)

3. By exiting the defense business by spinning-off or selling-off defense-related business to

competitors (spin-off)

4. By remaining in the industry and acquiring companies that served different defense

related markets (M&A and consolidation).

26 Augustine, boe R., The Last Supper, Revisited, Meeting Ignited Inevitable Consolidation, Defense News, June 26, 2008 27 Flamm, Kenneth, US Defense Industry Consolidation in the 1990s, in Susman and O‟Keefe, The Defense Industry in the Post- Cold War Era, Corporate Strategies and Public Policy Perspectives, Pergamon, 1998, ch.4 28 Ibid. Laurence Nguyen Page 13

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The matrix below illustrates the four previous points:

A comparative analysis of the defense conversion mix employed by today‟s top five US prime contractors in response to systemic changes and budgetary constraints of the Post-Cold War period is examined next.

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

To understand the reasoning and dynamics behind prime contractors‟ corporate strategies in the

Post-Cold War era, the next section is dedicated to company analysis and background of the companies studied.

Table 1 introduced earlier on page 4 provides a brief snapshot of the group of five, and Table 4 on page 18 gives an overview of the key financials of the companies analyzed within the universe of prime contractors.

For 2009, the total market capitalization of the top five US-based contractors was $141 billion dollars, with sales of $205 billion, net income of $10 billion and total assets of over $182 billion.29 The group employed half a million people worldwide and generated revenues from arms sales of $140 billion.30

Figure 1 shows relative size of each prime Figure 1: Relative Size by Market Cap contractor when compared to the other five, Raytheon Co. based on market capitalization in 2009. Boeing 12% Northrop Boeing Co. Grumman (The) is the largest participant, taking over one third Corp 36% 14% of the pie, with a total market capitalization of

Lockheed Martin $50.5 billion. Lockheed Martin and General Corp. General 19% Dynamics Corp. Dynamics rank second weighing twenty 19% percent respectively in relative size and with individual market capitalization of $27 billion. Northrop Grumman and Raytheon make up the remainder quarter of the chart, with market capitalization of $20 billion for Northrop Grumman and $18 billion for Raytheon.

29 Mergent Online General Company Information, available at http://www.mergentonline.com.ezproxy.library.tufts.edu/companynews.php?compnumber=5271&pagetype=recent&area=detail&stor yid=376461220 30 Ibid. Laurence Nguyen Page 15

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Figure 2 below shows relative revenue from total income (blue bar) and relative revenue generated from arms sales (burgundy bar) for each contractor, relative to the rest of the group.

While it is not surprising that the largest player, Boeing, generates the most revenues in absolute terms, with yearly sales reaching $68 billion for 2009, the revenue market weight proportionality is not kept constant to firm size with other contractors. Indeed, where Lockheed Martin and

General Dynamics are expected to report similar sales income by virtue of similar size,

Lockheed Martin outperforms General Dynamics in total sales by six percent.

Figure 2: Relative Revenue in Relation to Peers Generaled from Total Sales and Arms Sales in 2009

40%

35%

30%

25%

20%

15%

10%

5%

0% Boeing Co. (The) General Dynamics Lockheed Martin Corp. Northrop Grumman Raytheon Co. Corp. Corp

Relative Revenue % Relative Revenue from Arms Sales %

Managerial decisions, working capital management (use of resources), and corporate capital structure can typically offer explanations to these differences. Because the spread distribution across prime contractors appears to be somewhat even, the hypothesis advanced by many industry observers, that procurement contracts are being allocated on a rotational basis rather than merit-based, can be advanced. This is especially holds true when taking into account the monopsony nature of the defense industry.

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

Figure 3 shows the percentage of company sales directly attributable to arms sales31 (burgundy bar).

Figure 3: Direct Revenues Derived From Arms Sales 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Boeing Co. General Lockheed Northrop Raytheon Co. (The) Dynamics Martin Corp. Grumman Corp. Corp

Arms Sales % Other Sales %

An interesting account lies in comparing Figures 2 and Figure 3, and noting that revenues derived from direct arms sales do not correlate with relative revenue obtained when compared to peers. Raytheon derives over ninety percent of its revenues from arms sales, yet the company only has fifteen percent of the market share available to the top five contractors. This suggests heterogeneity in the observed companies‟ structures, differences in managerial mix strategies for capturing government military procurement contracts, and different levels of government procurement dependencies. The level of dependency on government contracts will affect corporate elasticity tolerance relative to changes in national budgetary allocations and procurement drawdown.

31 SIRPI figures in Appendix 1 on arms sales as a percentage of total sales in 2008 Laurence Nguyen Page 17

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Table 4: Key Financials of Top 5 Defense Contractors

BA RTN LMT GD NOC

(In USD as of 09/30/2010) (In USD as of 09/26/2010) (In USD as of 09/26/2010) (In USD as of 10/03/2010) (In USD as of 09/30/2010) Income Statement Income Statement Income Statement Income Statement Income Statement Revenue 65,693m Revenue 24,965m Revenue 45,978m Revenue 31,763m Revenue 33,902m Net Income 3,411m Net Income 1,885m Net Income 2,770m Net Income 2,509m Net Income 2,090m EPS from Continuing Operations 4.68 EPS from Continuing Operations 4.74 EPS from Continuing Operations 7.13 EPS from Continuing Operations 6.5 EPS from Continuing Operations 6.47 EPS - Net Income - Diluted 4.66 EPS - Net Income - Diluted 4.95 EPS - Net Income - Diluted 7.41 EPS - Net Income - Diluted 6.47 EPS - Net Income - Diluted 6.85 Revenue per Share 88.88 Revenue per Share 67.16 Revenue per Share 127.68 Revenue per Share 83.79 Revenue per Share 115.51 Balance Sheet Balance Sheet Balance Sheet Balance Sheet Balance Sheet Total Assets 65,222m Total Assets 22,852m Total Assets 35,551m Total Assets 31,483m Total Assets 30,176m Total Liabilities 60,768m Total Liabilities 127m Shareholders' Equity 3,918m Total Liabilities 17,901m Shareholders' Equity 13,194m Shareholders' Equity 4,454m Shareholders' Equity 10,100m Total Assets per Share 98.72 Shareholders' Equity 13,582m Total Assets per Share 103.26 Total Assets per Share 88.93 Total Assets per Share 62.78 Total Assets per Share 83.34 Net Assets per Share 6.07 Net Assets per Share 62.43 Net Assets per Share 35.96 Cash Flows Cash Flows Cash Flows Cash Flows Cash Flows Cash from Operations 5,048m Cash from Operations 2,146m Cash from Operations 2,782m Cash from Operations 3,077m Cash from Operations 1,997m Cash from Investing -8,125m Cash from Investing -736m Cash from Investing -1,106m Cash from Investing -732m Cash from Investing 1,025m Cash from Financing -96m Cash from Financing -1,703m Cash from Financing -1,750m Cash from Financing -1,892m Cash from Financing -2,418m Capital Expenditures 924m Capital Expenditures 326m Capital Expenditures 765m Capital Expenditures 353m Capital Expenditures 616m Cash Flow per Share 6.78 Cash Flow per Share 5.73 Cash Flow per Share 7.64 Cash Flow per Share 8.04 Cash Flow per Share 6.71

Source: Data extracted from Mergent Online Available at: http://www.mergentonline.com.ezproxy.library.tufts.edu/companynews.php?compnumber=5271&pagetype=recent&area=detail&storyid=376461220

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

The dependence on a sole off-taker is a double-edged sword. On the one hand, the relationship should offer protection against turbulence in the aerospace sector, but on the other, the dependence also leaves contractors vulnerable to defense spending cuts. Even though military development contracts tend to span a multi-year schedule, Congress has to approve the ongoing funding of military contracts on a yearly basis. This entails that complex contracts are subject to yearly scrutiny and potential challenges.

Moreover, from a macroeconomic perspective, it is important to remember that companies do not operate in a vacuum. Therefore, the stock performance of players operating in the defense industry is not sheltered from general systemic market risks. Consequently, it is essential to identify and isolate exogenous (systemic) factors that influence and affect the companies‟ stock performance from strategic and managerial decisions that translate into value creation for the company and stockholders.

The following Chart 1 graphs the Dow Jones Industrial Average, Standard and Poor‟s 500 and the New York Stock Exchange indices in parallel with the performance of Boeing, General

Dynamics, Lockheed Martin, Northrop Grumman and Raytheon‟s stock in the decade following the Cold War, under the context of US international military engagements. Chart 1 efforts to provide a general idea of the security-financial landscape of the observed period.

The next section describes strategic moves adopted by today‟s top defense contractors during that same period, from 1990 to 2000.

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Post-Cold War Defense Contracting Consolidation: Survival Strategies

Chart 1: Comparative Stock Performance of the Top Five US Defense Contractors from 1990 to 2000 relative to the Dow Jones Industrial Average, S&P 500 and the New York Stock Exchange

Note: Scale used for indices (bottom) and individual company stock performance (top) differ

Clinton Years

Source: Generated by Symbol lookup from Yahoo! Finance, available at http://finance.yahoo.com/echarts?s=BA+Interactive#chart16:symbol=ba;range=19900102,20000103;compare=gd+lmt+noc+rtn;indica tor=volume;charttype=line;crosshair=on;ohlc values=0;logscale=on

Laurence Nguyen Page 20

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The Boeing Company (BA) Post-Cold War - Snapshot

Source: Generated by Symbol lookup from Yahoo! Finance, available at http://finance.yahoo.com/echarts?s=BA+Interactive#chart1:symbol=ba;range=1d;compare=^dji+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source =undefined

Laurence Nguyen Page 21

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The Boeing Company (BA) Post-Cold War

The Boeing Company (BA) was incorporated at the beginning of the last century under Delaware law, and has recently relocated its headquarter to Chicago from Seattle. The company enjoys a long-standing relationship with the US government, having been the main supplier in American civilian and military aircraft since the beginning of World War Two, as well as by virtue of being one of the largest aerospace and defense contractors in the world32.

Today, the company has a market capitalization of $50.6 billion33, is part of the Dow Jones

Industrial Average, and employs more than 158,000 people across the United States and in 70 countries34. Boeing employs the largest labor force amongst the top five prime US contractors.

Unlike its defense contracting peers, Boeing‟s revenue stream is the less reliant on US government procuration. The company is organized into two business units serving commercial and military interests: Boeing Commercial Airplanes and Boeing Defense, Space & Security

(BDS). Each segment brings in the same weight of revenue, although BDS‟ primary customer is the US Department of Defense with eighty two percent of BDS 2010 revenues being derived from this customer. Other significant revenues were derived from the National Aeronautics and

Space Administration (NASA), international defense markets, civil markets and commercial satellite markets.35

32 Pavelec, Sterling Michael, Editor, The Military-Industrial Complex and American Society, Library of Congress Catalog-in- Publication Data, ABC Clio, 2010 33 Boeing Co/The (BA:US) Stock Quote & Analysis – Bloomberg, available at http://www.bloomberg.com/apps/quote?ticker=BA:US 34 Boeing, About US, available at http://www.boeing.com/companyoffices/aboutus/index.html 35 The Boeing Company Form 10-K for the fiscal year ended December 31, 2010 Laurence Nguyen Page 22

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The Commercial Airplanes segment develops, produces and markets commercial jet aircraft and provides related support services, principally to the global commercial airline industry. Featured commercial jet aircraft includes the 737 narrow-body model and the 767 and 777 wide-body models. The 747-8 and 787 wide-body models are currently under development. Earlier in 2011,

Boeing was awarded a $35 billion contract by US Air Force to build the next-generation refueling tankers that will replace 179 of the service‟s 400 KC-135 tankers.36

Other supporting business segments include Boeing Capital Corporation, which offers a financing service to Boeing‟s customers, the Shared Services Group, and Boeing Engineering,

Operations & Technology. Together those supporting business segments make up less than two percent of Boeing‟s revenue in 2010 sales, totaling $770 million.

From its modest debut in Washington State where the company was founded by William E.

Boeing, a Yale student drop-out who wanted to take advantage of the risky and financially rewarding Northwest timber industry 37 , Boeing evolved from a small wooden planes manufacturer during World War One to a provider of bombers and transport aircraft to Allied

Air Forces in World War Two.38

36 Drew, Christopher, Air Force’s Shifting Rules Helped Boeing, Global Business, The New York Times, February 25, 2011, available at: http://www.nytimes.com/2011/02/26/business/global/26tanker.html 37 Boeing History, Boeing, 1916-1934, available at: http://www.boeing.com/history/boeing/boeing.html 38 Pike, John, Global Security.Org, The Boeing Company, Available at http://www.globalsecurity.org/military/industry/boeing.htm Laurence Nguyen Page 23

Post-Cold War Defense Contracting Consolidation: Survival Strategies

During the Cold War, Boeing capitalized on new innovations in jet technology and was able to add the Minuteman intercontinental ballistic missile (ICBM) system (that it assembled and tested) and the VC-137A, also known as Air Force One(i) amongst other goods and services offered by its product line.

By the end of the Cold War, Boeing was an integral part of U.S. strategic development and one of the largest influencers of the Military Industrial Complex.39 Today, Boeing is the largest exporter by value in the United States40.

