The Last Supper Ajay Bangalore-Harish Marc Grossman Jingqing

The Last Supper Ajay Bangalore-Harish Marc Grossman Jingqing Huang Christine Winiarz Assisted by Chris Walker

Introduction • The Last Supper – DOD held a dinner to warn the Aerospace companies: the last supper. – DOD is cutting defense budget, foresee fewer players in the future field – Kent Kresa is the CEO of Northrop: needs to decide what direction to take his company

What was driving the DOD to make such a radical suggestion?

What was driving the DOD to make such a radical suggestion? • End of Cold War, accompanied by massive defense spending cuts • Warn the companies – Enable self structure rather than all go out of business • Give the opportunity for companies that are heavily defense oriented the opportunity to partner with those that are less defense oriented • The DOD had previously bailed out Lockheed and now they need to let the aerospace companies know that bail outs won’t happen again. • Ties of friendship: they all know each other and likely wish each other the best. They hope the companies to be able to split the market and negotiate rather than all go for the same piece of pie.

What are the advantages and disadvantages of this suggestion for the nation? Advantages Disadvantages

What are the advantages and disadvantages of this suggestion for the nation? Advantages • • • Gives fair warning, allows companies to selfrestructure Maintain a defense industry in the United States: Controlled shrinkage rather than collapse Forces greater efficiency: in both the defense materials production and corporate structure. Bidding war for civilian contracts. This warning will likely raise the value of civilian contracts in the eyes of the companies, and thus they will be bid at a lower price. Layoffs: Highly trained individuals in the defense industry will be forced into other jobs. The market will place them at the most efficient location rather than in an artificial, government created market. Disadvantages • • • Drives the market value of companies down. Shareholders will worry that the companies are pending death. Market Confidance Unemployment: layoffs after mergers and closures. (1+1 = 1. 5)

Given this directive, what choices did Kent have for his company?

Given this directive, what choices did Kent have for his company? • Eat – Acquire companies with a significant share of civilian markets in order to diversify. – Acquire companies that are heavily defense linked in an effort to dominate the shrinking defense industry. • Be Eaten – It’s a question of protecting your people and their shares. Make sure you’re well valued during acquisition. • Close up Shop – Slowly lay off employees, divest company sectors and sell assets.

What are the advantages and disadvantages of these choices?

What are the advantages and disadvantages of these choices? • Eat: – From the Defense Side • Concentrate on the DOD business acquire another large defense player in order to gain product diversification and negotiation power. • It is unknown as to what extent the defense industry will cut funding. If they cut it completely, there will be nothing left and buying a defense industry company will not look so clever in hindsight. • DOD spending isn’t as affected as civilian funding during economic downturns and thus in some sense it is the safe bet. – From the Civilian Side • DOD spending isn’t as affected as civilian funding during economic downturns. Acquiring a company that derives a large percentage of their business from the civilian market is good if the economy stays strong, but prone to the risks of an economic downturn. • Not as likely to get large defense contracts. • Assuming economy keeps up, there will always be growth

What are the advantages and disadvantages of these choices? • Be Eaten: – Advantages • It’s easier. Laissez-faire type attitude • He can retire • Shareholders could do well if he makes a good sell. – Disadvantages • Disappointing on a personal level. • Close up Shop – Wasteful of potential

What factors should he consider when making a decision?

What factors should he consider when making a decision? • Current cash reserves – If Northrop had cash on hand it’s a nice time to buy others. If not then it’s a good time to be bought. • DOD is straightforward now, they’re likely to be the same in future. • Political future of country – DOD spending is heavily dependent on the political climate which changes rapidly. • They have good relationships in defense industry, and don’t have many contacts in the civilian industry yet. • Investigate past and future trends of civilian aerospace market. • Some parts of the company will be well adapted to switch from defense contracting to the civilian markets. Others will not.

What should Kent do and why? Consider Kent’s vision for Northrop and possible competitor response.

What should Kent do and why? Consider Kent’s vision for Northrop and possible competitor response. • Kent’s vision for the company predicted premiums on intelligence, longrange strike ability, precision, and survivability • Northrop’s skills, resources and relationships make it an ideal candidate for dominating the new defense market. • Kent should try to “eat” another large defense company and position the merged company to be a dominant player in the new market • Possible competitor response – Other companies will be looking to partner with Northrop because of their unique skill base, or they will also be trying to obtain larger market share in the defense market – They will be trying to become a large player in the civilian market and exit the defense market