Northrop Takeover Bid Key to Research Funds.

The stakes involved in Century City-based Northrop Grumman Corp.'s hostile $2.6 billion takeover bid for Newport News Shipbuilding Inc., formally tendered last week, are bigger than previously reported.

In addition to the nuclear shipbuilding business that Newport News operates, the Virginia-based company also holds the key to billions of dollars worth of research and development funds allocated to the Navy's nuclear ship program.

Should General Dynamics Corp.'s competing bid for Newport News be approved by the Pentagon, it and its subcontractors could lay claim to nearly all of the $12.3 billion in shipbuilding research and development money budgeted by the Navy for fiscal years 2001-05.

"It's fair to say that General Dynamics and Newport News are two of the major recipients of this kind of funding from the Navy," said Ronald O'Rourke, a Navy analyst with the U.S. Congressional Research Service. "If you put the two together, it would be a substantial share."

Meanwhile, if Northrop were to emerge victorious, it could snag roughly half of the $12.3 billion research and development funds, according to industry analysts.

Northrop officials are seizing on the R&D funding issue as yet another reason why the Pentagon should prohibit the marriage of General Dynamics and Newport News.

"The proposed transaction with General Dynamics and Newport News raises serious antitrust issues that, if permitted to proceed, would leave the nation vulnerable with only one nuclear-capable submarine-and-ship builder," said Randy Belote, spokesman for Northrop. "R&D is the precursor to the development of the next generation of ships. Ultimately, (R&D money) directs the production money."

O'Rourke said that if Northrop's bid were successful, the Naval R&D budget would likely be evenly split between the resulting company and General Dynamics.

"A GD/Newport News combination," he said, "is likely to (result in R&D funding being split) closer to 95-5 than 50-50. It's safe to say Newport News would be responsible for a substantial share of (GD having) the 95 percent figure."

Earlier calculations

The R&D funding issue may have played an even greater role in Northrop's attempt to disrupt GD's bid than did the potential monopoly of nuclear shipbuilding that the combined GD/Newport News would achieve.

When GD made a hostile bid for Newport News in 1999, O'Rourke's office concluded that the merged entity would receive more than 95 percent of the Navy's shipbuilding R&D money and 75 percent of the total shipyard engineering talent.

Based in part on those findings, then Defense Secretary William Cohen rejected the proposed deal.

Nuclear shipyards generally receive R&D money directly so the Navy can more closely monitor technology developments, said O'Rourke.

Conversely, non-nuclear shipyards receive far less money because the Navy makes awards to subcontractors that design and develop the systems that go into those ships.

With the more merger-friendly attitude in the Bush administration, however, and no new studies on the GD/Newport News merger complete, Northrop officials are again citing the 95 percent R&D figure, claiming it would ultimately lead to a disproportionately high share of production contracts being awarded to GD.

Belote refused to speculate on whether a GD/Newport News merger would result in layoffs anywhere within Northrop. While Northrop, through its Litton Industries unit, makes navigation, communications and radar systems, as well as providing systems integration for ships, none of those operations are in Los Angeles County.

Navy Lt. David Gai, a Department of Defense spokesman, said he did not know the extent of the funding shift that would result from a Northrop/Newport News merger.

Numbers disputed

General Dynamics asserted that the Congressional Research Service's report, based on 1998 figures, is obsolete because the shipbuilding industry has changed radically since then.

For example, Northrop and GD are both receiving an equal share of the $3.9 billion in R&D funds the Navy allotted through fiscal year 2005 for the DD-21 Land Attack destroyer. One of the companies will be awarded the design contract, after which each company will be awarded a production contract to build 16 of the $750 million ships.

GD officials said a GD/Newport News merger would guarantee only a combined $2.2 billion in R&D funds - for the Virginia-class nuclear submarines, currently a GD/Newport News joint project, and the CVNX carrier, which Newport News is to build.

That would leave $10.1 billion in R&D money up for grabs, GD officials asserted.

"This merger will have minimal if any effect on technology-and-innovation money," said Kendell Pease, a GD spokesman. "The DD-21 is getting the lion's share of the specific program-related R&D dollars. Back in 1998, that was not the case. Those (1998) numbers were fine then, but the world has changed."

Regardless of what happens with Newport News, the profitability of R&D contracts is expected to rise in the years to come, as the Pentagon moves toward ordering military hardware in smaller quantities, said O'Rourke.

Since fewer products are being ordered, the Pentagon may allow contractors fatter profit margins on the R&D contracts in the years ahead. In the past, because R&D profits were slimmer, the Pentagon often felt obligated to purchase the products that had been developed, just to keep contractors financially stable.