Boeing has historically based its growth strategy through an acquisition model where the company bought into business segments it wished to penetrate. By not drifting away from its core competencies, but rather acquiring companies that served different related markets, Boeing was able to leverage its system and the expertise of its capable engineers to successfully absorb and integrate new acquired ventures into business units.

It was under the leadership of Frank Shrontz, a lawyer by training and Harvard MBA graduate41 that Boeing entered into the Post-Cold War defense consolidation round. Frank Shrontz had a forty-year intermittent career between the revolving doors of Boeing and Department of Defense, where he ultimately held the position of Assistant Secretary of the Air Force. Shrontz first presided over Boeing in 1985, before he was elected chairman and chief executive officer in

1986, a position that he held for ten years.

Under Shrontz, Boeing expanded its influence within the industrial complex by acquiring

Rockwell Aerospace and Defense in a deal valued at $3.2 billion in 1996, and entered into the

(i) President Dwight D. Eisenhower was the first president to travel on the Air Force One 39 Pike, John, Global Security.Org, The Boeing Company, Available at http://www.globalsecurity.org/military/industry/boeing.htm 40Defense News Top 100 for 2009, Defense News, June 28, 2010 41 Boeing History, Boeing, 1958-1997, Frank Shrontz, President, Chief Executive Officer, Chairman of the Board, Chairman Emeritus http://www.boeing.com/history/boeing/shrontz.html Laurence Nguyen Page 24

Post-Cold War Defense Contracting Consolidation: Survival Strategies largest merger in defense history with McDonnell Douglas the following year, in a deal valued at

$13.3 billion. The Rockwell deal was financed by issuing 9.2 million shares of common stock valued at $875 million and assuming debt valued at $2,180 million. The acquisition was meant to strengthen the strategic position of the Company's defense and space segment, particularly with respect to space systems and information battle management systems. 42 The move also signaled

Boeing‟s formal entry into the fighter market.43

The McDonnell Douglas transaction was a stock-for-stock deal in which McDonnell Douglas shareholders received 0.65 shares of Boeing common stock for each share of McDonnell

Douglas common stock, based on the closing price of Boeing stock on December 13, 1996.44 In the end, 1.3 shares of Boeing‟s stock were issued for each share of McDonnell Douglas stock outstanding. As a result, Boeing issued 277.3 million shares in connection with the merger.45

Through the Rockwell acquisition and McDonnell merger, Boeing hoped to capitalize on the rapid expansion of information and communication technologies while profiting from economies of scale. The company also ensured that it secured its position as a top tier player in the space arena, an enviable position at the converging nexus of civil and military markets.46

Shrontz was succeeded by Philip Condit in 1996. A Princeton trained engineer and MIT management graduate, Condit led BA until 2003, when he stepped down from his leadership position over the Air Force tanker contract allocation scandal.47 His successor, Harry Stonecipher,

42 The Boeing Company Form 10-K for the fiscal year ended December 31, 1996, available at: http://www.sec.gov/Archives/edgar/data/12927/0000012927-97-000020.txt 43 Pike, John, Global Security.Org, The Boeing Company, Available at http://www.globalsecurity.org/military/industry/boeing.htm 44 Boeing Press Release, McDonnell Douglas to Merge with Boeing, Combination to be world's largest aerospace company, December 15, 1996, available at: http://www.boeing.com/news/releases/1996/news.release.961215.html 45 The Boeing Company Form 10-K for the fiscal year ended December 31, 1998, available at: http://www.sec.gov/Archives/edgar/data/12927/0000012927-98-000007.txt 46 Ibid. 47 Boeing History, Boeing, 1965-2004, Philip (Phil) M. Condit President, Chief Executive Officer, Chairman of the Board http://www.boeing.com/history/boeing/condit.html Laurence Nguyen Page 25

Post-Cold War Defense Contracting Consolidation: Survival Strategies the person behind the McDonnell Douglas merger was largely credited for turning the company around into a profitable enterprise.

Boeing‟s strategy Post-Cold War was different from its peers. The company‟s presence in both the military and civilian industrial markets as well as geographical and customer market diversification has the effect of reducing systematic risk, but also flattening the company‟s earnings.

Laurence Nguyen Page 26

Post-Cold War Defense Contracting Consolidation: Survival Strategies

General Dynamics Corporation (GD) Post-Cold War – Snapshot

Source: Generated by Symbol lookup from Yahoo! Finance, available at http://finance.yahoo.com/echarts?s=GD#chart1:symbol=gd;range=1d;compare=^dji+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined

Laurence Nguyen Page 27

Post-Cold War Defense Contracting Consolidation: Survival Strategies

General Dynamics Corporation (GD) Post-Cold War

General Dynamics is arguably the prime contractor that has best maneuvered the sale and acquisition of strategic assets as a means to maximize shareholder wealth and company value since the end of the Cold War. Through divestitures, internal investment and the repurchase of company shares on the open market48 the company was able to ensure well above market return on equity during a period of great consolidation. During the first half of the 1990s, General

Dynamics stripped itself to its “family jewels(i)”, a sly financial maneuver that crowned its stock with the greatest value appreciation amongst its group of peers.

It was only in 1995, that General Dynamics resumed its expansion operations by acquiring companies with expertise in information technology products and services. In 1999, the company purchased Gulfstream Aerospace Corporation, a business-jet aircraft and aviation support- services company. Since 1995, General Dynamics has acquired and integrated 57 businesses, including three in 2010.49

General Dynamics, today the third largest US defense contractor, with a market capitalization of

$28.3 billion,50 was originally incorporated in 1899 as the Electric Boat Company. Until its acquisition of Canadair, a Canadian aircraft builder in the mid-1950s, the company built ships and submarines and served the Allies during World War Two by successfully equipping them.51

General Dynamics‟ flourishing relationship with the US Department of Defense allowed the company to rely on existing contacts to transition into the production of nuclear submarines. In

48 General Dynamics Form 10-K for the fiscal year ended December 31, 2010 (i) Electric Boat and Land Systems 49 General Dynamics Form 10-K for the fiscal year ended December 31, 2010 50 General Dynamics Corp (GD:US) Stock Quote & Analysis, available at: http://www.bloomberg.com/apps/quote?ticker=GD:US 51 Pavelec, Sterling Michael, Editor, The Military-Industrial Complex and American Society, Library of Congress Catalog-in- Publication Data, ABC Clio, 2010 Laurence Nguyen Page 28

Post-Cold War Defense Contracting Consolidation: Survival Strategies the midst of the Cold War, General Dynamics sold Canadair and diversified its expertise into the tank building business, through the acquisition of Chrysler Defense.

During the Post-Cold War period, General Dynamics divested away from missile systems and military aircraft by selling its businesses to Hughes Aircraft and Lockheed.

Today, General Dynamics‟ main operating areas of business are Aerospace, Combat Systems,

Marine Systems and Information Systems and Technology.

In 2010, the Information Systems and Technology segment generated over one third of the total revenues for the business, increasing from thirty four to thirty six percent in the two previous years.

The pie chart below illustrates General Dynamics‟ 2010 revenue streams by segments.

General Dynamics‟ primary customers are the U.S. Department of Defense and the U.S. intelligence community. In 2010, seventy two percent of the company‟s revenues flowed directly from direct tender with the U.S. government; ten percent were from U.S. commercial customers; eight percent were directly from international defense customers; and the remaining ten percent were from international commercial customers.52

The company‟s U.S. commercial revenues were $3.2 billion in 2010, down twenty eight percent from $4.1 billion in 2008. The majority of these revenues are for business-jet aircraft where

52 General Dynamics Form 10-K for the fiscal year ended December 31, 2010 Laurence Nguyen Page 29

Post-Cold War Defense Contracting Consolidation: Survival Strategies

General Dynamics‟ customer base consists of individuals and public and privately held companies representing a wide range of industries. That business segment was highly affected by the recent financial crisis.

General Dynamics‟ extraordinary performance in the wake of the industry-wide consolidation of the mid-1990s was achieved through a strategy of divestment of peripheral businesses, employment consolidation, cut backs in research and development and reducing capital spending. General Dynamics opted for a leaner corporate structure and higher concentration on international sales. The company capitalized on the Persian Gulf conflict by selling tanks and F-

16 fighters to Turkey, Egypt, and Saudi Arabia, thus opening Middle East markets.53

General Dynamics entered the Post-Cold War period under the leadership of Stanley Pace, a

West Point graduated colonel, and ex-President of TRW.54 He kept his position until the end of

1991, when he was replaced by William Ander.

Pace‟s track record at General Dynamics include the sale of Quincy shipyard, famous for having produced the USS Lexington and the USS Salem,55 and the consolidation of General Dynamics‟ missiles and other air defense systems divisions (Valley Systems and Pomona), in an effort to better utilize existing resources and reduce overhead. The Pomona division produced Standard and Sparrow missiles and Phalanx Close-in Weapon Systems, while Valley Systems built Stinger and Rolling Airframe missiles.56

53 International Directory of Company Histories, Vol. 10, St. James Press, 1995, available at: http://www.fundinguniverse.com/company-histories/General-Dynamics-Corporation-Company-History.html 54 West Point Association of Graduates, 2001 Distinguished Graduate Award, Mr. Stanley C. Pace, June 1943, available at: http://www.westpointaog.org/netcommunity/page.aspx?pid=563 55 General Dynamics Corp., Quincy Shipbuilding Division, Fore River Shipyard, Quincy MA, available at: http://www.globalsecurity.org/military/facility/quincy.htm 56 Associated Press, COMPANY NEWS; General Dynamics Plans Layoffs, August 07, 1990, available at: http://www.nytimes.com/1990/08/07/business/company-news-general-dynamics-plans-layoffs.html Laurence Nguyen Page 30

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The new unit was called Air Defense Systems Division and targeted Space Defense programs.

One year later, in May 1992, Hughes Aircraft Company bought that same unit for $450 million, bringing among the previously mentioned armament, the Tomahawk Cruise Missile and

Advanced Cruise Missile along into Hughes' portfolio. That portfolio was later on acquired by

Raytheon.57

By the end of 1991, the gains in synergy and elimination of duplicate jobs totaled four thousand layoffs, not including the seven thousand layoffs arising from the shutdown of the Quincy shipyard. 58 On the day General Dynamics announced the Air Defense Systems Division divestment, the company stock rose $1, to $30, on the New York Stock Exchange, while the majority of other trading equities were declining59.That year, the company had paid back almost

$600 million in debt, which helped boost the company's valuation. The 1990 $578 million loss became a $305 million profit.60

Pace was also credited for taking measures to clean up the company by initiating an ethics program that led to the firing of twenty seven employees.61

Maj. Gen. William Anders, an engineer by training who graduated at the Air Force Institute of

Technology at Wright-Patterson Air Force Base, Ohio, earned his business credentials from the

Harvard Business School Advanced Management Program. After having served as a U.S. Air

Force fighter pilot, Anders became an astronaut for NASA.62 Anders continued his active flying

57 Pakistan Military Consortium, FIM-92 Stinger Surface-to-Air Missile System, available at http://www.pakdef.info/pakmilitary/airforce/sam/stinger.html 58 Vartabedian Ralph, Times, General Dynamics Unit to Cut 1,500 Jobs : Aerospace: The cutbacks at its air defense group are in addition to the loss of 2,500 workers announced earlier, September 1991, available at: http://articles.latimes.com/keyword/general- dynamics-air-defense-systems-division 59 International Directory of Company Histories, Vol. 10, St. James Press, 1995, available at: http://www.fundinguniverse.com/company-histories/General-Dynamics-Corporation-Company-History.html 60 Ibid. 61 Ibid. 62 Heritage Flight Museum webpage, Maj. Gen. William A. Anders, available at: http://www.heritageflight.org/content/about-2/maj- gen-william-a-anders/ Laurence Nguyen Page 31

Post-Cold War Defense Contracting Consolidation: Survival Strategies as a part-time test pilot for General Dynamics‟ F16 night attack systems while serving as

Chairman and CEO.

In 1992, Anders was entrusted to lead General Dynamics in the context of a consolidating industry. Managers can generally maximize margins by either increasing the top line or decreasing the business‟ cost of operation. Anders‟ strategy was to downsize, by selling off and eliminating non-core assets, including businesses and employees.

