Pickens’ Plan for Boeing Sends Aerospace Stocks Soaring

Aerospace stocks reacted sharply Tuesday to the disclosure that corporate raider T. Boone Pickens Jr. plans to accumulate Boeing shares, prompting some experts to worry that an industrywide restructuring may be coming sooner than expected.

Investors have long discounted the value of many aerospace stocks, partly owing to policies enacted by Defense Secretary Caspar Weinberger that have reduced the profit and increased risk on government weapons contracts, former defense officials and securities analysts said Tuesday.

As a result, the entire industry is now vulnerable to the manipulations of corporate raiders whose intent would be to threaten a takeover and walk away with a hefty profit after a forced restructuring, they said.

Pickens’ intentions with respect to Boeing are still unknown, but shares of the Seattle-based aerospace firm were bid up $7.125 in trading Tuesday and closed at $53.75. Other aerospace stocks were also up sharply, but closed below their highs for the day. Loral was up $1, Rockwell International was up $1 and TRW was up 87.5 cents.

Boeing, the world leader in commercial aircraft production and a major defense supplier, disclosed Monday that a group led by Pickens plans to acquire more than $15 million worth of Boeing common stock and may buy much more--up to 15% of the company.

The company has enacted a takeover defense, one indication of its concern. Another indication was a meeting Tuesday with Washington state officials, in which Boeing executives reportedly sought special anti-takeover legislation.

Although a slow reorganization in the aerospace industry through mergers of subcontractors has been under way for several years, the actions of corporate raiders is bound to accelerate the consolidation, according to David J. Smith, analyst at Alex Brown & Sons.

“Whether the Defense Department wanted it or not, they have forced a restructuring,” Smith said. “They have forced some major decisions at these companies very rapidly. There is going to be a major restructuring.”

What has forced those decisions, in part, is a series of Pentagon policies that have sharply increased the financing costs of defense contracts by reducing the level of contract progress payments and tooling payments.

Contractors have also been pushed to develop new weapons at a financial loss through a policy known as “cost sharing.” Meanwhile, the business is more risky due to increased competition that has disrupted established markets.

“I think in the long term, the Pentagon has increased the costs of the industry,” he added. “When you consolidate, you tend to eliminate competition.”

In recent weeks, aerospace industry representatives have been mounting a national effort to reverse some of the Pentagon policies that have reduced profit margins and increased costs.

The Aerospace Industry Assn., a national trade group, has recently railed at what it calls “an adversarial” relationship between the industry and the Pentagon.

“The Defense Department has to take a large share of the blame for the duress the industry is under,” said Donald Hicks, an aerospace consultant and recently retired undersecretary of defense. “The relationship between the industry and the Defense Department is at the lowest it has ever been.

“The big problem with Pickens is that he can get his hands on a lot of junk money and do things that can disrupt the industry. I don’t know how you handle this, frankly.”

The Pentagon is likely to be forced to re-examine its own policies if it believes that the U.S. defense industrial base could be seriously damaged by a restructuring, Hicks said.

“If they found their suppliers were under attack, they would be inclined to reduce the risk to these companies,” the consultant said. “You would see the Pentagon turn around things like progress payments.”

Indeed, Air Force Secretary Edward Aldridge acknowledged Tuesday that actions could be taken.

Asked whether the Defense Department could intervene if a takeover threatened to damage a defense contractor, he replied: “There are probably some things that we could do to prohibit that if we felt it was in the national interest to do so.

“I guess we could prohibit . . . the takeover from occurring if we thought that the Boeing military side was going to be dissolved.”

Restructuring’s Effects

A restructuring alone could prove detrimental to the aerospace industry, which has very long product development cycles and even longer profitability cycles. Douglas Aircraft, for example, lost money for nearly two decades.

Boeing said it considers preserving its assets for use on research and development, plant and equipment costs to be “of paramount importance” in any acquisition fight with Pickens. A restructuring that sharply increased its debt to pay for a stock buyback, for example, could severely curtail its ability to finance research.

“I have a very hard time understanding what this man (Pickens) could do for Boeing,” Smith said.

“Boeing is a national asset. It is already the low cost producer in its industry. It is a lean organization. It is very competitive in two of the toughest markets in the world.”

But some experts doubt the Pentagon is likely to interfere in a takeover fight in the defense industry.

“It would be my guess that there would not be interference,” said retired Air Force secretary Verne Orr. “I am not sure what you could do. I don’t think a threat would be viable. If you canceled a contract, it would take two or three years to get things going again.”

Officials at Pickens’ Mesa Limited Partnership in Amarillo, Tex., said Tuesday that they would have no comment.