According to some reports, the employee workforce was trimmed by over a quarter of its size during Anders‟ tenure, and the company saw $1.7 billion worth of its assets up for sale. The Air

Defense Systems division was sold to Hughes for $450 million (discussed earlier, initiated under

Pace), The Cessna Aircraft Company sold to Textron Inc. for $605 million,63 and the Electronics

Unit sold to Carlyle Group, for less than $100 million.64 The Company recognized in 1992 a gain on disposal of these businesses of $374 million, or $4.95 per share, net of income taxes of $22 million.65

By 1993, General Dynamics finalized the sale of its Fort Worth division, the production center for the F-111 Aardvark fighter-bombers and F-16 Fighting Falcon to Lockheed Corporation, for

$1.5 billion, recognizing a gain on disposal of $645 million, or $10.19 per share, net of income taxes of $331 million.66

63International Directory of Company Histories, Vol. 10, St. James Press, 1995, available at: http://www.fundinguniverse.com/company-histories/Textron-Inc-Company-History.html 64 Associated Press, October 1992, General Dynamics Agrees To Sell Electronics Unit To Carlyle Group, available at http://community.seattletimes.nwsource.com/archive/?date=19921006&slug=1516975 65 General Dynamics Form 10-k for the year ending December 31, 1993, available at: http://www.sec.gov/Archives/edgar/data/40533/0000950133-94-000045.txt 66Ibid Laurence Nguyen Page 32

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Anders was awarded the „CEO of the Year‟ award by National Security Industrial Association‟s for his ability to turn the company around.67 In the space of two years, the company stock appreciated by over thirty percent. His cut throat approaches to maximizing the bottom line did however come under criticism by the Pentagon and Department of Defense. Business Week reported a gain-sharing plan where twenty five executives received $18 million incentive bonuses in 1991 alone for maximizing share value, while the company‟s workforce shrunk from about 86,000 in 1991 to 30,500 in 1993. Debt decreased ninety four percent during the period.68

Anders pronounced the transformation of General Dynamics complete in 1993's annual report, but divestment activities pursued in 1994, when the Convair Division Aircraft Structure unit was transferred to McDonnell Douglas and Space Systems and Commercial Launch Services sold to

Martin Marietta for $208.5 million.69

Anders was succeeded by James R. Mellor in April 1994. Mellor, a Michigan University trained engineer held multitude engineering and management functions in the defense contracting sector with Hughes Aircraft Company, Litton Industries and served as a consultant to the Department of Defense before joining General Dynamics in 1981. 70 Under the Mellor leadership, the company stock and overall performance sustained its ascendance as the company prepared to enter into a period of acquisition.

Nicholas D. Chabraja became CEO in 1997 and led the company on an acquisition blitz. By the time he retired in 2009, the $4 billion business he had inherited from Mellor generated $31.9

67Heritage Flight Museum, Founder & Chairman: Maj. Gen. William A. Anders, available at http://www.heritageflight.org/content/about-2/maj-gen-william-a-anders/ 68International Directory of Company Histories, Vol. 10, St. James Press, 1995, available at: http://www.fundinguniverse.com/company-histories/General-Dynamics-Corporation-Company-History.html and 69Asset Purchase Agreement - Martin Marietta Corp., General Dynamics Corp., General Dynamics Space Systems Co. and General Dynamics Commercial Launch Services Inc.(Dec 21, 1993) available at: http://contracts.corporate.findlaw.com/planning/asset/3962.html 70 Bloomberg Business Week, James R. Mellor, Chairman and Member of Nominating & Governance Committee, available at: http://investing.businessweek.com/research/stocks/people/person.asp?personId=227542&ticker=USU:US&previousCapId=36096&p reviousTitle=USEC%20INC Laurence Nguyen Page 33

Post-Cold War Defense Contracting Consolidation: Survival Strategies billion in sales and had tripled its number of employees from 29,000 to 91,000. The legal training of the ex-general counsel allowed him to thoughtfully marshal the expansion of General

Dynamics‟ business.

General Dynamics‟ Post-Cold War survival strategy was twofold. In the first part of the 1990s, the company downsized and sold non-core assets to focus on competitive capabilities, generating cash to pay down debt. Because liquidity and positive cash flow are fundamental to meeting creditors‟ obligations, the company was able to stay alive until the later part of the 1990s, when it regained strength and entered into an acquisition mode. On a final note, while General

Dynamics was able to beautify its company‟s performance metrics by playing a game of denominators for Wall Street in the early 1990, it was towards the end of the decade that the company truly came out as a true contender to the title of US Prime Contractor.

Laurence Nguyen Page 34

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Lockheed Martin Corporation (LMT) Post-Cold War - Snapshot

Source: Generated by Symbol lookup from Yahoo! Finance, available at http://finance.yahoo.com/echarts?s=lmt#chart1:symbol=lmt;range=1d;co mpare=^dji+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcval ues=0;logscale=on;source=undefined

Source: Adapted from Aviation Week & Space Technology, 16 March, 1998, p. 25 as published in the SIPRI Yearbook 1999, p. 395

Laurence Nguyen Page 35

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Lockheed Martin Corporation (LMT) Post-Cold War

Lockheed Martin Corporation (LMT) is a $28.8 billion dollar, NYSE listed, global security company. In 2009, the company ranked 54th on the Fortune 500 list of largest industrial corporations. Lockheed Martin‟s main areas of activity include research, design, development, manufacture, integration, and sustainment of advanced technology systems and products.71 The company‟s businesses are in space, telecommunications, electronics, information and services, aeronautics, energy, and systems integration, 72 and organizes its business in four segments:

Aeronautics, Electronic Systems, IS&GS, and Space Systems.73

In 2010, Lockheed Martin reported sales of $45.8 billion, a backlog of $78.2 billion, and cash flow from operations of $4 billion74. Lockheed Martin employs 132,000 individuals, with the vast majority based in the US.

Aeronautics engineers and manufactures aircrafts, unmanned vehicles and related technology:

This segment accounts for twenty nine percent of total net sales, generating $13.2 billion in

2010. The three pillars composing this business and their relative contribution is as follows: 75

(From the Form 10K – Year Ended December 31, 2010, SEC Company filings)

Lockheed Martin‟s major combat aircraft programs include the F-35 Lightning II Joint Strike

Fighter, the F-22 Raptor, and the F-16 Fighting Falcon.

71 Lockheed Martin Corporation‟s Form 10-K for the fiscal year ended December 31, 2010 72 Mergent Online, General Company Information, Lockheed Martin Corp 73 Lockheed Martin Corporation corporate webpage, About Us, available at http://www.lockheedmartin.com/aboutus/index.html 74 Ibid. 75 Lockheed Martin Corporation‟s Form 10-K for the fiscal year ended December 31, 2010 Laurence Nguyen Page 36

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Electric Systems designs, develops and deploys hardware and software to equip armed forces and government agencies around the world. This segment accounts for thirty one percent of total net sales, the equivalent of $14.4 billion. Electric Systems has three lines of sales channels as follows: 76

(From the Form 10K – Year Ended December 31, 2010, SEC Company filings)

The Mission Systems & Sensors supports sea-based systems and Missiles & Fire Control targets air and land missions, whereas Global Training & Logistics offers applications for fixed-and rotary-wing aircraft. 77

Information Systems & Global Solutions provides management services and IT solutions, mostly to the US government in the civil, defense and intelligence sectors. This segment brings in twenty two percent of total net sales, or $10.0 billion, with the following distribution: 78

(From the Form 10K – Year Ended December 31, 2010, SEC Company filings)

Space systems designs and builds satellites, missile systems, and space transportation systems.

Net sales of $8.2 billion represent approximately eighteen percent of total net sales.

76 Lockheed Martin Corporation‟s Form 10-K for the fiscal year ended December 31, 2010 77 Ibid. 78 Ibid. Laurence Nguyen Page 37

Post-Cold War Defense Contracting Consolidation: Survival Strategies

In 2010, eighty four percent of the company‟s $45.8 billion in net sales were to the US government and fifteen percent to foreign governments.79

Norman R. Augustine, a Princeton Engineer by training and US policy wizard who knew all the technical and policy issues important to Lockheed Martin, led the merger of Martin Marietta

Corporation and Lockheed Corporation. As contraction in defense spending went from $536 billion in 1987 down to $358 billion by 1998 (in constant dollars of 2009),80 the CEO of Martin

Marietta was faced with the decision of either diversifying his business or concentrating on defense. Augustine came up with a plan to survive the downturn dubbed "Peace Dividend

Strategy", with the goal of building a “super company”. Riding the consolidation wave that was taking over the defense industry, Augustine set out to acquire GE‟s Aerospace business for $3 billion in 1992. That acquisition added about $6 billion in annual sales to his company.81 He then went on to purchase General Dynamics‟ Space Systems division for $208.5 million, consolidating 1 million square feet of office space and 400 jobs, to gain $500 million in synergy over 10 years.82 Through the judicial leveraging of the newly acquired launch services and military electronics capabilities, Augustine engineered a “merger of equals” with Lockheed in

1995, a transaction that would later come to be described by analysts as a small fish swallowing a big fish. Evidencing this statement was that not only the CEO position but also top management jobs were occupied by Marietta‟s people, and the new company was based in

Martin Marietta‟s Maryland headquarters. 83

79 Lockheed Martin Corporation‟s Form 10-K for the fiscal year ended December 31, 2010 80 See Appendix 10 81 Funding Universe, Lockheed Martin Corporation, available at http://www.fundinguniverse.com/company-histories/Lockheed- Martin-Corporation-Company-History.html 82 GlobalSecurity.Org, Atlas Facilities, available at http://www.globalsecurity.org/space/facility/atlas_f.htm 83 Hartung, William, Prophets of War, Lockheed Martin and the Making of the Military-Industrial Complex, Nation Books, NY, 2011 Laurence Nguyen Page 38

Post-Cold War Defense Contracting Consolidation: Survival Strategies

The transaction was structured an exchange offer for 7.9 million common shares, or about 3.9% of Lockheed‟s common stock outstanding, through which it split off its remaining 81% interest, for 35 million common shares, in Martin Marietta Materials. The transaction was valued at

$905.73 million. Under the terms of offer Lockheed exchanged 4.72 million common shares for each Lockheed shares tendered.84

The subsequent purchase of Loral Corporation, a key player in defense electronics, in a transaction valued at $8.8 billion, including the assumption of $2.1 billion in liabilities propelled the company to its current market size.85 Lockheed Martin completed its tender offer to acquire

Loral for $38 in cash per share, by accepting 167,769,814 common shares, or 94% of its common stock outstanding on a fully diluted basis. Concurrently, Loral spun off its Loral Space

& Communications unit.86

Augustine‟s political connections, his ambitious personality, and the firm‟s strong lobbying clout

(Lockheed Martin accounted for about one third of all political contributions made by the defense aerospace industry at the time of the Martin Lockheed merger)87 allowed him to propel

Lockheed Martin to the top tier level of the defense contracting universe.88

A failed attempt to diversify into the Information Service industry for civilian market and an intervention of the Department of Justice to ban Lockheed Martin‟s attempt to merge with

Northrop Grumman, a proposal that would have yielded in the creation of the largest single defense contractor in the US marked the end of the company‟s apogee.89

84 Thomson One, Lockheed Martin deals 01/01/1990 to 12/31/2000 85 Hartung, William, Prophets of War, Lockheed Martin and the Making of the Military-Industrial Complex, Nation Books, NY, 2011 86 Thomson One, Lockheed Martin deals 01/01/1990 to 12/31/2000 87 Ibid. 88 Ibid. 89 Ibid. Laurence Nguyen Page 39

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Vance Coffman succeeded Augustine in 1997 and inherited from the aftermath of forced integrations in the context of Post-Cold War consolidation gluttony. Lockheed Martin Corp. announced in 1999 that Year 2000 profits would be about half of expectations, due to overoptimistic forecasts.

Lockheed Martin‟s Post-Cold War survival strategy is the story of Martin Marietta‟s aggressive plans to build a “super company”. Through a series of acquisitions of strategic assets, the corporation aimed to reach the position of hegemon of the defense contracting universe. The bubble burst as the company attempted its final bid for the acquisition of Northrop Grumman.

National authorities intervened to slay the proposed mega merger.

Laurence Nguyen Page 40

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Northrop Grumman (NOC) Post-Cold War - Snapshot

Source: Generated by Symbol lookup from Yahoo! Finance, available at: http://finance.yahoo.com/echarts?s=NOC+Interactive#chart1:symbol=noc;range=1d;compare=^dji+^gspc;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;sour ce=undefined

Laurence Nguyen Page 41

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Northrop Grumman (NOC) Post-Cold War

Northrop Grumman (NOC) is the US‟ largest industrial designer and builder of naval vessels.

The company has a strong relationship with the US Navy and in May 2009 delivered to the service their newest carrier, the USS George H. W. Bush.90

Northrop Grumman has a market capitalization of $19.8 billion 91 and operates under five business segments. As of December 2010, Aerospace Systems, Information Systems and

Electronic Systems generated the most revenue for the firm, followed by Shipbuilding and

Technical Services.92

In July 2010, Northrop Grumman announced that it would evaluate the possibility of spinning off its Shipbuilding segment in 2011.

The company was originally formed as Northrop Corporation in California in 1939 and was reincorporated in Delaware in 1985.

It was under Kent Kresa‟s leadership that from 1994 through 2002, Northrop Grumman entered a period of significant expansion through acquisitions of other businesses.

Kent Kresa, an MIT trained engineer, worked with the Defense Advanced Research Projects

Agency (DARPA), where he was responsible for broad, applied research and development

90 Northrop Grumman Corporation Form 10-K for the fiscal year ended December 31, 2010 91 Northrop Grumman Corp (NOC:US) Stock Quote & Analysis – Bloomberg, available at http://www.bloomberg.com/apps/quote?ticker=NOC:US 92 Northrop Grumman Corporation Form 10-K for the fiscal year ended December 31, 2010 Laurence Nguyen Page 42

Post-Cold War Defense Contracting Consolidation: Survival Strategies programs in the tactical and strategic defense arena prior to joining Northrop Grumman.93 At

DARPA, he was exposed to and worked on a multitude of groundbreaking projects including the first stirrings of the internet, the evolution of infrared technology, precision weapons guidance,

GPS, stealth technology and unmanned vehicles. The hands-on experience allowed him to develop an insightful understanding of the engineering requirements behind the inventions themselves, and an appreciation and forethought of the direction of the defense industry.

Kresa came to MIT “in love with airplanes,” but had also contemplated the option of pursuing a business degree at Harvard. It is his business sense and problem-solving acumen that helped him lead Northrop Grumman through the downsizing of the national defense industry and subsequent acquisition phase.94 Under Kresa, Northrop Grumman went from annual revenue of $5 billion to

$28 billion during the period of the Gulf War. Kresa retired from head of Northrop in 2003.95

Northrop Grumman has historically concentrated its efforts in high technology areas such as stealth, airborne surveillance, battle management, precision weapons, systems integration, defense electronics and information technology.96 The current structure of Northrop Grumman resulted from a series of strategic acquisitions, mergers and divestures by the former Northrop

Corporation.97

Beginning in 1992, the company acquired a forty nine percent interest in the Vought Aircraft

Company, a maker and builder of commercial and military aircraft frames. Northrop finalized

93 MIT World Speakers, available at: http://mitworld.mit.edu/speaker/view/1341 94 MIT World Speakers, An Engineering Career - 50 Years Out, Kent Kresa '59, SM '61, EAA '66, available at http://mitworld.mit.edu/video/866 95Pae, Peter, New GM chief Kent Kresa has been here before, The interim GM chairman pulled Northrop Grumman back from the brink of extinction, Los Angeles Times, March 31, 2009, available at:http://articles.latimes.com/2009/mar/31/business/fi-gm-kresa31 96 Northrop Grumman Corporation 10-K Form, for the fiscal year ended December 31, 2001, http://www.sec.gov/Archives/edgar/data/1133421/000089843002000975/d10k405.htm 97 Ibid. Laurence Nguyen Page 43

Post-Cold War Defense Contracting Consolidation: Survival Strategies the purchase of the company in 1994, when it bought the remaining fifty one percent outstanding shares from the Carlyle Group.98

That same year, the Grumman Corporation was acquired through a friendly tender offer after winning a bidding war against Martin Marietta, at a settling price of $62 in cash per share for a total of $2.1 billion. A total of 32,766,109 shares had been tendered or about 93.4% of the shares. Grumman employees held a thirty three percent stake in the company.99 The corporation was acquired for its military aircraft systems integrating capabilities and space expertise. Indeed,

Grumman was the builder of the Lunar Module that first delivered men to the surface of the moon.

In 1996, the newly-formed company assimilated the defense and electronics businesses of

Westinghouse Electric Corporation for $3.6 billion. The consideration consisted of $3 billion in cash and $600 million in the assumption of liabilities.

In August 1997, the company merged with Logicon, Inc., a leading defense information technology company, in a stock swap transaction valued at $1.028 billion, based on Northrop

Grumman‟s closing stock price of $115.12 on July 31 of the same year.100

In 1998, following the US government opposition against its proposed merger with Lockheed on antitrust grounds, Northrop Grumman focused increasingly on cutting-edge areas of the defense industry, including electronics and systems integration.101

98 Northrop Grumman Corporation 10-K Form, for the fiscal year ended December 31, 2001, http://www.sec.gov/Archives/edgar/data/1133421/000089843002000975/d10k405.htm 99 Thomson One, Northrop Grumman Corp deals 01/01/1990 to 12/31/2000 100 Ibid. 101 New York Times, Article Collections, Northrop Grumman in Deal, available at: http://www.nytimes.com/keyword/northrop- grumman Laurence Nguyen Page 44

Post-Cold War Defense Contracting Consolidation: Survival Strategies

In 1998 and 1999, the company acquired several businesses that strategically fit within these operating sectors. Inter-National Research Institute Inc. (INRI) was acquired in 1998 in a $55 million cash deal and was integrated into the Information Technology sector. In 1999, the government business of California Microwave Inc, a minority equity stake in Kistler Aerospace

Corp, Data Procurement Corporation, Ryan Aeronautical, and Navia Aviation were acquired for a total of $335 million. Most of the transactions were cash deals.102

Northrop Grumman‟s horizontal diversification strategic moves in the Post-Cold War area brought the company a portfolio of products aligned to fight traditional wars against enemy states. From military aircraft to naval carriers, the company is currently remedying the situation by divesting its shipbuilding capabilities and refocusing expertise on other areas of war that is now fought amongst the people.103

102 Thomson One, Northrop Grumman Corp deals 01/01/1990 to 12/31/2000, Northrop Grumman 10-k Form for the fiscal year ended December 31, 2001, available at http://www.sec.gov/Archives/edgar/data/1133421/000089843002000975/d10k405.htm 103 Smith, Rupert, The Utility of Force: The Art of War in the Modern World, Penguin, New York, 2006 Laurence Nguyen Page 45

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Raytheon Company (RTN) Post-Cold War – Snapshot

Source: Generated by Symbol lookup from Yahoo! Finance, available at: http://finance.yahoo.com/echarts?s=RTN+Interactive#ch art1:symbol=noc;range=1d;compare=^dji+^gspc;indicat or=volume;charttype=line;crosshair=on;ohlcvalues=0;lo gscale=on;source=undefined

Source: Adapted from Aviation Week & Space Technology, 16 March, 1998, p. 25 as published in the SIPRI Yearbook 1999, p. 395 Laurence Nguyen Page 46

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Raytheon Company (RTN) Post-Cold War

The Raytheon Company (RTN) is currently the fifth largest prime contractor in the US, by virtue of market capitalization. The company is valued by the market at $18.1billion104 and has been in operation since 1922, when it was incorporated as American Appliance Company. As of

December 31, 2010, Raytheon employed approximately 72,000 employees and generated yearly net sales of $25.2 billion.105

Today, the core businesses of the inventor of microwave cooking and developer of guided missiles lies in defense, commercial electronics, business aviation and special mission aircraft.106

The company is divided under six business segments: Integrated Defense Systems, Intelligence and Information Systems, Missile Systems, Network Centric Systems, Space and Airborne

Systems, and Technical Services. Revenue generation from each segment is somewhat comparable. 107

In 2010, total net sales to the U.S. Government were $22.3 billion, representing eighty eight percent of total net sales. This figure includes international military sales through the U.S.

Government. Department of Defense is the principal customer of government-related sales,

104 Raytheon Co (RTN:US) Stock Quote & Analysis – Bloomberg, available at http://www.bloomberg.com/apps/quote?ticker=RTN:US 105 Raytheon Company Form 10-K for the fiscal year ended December 31, 2010 106 International Directory of Company Histories, Vol. 38, St. James Press, 2001, on Funding Universe, Raytheon Company, available at:http://www.fundinguniverse.com/company-histories/Raytheon-Company-Company-History.html 107 Raytheon Company Form 10-K for the fiscal year ended December 31, 2010 Laurence Nguyen Page 47

Post-Cold War Defense Contracting Consolidation: Survival Strategies while other agencies include the Departments of Homeland Security, Justice, State and Energy,

Intelligence Community agencies, NASA, and the FAA.108

Raytheon‟s sales to customers outside the U.S. were $5.8 billion or twenty three percent of total net sales, an increase of twenty percent in two years, from $4.6 billion in 2008, which illustrates the company‟s efforts to open new revenue streams. In 2010, international sales were negatively impacted by the UK Border Agency Program termination, a plan to install an electronic border security system which triggered a fifty seven percent decline in profits during the second quarter of 2010. By way of background, international sales are restrained to products and services permitted under the International Traffic in Arms Regulations (ITAR).109

Dennis Picard managed Raytheon through a period of unprecedented challenge characterized by a steep decline in defense-related procurement. His successor Daniel P. Burnham describes him as tough, tenacious, and focused.110

During the Post-Cold War budgetary cuts, while defense contractors were faced with either divesting their businesses or exploring new industry lines, Raytheon reinforced its position as prime defense contractor by focusing on the Patriot missile, its single most important product in the early 1990s.111 From the end of the Gulf War until late 1994, Raytheon received nearly $2.5 billion in orders for the missiles from overseas customers only.112

By the mid-1990s, Raytheon was a key participant in the wave of mergers and consolidations in the defense industry. The company married acquisition strategies with share buyback, a signal to the market that it was bullish on its own stock. In November of 1992, February of 1994 and

108 Raytheon Company Form 10-K for the fiscal year ended December 31, 2010 109International Directory of Company Histories, Vol. 38, St. James Press, 2001, on Funding Universe, Raytheon Company, available at:http://www.fundinguniverse.com/company-histories/Raytheon-Company-Company-History.html 110 Bloomberg Business Week, In Defense of Raytheon, available at: http://www.businessweek.com/1999/99_49/c3658080.htm 111International Directory of Company Histories, Vol. 38, St. James Press, 2001, on Funding Universe, Raytheon Company, available at:http://www.fundinguniverse.com/company-histories/Raytheon-Company-Company-History.html 112Ibid. Laurence Nguyen Page 48

Post-Cold War Defense Contracting Consolidation: Survival Strategies

1995, Raytheon‟s board authorized the repurchase of up to 28 million shares, for a total value of

$1.6 billion.113

Raytheon entered its acquisition wage with the purchase of Corporate Jets from British

Aerospace in 1993 for £250 million ($387.1 million US) in cash.

In the second quarter of 1995, Raytheon merged with E-Systems Inc. in a tender offer transaction valued at $2.25 billion, where Raytheon acquired outstanding common stock of E-Systems for

$64 in cash per share. This transaction brought military intelligence communications systems to

Raytheon‟s portfolio.114 In 1996 Raytheon bought Chrysler‟s Electrospace Systems operation and electronic warfare systems, which was involved in satellite communications and its airborne- technologies operation, in a $455 million in cash and a $20 million dividend deal.115

It was in 1997 that the company reached its current magnitude, with the acquisition of Texas

Instruments Inc. in a cash deal of $2.9 billion and the defense business of Hughes Electronics

Corporation, a subsidiary of General Motors Corporation, for $9.5 billion. The Hughes deal was structured in a Morris Trust transaction, an M&A technique where assets other than those being acquired are spun off into a new public company, with the remaining assets being merged with the Buyer “tax free”. 116 The acquisitions allowed Raytheon to diversify into the related commercial businesses of satellites, network services, laser-guided weapons systems, missiles, airborne radar, night vision systems, and electronic warfare systems while steering away from the civilian market.

113 From Thomson One -- November: 1992, Raytheon's board authorized the repurchase of up to 2 million of its common shares per year over the next five years, for a total of 10 million shares and an indicated value of up to $450 million; February 1994, Raytheon's board authorized the repurchase of up to 12 million common shares for an indicated value of up to $736.5 million; February 1995, Raytheon's board authorized the repurchase of up to 6 million common shares for an indicated value of up to $413.25 million 114 Jones, Kathryn, Raytheon Offers $2.3 Billion for E-Systems, The New York Times, April 1995, available at: http://www.nytimes.com/1995/04/04/business/raytheon-offers-2.3-billion-for-e-systems.html 115 Meredith, Robyn, Raytheon to Buy Chrysler Military Units, The New York Times, April 09, 1996, available at: http://www.nytimes.com/1996/04/09/business/raytheon-to-buy-chrysler-military-units.html 116 Bloomberg Law Reports, “Reverse Morris Trust” Deal Structures, Contributed by Christopher S. Harrison, Schulte Roth & Zabel LLP and NYU School of Law, April 2011, available at: http://www.srz.com/files/News/28b1661c-6845-429e-85a5- bf1d62411e24/Presentation/NewsAttachment/63f25615-d197-4a52-923c- e14992503d13/Harrison_Bloomberg_Law_Reports_Reverse_Morris_Trust_Deal_Structures_April_7_2011.pdf Laurence Nguyen Page 49

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Home appliance, heating, air conditioning, and commercial cooking operations were sold during that period for $522 million, and restructuring plans concerning the consolidation of Raytheon

Systems Company (defense electronics operation) and Raytheon Engineers & Constructors

(engineering and construction unit) were announced in 1998. Several factories were closed in the

US and workforces have also been significantly reduced. Pre-tax restructuring cost totaled $599 million in 1999.117

Thought a series of acquisitions, share repurchases and sale of non-core activities, Raytheon maneuvered its way through the consolidation wave of the 1990s by doubling its sales in the space of five years, to $19.5 billion.118

Raytheon‟s glorious Post-Cold War performance was raddled in 1999 when new CEO Burnham announced to shareholders that financial forecast for the year 2000 had to be revised downwards.

Two reasons can be put forward to explain the forthcoming consequences. It was reported that

Burnham had inherited a corporation of "passive aggressive" managers, where Picard‟s abrasive management style had created a culture of fear and self-doubt in people. Executives had been unable to truly disclose realities of company units‟ performance.119

Additionally, numerous unanticipated contract delays resulting from the company‟s stumble to integrate the diverse operations it recently acquired had generated overoptimistic assumptions about pricing and profit margins. Business Week reported that “A deal to sell Patriot missiles to

Egypt that was supposed to generate $975 million in revenues [in 2000] was marked down to

117 Raytheon Corporation Form 10-K, for the fiscal year ended December 31 2000 http://www.sec.gov/Archives/edgar/data/1047122/0001047122-00-000007.txt 118 Smith, Geoffrey, and Victoria Murphy, Reality Bites at Raytheon, Business Week, November 15, 1999, pp. 78, 80, 82, available at: http://www.businessweek.com/archives/1999/b3655139.arc.htm 119 Ibid. Laurence Nguyen Page 50

Post-Cold War Defense Contracting Consolidation: Survival Strategies

$350 million because of delays. An expected $1 billion deal to sell Patriots to Taiwan [in 2000] had been put off until 2001, as were several other billion-dollar Patriot deals.” 120

Burnham concluded, “People were so busy working on the nuts and bolts of the reorganization, we failed to step back and assess how the world was changing around us”, “that fundamental changes are taking place in our business and in the industry, and as a result we are changing some key assumptions in our business model to arrive at a new baseline for Raytheon that is fact- based and realistic.”121

Despite its commendable performance in the period ensuing the end of the Cold War,

Raytheon‟s inability to identify a sustainable and realistic growth model was punished by the market. On the day the company announced it was reducing earnings outlook for 1999 and 2000 the stock lost 50% of its value.122

120 Smith, Geoffrey, and Victoria Murphy, Reality Bites at Raytheon, Business Week, November 15, 1999, pp. 78, 80, 82, available at: http://www.businessweek.com/archives/1999/b3655139.arc.htm 121 Press Release: Raytheon Exits the Personal Rapid Transit Business, October 12, 1999, available at: http://faculty.washington.edu/jbs/itrans/rayexit.htm 122 Smith, Geoffrey, and Victoria Murphy, Reality Bites at Raytheon, Business Week, November 15, 1999, pp. 78, 80, 82, available at: http://www.businessweek.com/archives/1999/b3655139.arc.htm Laurence Nguyen Page 51

Post-Cold War Defense Contracting Consolidation: Survival Strategies

In summary

The constant evolution of realities defining wars on the battlefield and in the corporate rink requires from performing actors that they not only to be aware of their surroundings, but demands from them that they take timely and accurate action to ensure survival and victory.

As demonstrated by the insurgencies in Iraq and Afghanistan, the consequences of not adapting to the new realities of the battlefield carry not only battle specific consequences, but also bleed into public, national, and international costs.

The status quo is not an option for contractors who are perceptive to the transformations of the new world.

At the 38th Institute for Foreign Policy Analysis Conference on National Security Strategy and

Policy earlier this year, Air, Space, & Cyperspace Power in the 21st-Century 123 , Professor

Pfaltzgraff noted the need to develop high and low end aerospace power to be responsive to both traditional threats and irregular warfare. This would assume addressing nuclear issues and conventional concerns as well as state and non-state actors.

In the Raytheon case, failure to implement restructuration plans post-acquisition of strategic businesses and overoptimistic sales forecast in the context of a changing environment had led to severe punishment by markets and disastrous consequences on share prices.

The matrix below recapitulates survival strategies employed by today‟s major players in the defense contracting industry (in terms of present market capitalization) in the early 1990s.

123 Institute for Foreign Policy Analysis, International Security Studies Program of the Fletcher School, Tufts University, Air. Space, & Cyberspace Power in the 21st-Century, Robert L. Pfaltzgraff Jr. Laurence Nguyen Page 52

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Defense Contracting Consolidation Strategies Matrix Illustration of the largest consolidation moves from 1990 to 2000

Industry Contraction

Concentration Source: Adapted from Flamm, Kenneth, US Defense Industry Consolidation in the 1990s, in Susman and O‟Keefe, The Defense Industry in the Post-Cold War Era, Corporate Strategies and Public Policy Perspectives, Pergamon, 1998 Commonalities in the actions observed in today‟ industry survivors and giants during the

consolidation wave of the 1990s include the desire to remain in the industry, the ability to

efficiently consolidate redundant and non-relevant business units, the capacity to grow through

thoughtful acquisitions and the subsequent integration of those businesses.

General Dynamics profited from the sale of its assets as it generated enough momentum to

liberate liquidity that was used towards reducing the corporate debt burden. At the same time, the

sale of non-core businesses allowed executives to concentrate on the company‟s competitive

strength, thus building a solid base for its performance. It is important to note however that it is

the acquisition phase into which General Dynamics entered in the second half of the 1990s that

gave the company its current clout.

Laurence Nguyen Page 53

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Northrop Grumman adopted a strategy of horizontal diversification where it positioned itself as top supplier for conventional symmetric war material, such as military aircrafts and naval vessels. That proposal however becomes weakly relevant in an asymmetric warfare environment.

The US government budgetary constraints and the consequences of tighter spending to the defense sector have pushed the company to announce the spin-off of its shipbuilding segment in

2011. Pre-empting the change in the nature of the services required by the industry, Northrop

Grumman initiated in 2002 a $7.8 billion share acquisition of TRW124. The acquisition propelled

Northrop Grumman further into the military and civil space systems and communication satellite arena125, an enviable position considering the upcoming prominence of digital communication warfare.

Since 2002, other notable acquisitions include Integic Corporation (2005), an information technology provider specializing in enterprise health and business process management solutions and Essex Corporation (2007), a signal processing product and services provider to U.S. intelligence and defense customers.126

Boeing and Lockheed Martin have based their growth on a strategy of large scale acquisitions.

Where Boeing used the 1990s consolidation round to solidify its position within the defense industry, as signaled by its merger with McDonnell Douglas, Lockheed Martin‟s final plans to build a one stop shop “super company” for the American government with a proposed $11.82 billion stock swap transaction with Northrop Grumman127 were finally met by Hart-Scott-Rodino anti-trust regulatory ax.

124 Northrop Grumman - News Releases, Northrop Grumman to Acquire TRW for $60 per Share in Stock, available at:http://www.irconnect.com/noc/press/pages/news_releases.html?d=29152 125 Northrop Grumman Corporation Form 10-K for the fiscal year ended December 31, 2010 126 Ibid. 127 Thomson One, Lockheed Martin deals 01/01/1990 to 12/31/2000 Laurence Nguyen Page 54

Post-Cold War Defense Contracting Consolidation: Survival Strategies

In a monopsony world, size does matter. As the defense industry consolidated itself to form mega defense corporations, companies had to choose either to acquire or to be acquired. To remain competitive in addressing the Department of Defense national security and strategic needs, contractors had to show their capabilities to carry out in scale and in scope procurement requirements set by the government. As such, surviving defense contractors understood that sheer market size became a competitive advantage in addition to corporate performance.

Commonalities in leadership personalities and backgrounds of CEOs leading what is known as today‟s largest defense company performers also transpire through the analysis. Like real persons, companies espouse the personalities of their leaders, and appreciating the various leadership backgrounds can also help understand the choices of strategies and leadership styles.

The following timelines juxtapose different leaderships during the 1990s consolidation period.

Laurence Nguyen Page 55

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Today‟s Top Five US Defense Contracting Companies and their Management from 1990 to 2000

Frank Shrontz, a revolving door officer and Ivy League educated CEO held the reins for Boeing during the contraction decade. He was followed by Philip Condit, another Ivy League educated engineer. Similarly, Lockheed Martin‟s Norman Augustine also studied engineering at Princeton.

Their common backgrounds suggest similar thinking paths.

General Dynamics‟ top managers typically yielded from the military field and held distinguished careers in the defense contracting and engineering worlds before landing the top position. Maj.

Gen Anders was an astronaut for NASA prior to engineering the spin-off of General Dynamics‟ business units. Similarly, Kent Kresa was a researcher for DARPA and an MIT trained engineer before heading the Northrop Grumman group.

Laurence Nguyen Page 56

Post-Cold War Defense Contracting Consolidation: Survival Strategies

Frank Shrontz from Boeing and General Dynamics‟ Nicholas Chabraja both had legal training which most likely gave them a solid edge for understanding corporate structures intricacies and maneuvers for merger and acquisition schemes.

Recipes for successful leadership for defense contracting companies in a constraining and transitional environment appear to take root in prestigious graduate business schools and stem from strong technical skills in engineering. Moreover, a sincere and profound love for the aerospace industry prior to becoming a manager appears to be a required characteristic, needed to fuel the top leader with the ambition and motivation to carry its company through turbulent times and to the top of the pack.

As Northrop Grumman is dropping its shipbuilding capabilities to grow stronger in space satellites and electronic defense intelligence systems (TRW)128, Boeing gearing to build a new generation of tankers air refueling jet (the KC-46A) for the US Air Force, a $35 billion contract129, and Lockheed Martin experimenting a slowdown in its F-35 program130, the likes of

BAE, EADS, and Finmeccanica are gaining grounds internationally and pushing on US shore.

The word strategy comes from the Greek word strategos, meaning “the leader of the army”.

Strategy in this sense is the art of commanding a war effort and deciding on what maneuvers to use to gain an edge. With time, military leaders have discovered that the more planning they put into their efforts, the greater the chance of success.131

The industry consolidation under the military industrial complex has yielded five principal defense contractors. While different strategies have been adopted to remain competitive and survive the downsizing of the market, this paper has outlined the many commonalities in

128Hasik, James, Arms and Innovation, The University of Chicago Press, Chicago and London, 2008 129 Selinger, Marc, Boeing Featured Story, Boeing to build US Air Force tankers, available at: http://www.boeing.com/Features/2011/02/bds_tanker_announcement_02_24_11.html 130 Capaccio, Tony, Gates Said to Put Marines' Lockheed F-35 on `Probation' Amid Testing Need, Bloomberg News, Jan 6, 2011, available at: http://www.bloomberg.com/news/2011-01-06/gates-is-said-to-put-lockheed-marine-corps-f-35-on-probation-.html 131 Greene, Robert, The 33 Strategies of War, Penguin Books, 2006 Laurence Nguyen Page 57

Post-Cold War Defense Contracting Consolidation: Survival Strategies behavior used by escapees of the Post-Cold War era. Hopefully, corporate memory has recorded successful strategies and in-house analysts taken note of effective implementation models that can be deployed swiftly to meet new government demands and budgetary constraints.

Laurence Nguyen Page 58

Appendix 1

Source: SIPRI Fact Sheet, April 2010, The SIPRI Top 100 Arms Producing Companies, 2008, Susan T. Jackson and The SIPRI Arms Industry Network

Laurence Nguyen Page 59

Appendix 2

Changes in Concentration Ratios (% of combined total of SIPRI Top 100 Companies, 1990 – 2005) Arms Sales Total Sales Company Section 1990 1995 2000 2005 1990 1995 2000 2005 5 Largest Companies 22 28 41 43 33 34 43 45 10 Largest Companies 37 42 57 62 51 52 61 62 15 Largest Companies 48 53 65 69 61 64 71 73 20 Largest Companies 57 61 70 74 69 72 79 81

Source: Home Search Database Publication SIPRI Yearbook Library Media Blogs About SIPRI, Concentration in the Arms Industry, Changes in concentration ratios, SIPRI Top 100 companies, 1990 – 2005

Laurence Nguyen Page 60

Appendix 3

SIPRI Military Expenditure and Arms Production Project – June 2004 Significant acquisitions among arms–producing companies within North America (US companies unless indicated otherwise), 1998–2003

Buyer company Acquired company Seller company (US $m.) acquisit. Alcoa Cordant Technologies 2 300 2000 Alliant Tech Systems Thiokol Propulsion Alcoa 685 2001 Alliant Tech Systems Unit of Blount Int. Blount Int. 250 2001 Alliant Tech Systems Boeing Ordnance Boeing 52 2002 Alliant Tech Systems Science and Applied Techn. ... 2002 Alliant Tech Systems Composite Optics … 2003 Alliant Tech Systems GASL and Micro Craft Allied Aerospace … 2003 Allied Research Corp. NS Microwave … 2002 Allied Research Corp. Sea Space … 2002 Allied Research Corp. Titan Dynamics … 2002 Allied Signal Honeywell 14 000 1999 Allied Signal Tristar Aerospace 291 1999 Anteon Information Spectrum Privately Held 91 2003 Armor Holdings Simula … 111 2003 BFGoodrich Rohr Industries 1 300 1998 BFGoodrich ACES II Boeing 1999 BFGoodrich Coltech Industries 2 200 1999 BFGoodrich Raytheon Optical Systems Raytheon … 2000 BFGoodrich Humphrey Remec 13 2001 Goodrich TRW Aeronautical Systems TRW 1500 2002 Boeing Hughes Space and General Motors 3 750 2000 Communications Activities Boeing Conquest … … 2003 CACI Premier Technology Group … … 2003 CACI Applied Technology Solutions … … 2003 Carlyle Group Northrop Grumman ISA Northrop Grumman 843 2000 Carlyle Group Sippican … 2002 CMC Electronics (CAN) Flight Visions ONCAP … 2002 Colt Saco Defense … 1998 Computer Science Corp. Nichols Research 391 1999 Computer Science Corp. DynCorp 950 2003 Condor Systems Applied Tech. div. Litton 120 1999 Condor Systems ARGOSystems Boeing … 1999 Curtiss-Wright Westinghouse unit Westinghouse 80 2002 Curtiss-Wright DY 4 Systems Solectron 110 2003 Curtiss-Wright Systran … 18 2003 DRS Technologies Second Generation Ground Raytheona 45 1998 Electro-Optical Syst. and Focal Plane Array (part) DRS Technologies NAI Technologies 1999 DRS Technologies Unit of Boeing Boeing 84 2001 DRS Technologies Eaton Corp unit (Navy Eaton Corp 92 2002 Controls) DRS Technologies Nytech 2002 DRS Technologies Paravant 105 2002 DRS Technologies Kaman unit Kaman … 2003 DRS Technologies Integrated Defense 543 2003 Technologies

Laurence Nguyen Page 61

Appendix 3

Buyer company Acquired company Seller company (US $m.) acquisit.

L-3 Communications Gov‟t Service Group Emergent Information 38 2001 Technologies L-3 Communications Units of Bulova Techn. Bulova Technologies 44 2001 L-3 Communications ComCept … 2002 L-3 Communications Northrop Grumman units Northrop Grumman 2002 L-3 Communications Raytheon Aircraft Raytheon 1 150 2002 Integration Systems L-3 Communications PerkinElmer Detection PerkinElmer Systems 110 2002 L-3 Communications Spar Aerospace (Canada) 2002 L-3 Communications SY Technology 50 2002 L-3 Communications Technology Management 50 2002 & Analysis L-3 Communications Wescam (Canada) 119 2002 L-3 Communications Westwood Corp. 27 2002 L-3 Communications Aeromet 20 2003 L-3 Communications Goodrich Avionics Systems Goodrich 188 2003 L-3 Communications IPITEK IPICOM 28 2003 L-3 Communications Vertex Aerospacec Veritas Capital 650 2003 L-3 Communications Bombardier Military Aviation Bombardier (CAN) 90 2003 Services (CAN) Litton Avondale Industries 529 1999 Litton Denro 60 1999 Lockheed Martin OAO Corp … 2001 Lockheed Martin ACS Federal Technology & IT ACS 551 2003 Lockheed Martin Leigh aerospace unit Privately held 2003 Lockheed Martin Orincon Privately held 2003 Lockheed Martin Titan … 2 500 2003 ManTech International Integrated Data Systems … 63 2003 Moog Poly Scientific Northrop Grumman 2003 Northrop Grumman International Research Inst. 55 1998 Northrop Grumman Data Procurement Corp. 33 1999 Northrop Grumman Information Syst. Division California Microwave 93 1999 Northrop Grumman Ryan Aeronautical Allegheny Teledyne 140 1999 Northrop Grumman Sterling‟s Federal Systems 150 2000 Group Northrop Grumman Comptek 156 2000 Northrop Grumman Federal Data System 302 2000 Northrop Grumman Litton 2 600 2001 Northrop Grumman Newport News 2 600 2001 Northrop Grumman Unit of Aerojet GenCorp 315 2001 Northrop Grumman Fibersense Audax Group 44 2002 Northrop Grummanb TRW 7 800 2002 Raytheon Communications Systems Allied Signal 63 1998 Raytheon Orbital Sciences 21 1999 Raytheon JPS Communications … 2003 Raytheon Solypsis … 2003 Rockwell Collins Kaiser Aerosp. and Electr. 300 2000 Rockwell Collins NLX Holding Corp. Arlington Capital Partners 125 2003

Laurence Nguyen Page 62

Appendix 3

Buyer company Acquired company Seller company (US $m.) acquisit.

Science Applic. Internat. Information Services Boeing … 1999 Science Applic. Internat. Units of Maxwell Techn. Maxwell Technologies … 2001 Sikorsky (UTC) Helicopter Support Inc. … 1998 Sikorsky (UTC) Derco Holdings 2002 SRA International Adroit Systems Privately held 40 2003 Titan BTG … 2001 TriQuint Semiconductor Monolithic Microwave Raytheona 39 1998 United Defense US Marine Repair Carlyle Group 305 2002 Industries United Technologies Sundstrand 4 300 1999 United Technologies Sensor Systems Orbital Sciences 20 2001 Veridian ERIM International 1999 Veridian MRJ Techology 1999 Veridian Trident Data 1999 Veridian Signal 227 2002 Veritas Capital Raytheon Aerospace (70%) Raytheon 270 2001 …c United Defense Carlyle Group 225 2002 Vought Aircraft Aerostructures 2003

Notes: a Sale required by the Department of Justice. b TRW sold its aeronautical systems unit, based in the UK, to Goodrich (USA) and Northrop Grumman sold 58% of the TRW automotive unit to Blackstone (USA). c The Carlyle Group conducted an initial public offering of United Defense on the New York stock exchange. It continues to hold 54% of United Defense.

Source: SIPRI files on mergers & acquisitions

Laurence Nguyen Page 63

Appendix 4

Laurence Nguyen Page 64

Appendix 5

Boeing Defense, Space and Security Product Capabilities include * Advanced Tanker * Air Force One * C-17 Globemaster III * C-32A Executive Transport * C-40A Clipper Military Transport * C-40B Special-Mission Aircraft * C-40C Operational Support and Team Travel Aircraft Airlift and Tankers * KC-10 Extender * KC-135 Stratotanker * KC-767 Advanced Tanker

* Combat Survivor Evader Locator (CSEL) * Family of Advanced Beyond Line-of-Sight Terminals (FAB-T) * Joint Tactical Radio System Ground Mobile Radios (JTRS GMR)

Battle Communication Networks * 2018 Bomber * AV-8B Harrier II Plus * B-1B Lancer * B-2 Spirit * B-52 Stratofortress * EA-18G * F-15E Strike Eagle * F-15K - Republic of Korea * F/A-18 Hornet Fighters & Bombers * F/A-18E/F Super Hornet * F-22 Raptor * Joint Helmet-Mounted Cueing System (JHMCS) * T-45 Training System

* Mission Operations * BattleScape * Boeing Mission Systems Global Situational Awareness * Boeing Integration Center (BIC) * Brigade Combat Team Modernization (BCTM) * E-4B Advanced Airborne Command Post * E-6 Tacamo * Joint Effects-Based Command and Control (JEBC2)

Integrated Command & * Network Centric Operations (NCO) Control * SOSCOE

* Boeing Launch Services (BLS) * Expendable Launch Systems

Launch Systems

* Airborne Laser Testbed (ALTB) * Arrow * Avenger * Ground-based Midcourse Defense (GMD) * Laser & Electro-Optical Systems (LEOS) Strategic Missile & * Strategic Missile & Defense Systems Defense Systems

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Appendix 5

* Aegis SM-3 * AGM 86-C Conventional Air-Launched Cruise Missile (CALCM) * Brimstone * Harpoon * Joint Direct Attack Munition (JDAM) * Patriot Advanced Capability (PAC-3) Missiles & Weapons * Standoff Land Attack Missile -- Expanded Response SLAM ER * Small Diameter Bomb (SDB) * Strategic Missile Systems * Waverider * Advanced Logistics Services * Engineering & Logistics Services * GSA Professional Services * Maintenance, Modifications & Upgrades * Supply Chain Services * Training Support Center Product Support * Training Systems and Services * AH-64 Apache * CH-46E Sea Knight * CH-47D/F Chinook * Canard Rotor/Wing * MH-47E/G Special Operations Chinook * UH-46D Sea Knight Rotorcraft * V-22 Osprey * Boeing 376 * Boeing 601 * Boeing 702HP * Boeing 702MP * Boeing Satellites * Commercial/Civil Satellite Programs * GPS IIF (Global Positioning System) Satellites & * Orbital Express Communication * Space and Intelligence Systems Systems * Spectrolab * TSAT (Transformational Satellite Communications System) * Wideband Global SATCOM (WGS) * XSS-10 Micro-Satellite * Ares I Crew Launch Vehicle * Checkout, Assembly & Payload Processing Services (CAPPS) * Constellation/Ares I Crew Launch Vehicle * International Space Station (ISS) * MEXSAT * Space Exploration Space Exploration * Space Flight Awareness (SFA) * Space Shuttle * 737 AEW&C * 737 AEW&C Peace Eagle * 737 AEW&C Wedgetail * 767 AWACS * E-10A MC2A (Multi-sensor Command & Control Aircraft) * E-3 AWACS Surveillance & * Information Solutions Reconnaissance * Long-term Mine Reconnaissance System (LMRS) * Nimrod Maritime Patrol Aircraft * P-8

* A160 Hummingbird * ScanEagle

Unmanned Aerial Vehicles

Source: Boeing Corporate Webpage, Products, Defense, Space & Security Capabilities, available at: http://www.boeing.com/bds/capabilities.htm

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Appendix 6

General Dynamics Military and Defense related product include

* Bath Iron Works * Electric Boat * National Steel and Shipbuilding Company

Marine systems Combat systems General Dynamics Land Systems * General Dynamics Robotic Systems[11] o Autonomous Navigation System[12] o Mobile Detection and Assessment Response System[13] o Unmanned Surface Vehicle[14] * Armored Personnel Carrier (LAV Family, FOX) * Mine Protected Tactical Vehicle (RG Family) * M1 Series Abrams Main Battle Tank * Expeditionary Fighting Vehicle * Stryker Armored Combat Vehicle * Weapon Systems (Anti-Tank Guided Missile, Integrated Battlefield Information

System, Infantry Fighting Vehicle)

General Dynamics Armament and Technical Products * GAU-17 (Minigun) * GAU-19 European Land Systems (previously known as Steyr-Daimler-Puch) * Armoured Vehicles - Tracked  ASCOD 2 * Armoured Vehicles - Wheels - 8-28 to.  Duro  Eagle  Pandur  Piranha * Bridges Systems  M3  IRB  REBS  IAB * Weapons Systems  Artillery  Grenade Launcher LAG 40 * Munition  Big Calibers  Medium and Small Calibers  General Dynamics Advanced Information Systems  General Dynamics C4 Systems  General Dynamics Information Technology

Information systems and  General Dynamics United Kingdom technology

Gulfstream Aerospace (G family) * Special Missions

Aerospace

Source: General Dynamics Corporate Webpage, http://www.generaldynamics.com/

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Appendix 7

Lockheed Martin Products include Advanced Composite Cargo Aircraft Advanced Development Programs C-130J Super Hercules C-5M Super Galaxy F-16 Fighting Falcon F-2 Aeronautics F-22 Raptor F-35 Lightning II Greenville Site Operations Hybrid Air Vehicle (P-791) Integrated Warfare Development Center P-3 Orion T-50 Multirole Trainer Transformer TX U-2 Dragon Lady Advanced Extremely High Frequency Ground Station Advanced Technologies and Oceanic Procedures Agency Consolidated End-User Services Air & Space Operations Weapon System Integrator Air Traffic Control Simulation Systems

Information Systems Airborne and Maritime / Fixed Station Joint Tactical Radio Systems Airborne Multi-INT and Global Solutions Laboratory Albania National Airspace Modernization Program All Source Analysis System Audacity Automated Flight Service Station Automated Radar Terminal System (ARTS) Color Display Biometric Experimentation and Advanced Concepts Center Biometrics Bureau of Alcohol, Tobacco, Firearms and Explosives Software Maintenance Support CECOM Rapid Response Census Systems Chief Information Officer Solutions and Partners 2 (CIO-SP2) Command Center Operations Command, Control, Battle Management & Communications Common Automated Radar Terminal System Contact Center Solutions Counter Narco-Terrorism Technology Program and Operations Support Decennial Response Integration System Defence Fixed Telecommunication Service Program Defense Services Design and Engineering Support Program Distributed Common Ground System DoD Logistics, Maintenance and Supply Support e-Customs Partnership Electronic Records Archive Electronic Suspense Tracking and Routing System En Route Automation Modernization program Energy Business Services Energy Efficiency Services Energy Engineering & Technical Services Enterprise IT Solutions Environmental Services Flight Operations for Defense FltWinds and SPEAR: Lockheed Martin Airline Solutions Foliage Penetration Synthetic Aperture Radar Geostationary Communications and Control Segment program Global Combat Support System - Air Force Global Command and Control Systems - Army Global Compass Navigation System GSA Schedule 84 HI-Vision Lab Host Sustainment Information & Knowledge Solutions Information Technology Enterprise Solutions Information Technology Services for Homeland Security Integrated Electronic Security System and Command, Communications and Control Integrated High-Level Physical Security Integrated Ocean Observing System Integrated Space Command and Control Integrated Strategic Planning and Analysis Network Integrated Submission and Remittance Processing System Laurence Nguyen Page 68

Appendix 7

Integration & Technical Services Integration of Command, Control, Communications and Information (C3I) System for London Metropolitan Police Intelligence on Demand Intranet Quorum IronClad (TM) IRS Solutions iSMART - Interoperable Systems Management and Requirements Transformation Lockheed Martin Center for Security Analysis Lockheed Martin Flight Services London Area Control Center Maneuver Control System Maps On the Move Mark IVB Meteorological Data System MEGA 3 Metrology Service Laboratories Microprocessor En Route Automated Radar Tracking System Mission Planning Enterprise Contract MONAX Network-Centric Solutions Next Generation Identification (NGI) Oceanic Air Traffic Management Services OMEGA Public Health Informatics Range and Communications Development Contract Range Standardization and Automation IIA Rapid Response 3rd Generation Registered Traveler Remote Sensing Systems Integration SBIRS High Ground Segment Seaport Enhanced Short Term Conflict Alert Silent Sentry SkyLine Air Traffic Management Systems Smart Grid Solutions Spatial Awareness Fusion Environment Specialized Security Training Strategic Airport Security Rollout Swift Lab Terminal Systems Theater Battle Management Core Systems Time Domain Voicing Cutoff TRACER Training Solutions Transportation Worker Identification Credential Trusted Manager U.S. Air Force Europe Assistance and Advisory Services U.S. Army Corps of Engineers (USACE) Information Technology Unmanned Aircraft Systems User Request Evaluation Tool and Display System Replacement Utility & Smart Grid Services Warfighter Information Network - Tactical Wireless and Mobile Computing Acoustic Rapid COTS Insertion Advanced Digital Receiver Processor (ADRP™) Advanced Technology Support Program Aegis Ballistic Missile Defense Aegis Platform System Engineering Agent Aerostat Mission Systems and Airborne Mine Countermeasures Sensors AN/ALQ-210 AN/APG-67 Airborne Multimode Radar AN/APS-145 Advanced Early Warning Airborne Surveillance Radar AN/BLQ-10 (V) Submarine Electronic Warfare Systems AN/SQQ-89(V) Undersea Warfare Combat System AN/TPS-77 Tactical Transportable Radar System AN/UYK-43 Computer AN/UYQ-70(V) Advanced Display System AT-6 Light Attack and Armed Reconnaissance Aircraft AWD Air Warfare Destroyer Laurence Nguyen Page 69

Appendix 7

Biomass Energy and Fuels Coast Guard C4ISR Combat Talon II Commercial Products Selection Common Radio Room Consolidated Afloat Networks and Enterprise Services Program Critical Infrastructure Protection Customer Support Services Field Engineering DESWAT - Destructive Waters Project (Romania) Egyptian Fast Missile Craft Program Enhanced Biological Aerosol Warning System Extensible Launching System G-STAR GPS Anti-Jam Solutions High Altitude Airship InfoScene Integrated Data System Integrated Weather and Environmental Systems Interactive Defensive Avionics System / Multi-Mission Advanced Tactical Terminal Japan P-3C Upgrades Joint Strike Fighter Tactical Avionics LaserNet Fines Lifetime Support Low Light Level Television Sensor MagneLink Magnetic Communication System (MCS) Maritime Integrated Domain Awareness Solution Medium Extended Air Defense System (MEADS) Sensors Metrology Calibration Services Millennium Gun Mobile Electronic Warfare Support System Product Improvement Program Multi-Hypothesis Tracker/Data Fusion Naval Mission Planning Ocean Thermal Energy Conversion Operator Support Application Framework (OSAF) P-3C Update III Block Modification Upgrade Program Persistent Threat Detection System Printed Wiring Board Remote Minehunting System RNoAF P-3C Upgrade Improvement Program Royal Navy Tomahawk Integration S-Band Advanced Radar Semi-Automatic Tray Sleever Shipboard Integration Single Cell Launcher Skyshield Software Digital Map Solid Oxide Fuel Cells Spanish Navy Next Generation F-105 Frigate Sonar System SPY-1 Family of Radars Supply Chain Management Plus (TM) Surface Combat Ship Symphony Radio Controlled-IED Defeat System Technical Manuals TPS-79 3-D Tactical Air Surveillance Radar Trident Submarine Navigation Vertical Launch Anti-submarine Rocket Warfighter's Decision Aid Wide Field of View Camera System Worldwide Engineering & Depot Operations Center Aculight Laser Solutions Advanced Hull Forms Aegis Ashore Aegis Modernization Aegis Weapon System Air Sovereignty Operations Center Alternative Energy Generation Solutions AN/ALQ-217 AN/APR-48A Radar Frequency Interferometer Electronic Support Target Acquisition Laurence Nguyen Page 70

Appendix 7

System AN/APY-9 Airborne Early Warning Radar AN/FPS-117 Long Range Solid-State Radar AN/TPS-59 Tactical Missile Defense Radar AN/USQ-78B Acoustic Subsystem AN/UYK-44 Computer ASW Training Targets Automatic Flats Tray Lidder System B-2 CP1936(V)/A Avionics Control Computer Chemical, Biological, Radiological and Nuclear Defense Systems Coastal and Border Surveillance COMBATSS-21 Combat Management System Common Cockpit Avionics Suite Comms at Speed and Depth Crew Transfer System Customer Assistance Center - Help Desk Services Desert Hawk III Directional Infrared Countermeasures Enhanced AN/TPQ-36 Counterfire Target Acquisition Radar Expendable Mine Neutralization System Fleet Automotive Support Initiative - Global German F-122 Frigate Combat System Human Systems Integration Integrated Common Electronic Warfare System Integrated Surveillance Systems Intelligent System Manager Japan ASP Joint Direct Attack Munitions K-MAX Unmanned Helicopter Life Cycle Cost Modeling Littoral Combat Ship LPD 17 Class Amphibious Transport Dock Manufacturing Services Marlin MetroGuard MH-60R MK 41 Vertical Launching System MSD Germany (F-122 / F-123) National Weather Radar Testbed Nulka Offboard Countermeasure System Off-Shore Crew Transport Boat P-3C Anti-Surface Warfare Improvement Program Package Recognition System Positive Train Control Remote Computer Reader Research Vessels Royal Australian Air Force AP-3C Data Management System RuleSentry SeaSLICE Shipboard Integrated Electro-Optic Defense System SIMIN National Integrated Meteorological System (Romania) Skyranger Small Tactical Craft Solar Energy Space Fence Spares Modeling Submarine Precision Navigation System Supportability Engineering Surface Electronic Warfare Improvement Program Tactical Environmental Processor Towed Array Systems Training UK Sonar 2054 Vessel Traffic Management Information Systems Wave & Tidal Energy Windfarm Support Vessel

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Appendix 7

Technology Commercialization

Technology Ventures

Advanced Gunnery Training System Autonomic Logistics Information System Basic Wings Course Battlegroup Command and Control Trainer

C-130J Maintenance and Aircrew Training System (MATS) Global Training and Close Combat Tactical Trainer Logistics Combat Air-to-Air Training System Combat Leader Environment Common Organizational Level Tester Communications and Electronics Command Rapid Response Constructive Simulation Capabilities Counter Narco-Terrorism Technology Program and Operations Support CultureSim – Urban Populace Modeling Deployable Virtual Training Environment Distributed Mission Operations Center Embedded Platform Logistics System Enterprise Solutions F-35 Lightning II Training Systems FIRST Program Flight Total Schoolhouse Hand-Held Device Immersive Training/Gaming Capabilities Infrastructure Harmonization Irregular Warfare / Stability Operations Capability Landing Craft Air Cushion Service Life Extension Program Live Training Capabilities Logistics Support System Marine Automation and Control Systems Military Flying Training System Missile Defense & Range Operations Moving Armor Target Multiple Integrated Laser Engagement System OneMILES Multi-Purpose Wireless Interactive Target System OneMILES Seagoing Wireless Interactive Target System (Helicopter) OneMILES Small Arms Transmitter Physical Security & Electronic Protection Rapid Response 3rd Generation Sound Effect Simulator Stationary Infantry Target Mechanism Surface Ship Training System Turnkey Training Solutions U.S. Army Corps of Engineers Information Technology UltiVis Universal Communications Platform Virtual Training Capabilities Aircrew Training And Rehearsal Support Base Operations Support Services Battlefield Firing and Target Effects C-130 Aircrew Training System Calibration Services Close Combat Tactical Trainer - Reconfigurable Vehicle Simulator Combat Convoy Simulator Combat Training Center Objective Instrumentation System Common Training Instrumentation Architecture Communications Support Contractor Logistics Support Services Crosslands Aircraft Training Center

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Appendix 7

Deployable Advanced Gunnery Training System Design and Engineering Support Program Driver Trainers Engineering Solutions F-16 Mission Training Center F35 Lightning II Support Equipment Flight Simulation Global Air Operations and Maintenance Human Performance Engineering Improvised Explosive Device Effects Simulator Integrated Logistics Support Joint Asset Management and Engineering Solutions Life Cycle Support LM-STAR Manufacturing Solutions MILES Shootback Device Military Operations on Urban Terrain Mobilization Training Managment Tool Moving Infantry Target OneMILES Man-Worn Harness OneMILES Seagoing Wireless Interactive Target System (Boat) OneMILES Shoulder Launched Munitions OneMILES Universal Controller Device / Micro Controller Device Range Controller Station Security Training and Exercise Capabilities Stationary Armor Target Strategic Services Sourcing ID/IQ Tank Driver Trainer U.S. Air Force Europe Assistance and Advisory Services UltiSim United Kingdom Combined Arms Tactical Trainer Virtual Combat Convoy Trainer Weapons System Support Contract AAS Airborne Laser Wide Area Surveillance Subsystem Arrowhead CEOS Compact Kinetic Energy Missile F-35 Lightning II Electro-optical Targeting System Gyrocam Systems Heat Rejection Radiators Missiles and Fire High Mobility Artillery Rocket System Control HULC IRST Javelin Joint Light Tactical Vehicle LONGBOW FCR and LONGBOW HELLFIRE Missile LRLAP MEADS Internal Communications Subsystem Missile Launch Detector Multifunction Utility/Logistics and Equipment Vehicle Multiple Launch Rocket System M270A1 PAC-3 Missile Pathfinder Paveway II Dual Mode Laser Guided Bomb Paveway II Plus Laser Guided Bomb Reduced-Range Practice Rocket Scorpion Sniper Advanced Targeting Pod TacScape THAAD TSS VNsight After Market Enterprise Army Tactical Missile System Block IA Unitary CEEU CMMS Laurence Nguyen Page 73

Appendix 7

DAGR Guided Unitary MLRS Rocket HAAWC HELLFIRE II Missile High Speed Wind Tunnel Intelligent Microgrid Solutions JAGM Joint Air-to-Surface Standoff Missile LANTIRN ER LONGBOW UTA M299 Missile Launcher Medium Extended Air Defense System Modernized Day Sensor Assembly Multiple Launch Rocket System M270 Network Activated Short Range Air Defense System PAC-3 Missile Segment Enhancement Patriot Paveway II Enhanced Laser Guided Training Round Q-39 SCALPEL SMSS Space Shuttle Thermal Protection TADS Electronic Display and Control TOPSCENE TTU594A/E Mission Readiness Test Set VUIT 2001 Mars Odyssey Airborne Laser Test Bed Boost Vehicle-Plus (BV-Plus) Collaborative Human Immersive Laboratory (CHIL) Defense Meteorological Satellite Program Exoatmospheric Reentry Interceptor Subsystem (ERIS) Friction Stir Welding GeoEye-2 Global Positioning System

Ground-based Midcourse Defense Space Systems Hubble Space Telescope International Space Station Mars Global Surveyor Mars Science Laboratory Aeroshell Mobile User Objective System Orion Phoenix Mars Lander Polaris PROWLR Solar Array Flight Experiment Spitzer Space Telescope Stardust-NExT Thermal Protection Materials Trident II D5 Fleet Ballistic Missile WindTracer Advanced Extremely High Frequency Athena Cassini Composite Products & Technologies Defense Satellite Communications System External Tank-138 Genesis Geostationary Operational Environmental Satellite R-Series Gravity Probe B Relativity Mission Homing Overlay Experiment Intercontinental Ballistic Missile Lunar Prospector Mars Reconnaissance Orbiter Milstar Multiple Kill Vehicle Payload Launch Vehicle (PLV) Laurence Nguyen Page 74

Appendix 7

Polar-Orbiting Operational Environmental Satellites Poseidon C3 Rosetta Spacecraft Space Based Infrared System Stardust Targets and Countermeasures Trident 1 C4 Viking Lockheed Martin Healthcare Information Systems Integration Canada Intruder Detection System Visual Interactive Simulation Training Application Lockheed Martin UK Address Interpretation Merlin HM MK1

Source: Lockheed Martin Corporate Webpage, Products by Lockheed Martin Organization, available at: http://www.lockheedmartin.com/products/Locations/index.html

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Appendix 8

Northrop Grumman Products Capabilities include Strike & Surveillance Systems  RQ-4 Global Hawk unmanned reconnaissance system  B-2 stealth bomber  F-35 Lightning II  F/A-18 Super Hornet strike fighter  Minuteman III Intercontinental Ballistic Missile (ICBM) Aerospace Systems  MQ-8B Fire Scout unmanned aircraft system  Multi-Platform Radar Technology Insertion Program (MP-RTIP) Space Systems  James Webb Space Telescope (JWST)  Advanced Extremely High Frequency (AEHF) payload  Space Tracking and Surveillance System (STSS) Battle Management & Engagement Systems  E-2 Hawkeye  Joint Surveillance Target Attack Radar System (Joint STARS)  Broad Area Maritime Surveillance (BAMS) unmanned aircraft system  Long Endurance Multi Intelligence Vehicle (LEMV)  EA-6B Prowler, and its next generation platform, the EA-18G Growler Advanced Programs & Technology  Navy Unmanned Combat Air System (N-UCAS)  Airborne Laser Test Bed (ALTB) Intelligence, Surveillance & Reconnaissance (ISR) Systems  Space Based Infrared System (SBIRS)  Defense Meteorological Satellite Program (DMSP)  Defense Support Program (DSP)  TPS-78/703 family of ground based surveillance radars

Electronics Services  Multi-role Electronically Scanned Array (MESA) radar Land & Self Protection Systems  U.S. Marine Corps Ground/Air Task Oriented Radar (G/ATOR)  Large Aircraft Infrared Countermeasures (LAIRCM) system  AN/ALQ-131(V) electronic countermeasures pods  LR-100 high-performance radar warning receiver (RWR)/electronic support measures (ESM)/electronic intelligence (ELINT) receiver system  U.S. Army‟s STARLite synthetic aperture radar for Unmanned Aerial Vehicles (UAVs)  U.S. Army Vehicle Intercom Systems (VIC 3 and VIC-5)  U.S. Army Next Generation Automated Test System (NGATS)  U.S. Air Force Joint Threat Emitter (JTE) training range system  Vehicle and Dismount Exploitation Radar (VADER) Naval & Marine Systems  AN/WSN 7 Gyro Navigator  Anti-ship missile defense and surveillance radars (Cobra Judy, AN/SPQ 9B, AN/SPS 74)  Propulsion equipment and missile launch systems for the Virginia-class submarines. Navigation Systems  Integrated Avionics System  AN/TYQ-23 Aircraft Command and Control System  Fiber Optic Acoustic Sensors Targeting Systems  Fire control radars for the B-1B, F-16 (worldwide)  F-22 U.S. Air Force, and F-35  AN/APN 241 navigation/weather radar  AN/AAQ 28(V) LITENING family of targeting pods  Distributed Aperture EO/IR systems  Lightweight Laser Designator Rangefinder (LLDR) Aircraft Carriers  Nimitz-class, the USS George H. W. Bush, was delivered in May 2009, design work on the next generation carrier, the Ford-class has been underway for over eight years.  USS Gerald R. Ford (scheduled for delivery in 2015)  USS Theodore Roosevelt (scheduled for redelivery in 2013),

Shuipbuilding Expeditionary Warfare  Wasp class multipurpose amphibious assault ship  LHA 6, new class of enhanced amphibious assault ships Surface Combatants

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Appendix 8

 Arleigh Burke-class Aegis-guided missile destroyers  Zumwalt-class, land attack destroyer Submarines  Virginia-class nuclear attack submarines Coast Guard & Coastal Defense  USCGC Berthoff, National Security Cutter (NSC)  USCGC Waesche (NSC-2)  Stratton (NSC-3) Fleet Support  Fleet Support provides after-market services

Defense and Government Services Training Solutions Integrated Logistics and Modernization

Technical Services

Source: Northrop Grumman Form 10K SEC Filing, 23/21/11 available at: http://www.sec.gov/Archives/edgar/data/1133421/000095012311010835/v57435e10vk.htm

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Appendix 9

Raytheon Products and Services include

 AGM-154 Joint Standoff Weapon  ALE-50 Towed Decoy System  ALR-67 Radar Warning Receiver  AN/APG-79 AN/ASQ-228 ATFLIR Integrated Defense System  (IDS)  AN/AWG-9  AN/MPQ-64 Sentinel  AN/PAS-13  AN/SLQ-32 Electronic Warfare Suite  AN/SPS-49  AN/TPQ-36 Firefinder radar  AN/TPQ-37 Firefinder radar  APG-65 and APG-73  APQ-181 radar Cybersecurity  AQM-37 Jayhawk  ASARS-2  AGM-129 ACM  AGM-65 Maverick  AGM-88 HARM  AIM-54 Phoenix  AIM-120 AMRAAM  AIM-9 Sidewinder  AN/ALE-47

Homeland Security  AN/AQS-20A  AN/SQQ-32 Mine-hunting sonar  APG-63 and APG-70  Ballistic Missile Early Warning System  Tomahawk (missile)  Counter Rocket, Artillery, and Mortar  EQ-36 Counterfire Target Acquisition  FMRAAM  FGM-148 Javelin

Missile Defense  FIM-92 Stinger  GBU-53/B  Ground-Based Midcourse Defense  HARM Targeting System  Hawker 400, 4000, 800  MIM-23 Hawk  Mark 48 torpedo  MIM-104 Patriot  Network Centric Airborne Defense Element  PAVE PAWS Space Solutions  Paveway  Paveway IV  Phalanx CIWS  RAYDAC

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Appendix 9

 RIM-116 Rolling Airframe Missile  RIM-66 Standard  RIM-67 Standard  RIM-161 Standard Missile 3  Raytheon Lectron Training  Raytheon Sentinel  Sea-based X-band Radar  Small Tactical Munition  Beechcraft T-6 Texan II http://www.raytheon.com/capabilities/products/rf_components/

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Appendix 10

Budget Authority for National Defense, FY 1948-2009 (in billions of constant FY09 dollars; includes war & nuclear funding

Current U.S. Defense Spending vs. Spending Since 1948

Budget Authority for National Defense, FY 1948-2009 (in billions of constant FY09 dollars; includes war & nuclear funding) $800 $600 $400 Funding $200

$0

1954 1963 1972 1981 1951 1957 1960 1966 1969 1975 1978 1984 1987 1990 1993 1996 1999 2002 2005 2008 1948

Fiscal Fiscal Fiscal Fiscal Fiscal Fiscal Funding Funding Funding Funding Funding Funding Year Year Year Year Year Year 1948 $171 1958 $361 1968 $513 1978 $377 1988 $508 1998 $358 1949 $160 1959 $376 1969 $497 1979 $378 1989 $502 1999 $375 1950 $181 1960 $364 1970 $454 1980 $385 1990 $492 2000 $387 1951 $460 1961 $366 1971 $411 1981 $428 1991 $447 2001 $426 1952 $604 1962 $416 1972 $398 1982 $470 1992 $443 2002 $448 1953 $504 1963 $418 1973 $378 1983 $502 1993 $416 2003 $547 1954 $385 1964 $404 1974 $362 1984 $522 1994 $383 2004 $570 1955 $343 1965 $390 1975 $352 1985 $557 1995 $381 2005 $565 1956 $347 1966 $458 1976 $357 1986 $536 1996 $371 2006 $605 1957 $363 1967 $510 1977 $383 1987 $519 1997 $367 2007 $660 2008 $709

2009 $687

Source: The Centre for Arms Control and Non-Proliferation, Current U.S. Defense Spending vs. Spending Since 1948, available at http://armscontrolcenter.org/policy/securityspending/articles/022609_fy10_topline_growth_since48/

Laurence Nguyen Page 80

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Laurence Nguyen

The New York Times, Jones, Kathryn, Raytheon Offers $2.3 Billion for E-Systems, April 1995, available at: http://www.nytimes.com/1995/04/04/business/raytheon-offers-2.3-billion-for-e- systems.html The New York Times, Meredith, Robyn, Raytheon to Buy Chrysler Military Units, April 09, 1996, available at: http://www.nytimes.com/1996/04/09/business/raytheon-to-buy-chrysler- military-units.html The New York Times, Wayne, Leslie, Lockheed cancels Northrop merger, citing U.S. stand, July 17, 1998 The Seattle Times, Bjerga, Alan, Knight Ridder Newspapers, Ex-Boeing CFO pleads guilty in tanker deal scandal, November 16, 2004, available at: http://seattletimes.nwsource.com/html/businesstechnology/2002091816_webboeing16.html Times, Vartabedian Ralph, General Dynamics Unit to Cut 1,500 Jobs : * Aerospace: The cutbacks at its air defense group are in addition to the loss of 2,500 workers announced earlier, September1991, available at: http://articles.latimes.com/keyword/general-dynamics-air-defense- systems-division Washington Post, Hedgpeth , Dana, At General Dynamics, Chief Leaves a Legacy Of Nailing the Numbers, Monday, June 22, 2009, available at http://www.washingtonpost.com/wp- dyn/content/article/2009/06/21/AR2009062101831.html Think Thank Publications Institute for Foreign Policy Analysis, International Security Studies Program of the Fletcher School, Tufts University, Air. Space, & Cyberspace Power in the 21st-Century, Robert L. Pfaltzgraff Jr. Miller Centre of Public Affairs, University of Virginia, Gerald L. Baliles, Director, American President, An Online Reference Resource, George H.W. Bush (1924-), available at: http://millercenter.org/president/bush/essays/biography/4 Strategic Studies Institute, Meinhart, Richard, Strategic Planning by the Chairmen, Joint Chiefs of Staff, 1990 to 2005, April 2006, available at: http://www.comw.org/qdr/fulltext/0604meinhart.pdf Stockholm International Peace Research Institute, SIPRI Fact Sheet, April 2010, The SIPRI Top 100 Arms Producing Companies, 2008, Susan T. Jackson and The SIPRI Arms Industry Network Stockholm International Peace Research Institute, Home Search Database Publication SIPRI Yearbook, Library Media Blogs, About SIPRI, Concentration in the Arms Industry, Changes in concentration ratios, SIPRI Top 100 companies, 1990 – 2005 Stockholm International Peace Research Institute, SIPRI, Military Spending and Armament, available at: http://www.sipri.org/research/armaments/production/researchissues/concentration_aprod

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Electronic Asset Purchase Agreement - Martin Marietta Corp., General Dynamics Corp., General Dynamics Space Systems Co. and General Dynamics Commercial Launch Services Inc.(Dec 21, 1993) available at: http://contracts.corporate.findlaw.com/planning/asset/3962.html Bloomberg – Boeing Co/The (BA:US) Stock Quote & Analysis, available at http://www.bloomberg.com/apps/quote?ticker=BA:US Bloomberg – General Dynamics Corp (GD:US) Stock Quote & Analysis, available at: http://www.bloomberg.com/apps/quote?ticker=GD:US Bloomberg – Northrop Grumman Corp (NOC:US) Stock Quote & Analysis, available at http://www.bloomberg.com/apps/quote?ticker=NOC:US Bloomberg – Raytheon Co (RTN:US) Stock Quote & Analysis, available at http://www.bloomberg.com/apps/quote?ticker=RTN:US Bloomberg BusinessWeek - EXECUTIVE PROFILE, James R. Mellor, available at: http://investing.businessweek.com/research/stocks/people/person.asp?personId=227542&ticker= USU:US&previousCapId=36096&previousTitle=USEC%20INC Bloomberg Law Reports, “Reverse Morris Trust” Deal Structures, Contributed by Christopher S. Harrison, Schulte Roth & Zabel LLP and NYU School of Law, April 2011, available at: http://www.srz.com/files/News/28b1661c-6845-429e-85a5- bf1d62411e24/Presentation/NewsAttachment/63f25615-d197-4a52-923c- e14992503d13/Harrison_Bloomberg_Law_Reports_Reverse_Morris_Trust_Deal_Structures_Ap ril_7_2011.pdf Capaccio, Tony, Gates Said to Put Marines' Lockheed F-35 on `Probation' Amid Testing Need, Bloomberg News, Jan 6, 2011, available at: http://www.bloomberg.com/news/2011-01-06/gates- is-said-to-put-lockheed-marine-corps-f-35-on-probation-.html Chowkwanyn, Merlin, The Savage Extreme of a Narrow Policy Spectrum, Five Questions with Noam Chomsky, Counterpunch.org, July 31, 2004, available at: http://www.counterpunch.org/merlin07312004.html Funding Universe, Lockheed Martin Corporation, available at http://www.fundinguniverse.com/company-histories/Lockheed-Martin-Corporation-Company- History.html GlobalSecurity.Org, Atlas Facilities, available at http://www.globalsecurity.org/space/facility/atlas_f.htm Heritage Flight Museum webpage, Maj. Gen. William A. Anders, available at: http://www.heritageflight.org/content/about-2/maj-gen-william-a-anders/ Library of Economics and Liberty, available at: http://www.econlib.org/library/Enc/PublicGoods.html

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MIT World Speakers, Available at http://mitworld.mit.edu/speaker/view/1341 MIT World Speakers, An Engineering Career - 50 Years Out, Kent Kresa '59, SM '61, EAA '66, available at http://mitworld.mit.edu/video/866 Mergent Online, General Company Information, Lockheed Martin Corp Pakistan Military Consortium, FIM-92 Stinger Surface-to-Air Missile System, available at http://www.pakdef.info/pakmilitary/airforce/sam/stinger.html Pike, John, Global Security.Org, The Boeing Company, Available at http://www.globalsecurity.org/military/industry/boeing.htm Press Release: Raytheon Exits the Personal Rapid Transit Business, October 12, 1999, available at: http://faculty.washington.edu/jbs/itrans/rayexit.htm Press Release: Northrop Grumman to Acquire TRW for $60 per Share in Stock, available at:http://www.irconnect.com/noc/press/pages/news_releases.html?d=29152 Sharp, Travis, Current U.S. Defense Spending vs. Spending Since 1948, The Centre for Arms Control and Non Proliferation, February 26, 2009, available at http://armscontrolcenter.org/policy/securityspending/articles/022609_fy10_topline_growth_since 48/ Standard & Poor‟s 500, Index Constituents, available at http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l-- Thomson One, Boeing deals 01/01/1990 to 12/31/2000 Thomson One, General Dynamics deals 01/01/1990 to 12/31/2000 Thomson One, Lockheed Martin deals 01/01/1990 to 12/31/2000 Thomson One, Northrop Grumman deals 01/01/1990 to 12/31/2000 Thomson One, Raytheon deals 01/01/1990 to 12/31/2000 West Point Association of Graduates, 2001 Distinguished Graduate Award, Mr. Stanley C. Pace, June 1943, available at: http://www.westpointaog.org/netcommunity/page.aspx?pid=563 Yale Global Online on Grand Strategy for a Divided America by Charles A. Kupchan, published in Foreign Affairs July/August 2007, available at: http://yaleglobal.yale.edu/content/grand- strategy-divided-america Corporate Websites Boeing, About US, available at: http://www.boeing.com/companyoffices/aboutus/index.html Boeing, History, available at: http://www.boeing.com/history/boeing/boeing.html

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