Reuters reported on January 10 that Textron, Inc. has initiated a review of strategic options that might result in the sale or spinoff of its defense businesses. While management clearly would like to retain the company’s current multi-industry character, it has been under pressure behind the scenes from the same activist investors who forced the break-up of ITT and L-3 last year. The activists contend that defense operations drag down the market value of other business lines in a conglomerate because Pentagon demand is expected to whither in the years ahead. Textron’s shares trailed the performance of the S&P 500 Index in 2012, so management must respond to the activists even if it thinks divestitures are a bad idea.
Although Textron is not one of the big-six defense integrators, it is an important niche player in military rotorcraft such as the V-22 Osprey, unmanned aircraft such as the Shadow, and smart munitions such as the Sensor Fuzed Weapon. Many of its military products are genuinely unique, which means the defense department needs to assure their future availability will not be impaired by changes in the character of the enterprise. For instance, the Sensor Fuzed Weapon is the only area-denial munition the joint force has that can accomplish military objectives while eliminating the kind of noncombatant injuries associated with traditional cluster bombs.
Textron’s defense programs would not simply go away in any breakup or divestiture scenario, because they generate billions of dollars in revenue annually for the company. However, the financial and management structure that Textron currently operates as a multi-industry enterprise might go away, and that could leave its defense operations more exposed to the vicissitudes of the marketplace. Without the resources of a $12 billion conglomerate behind them, managers of weapons programs might be more constrained in the risks they take and the investments they make. That would be especially true if the operations were acquired by private equity, which often tries to drain cash from properties before flipping them to the next owner.
Textron’s diverse business base has helped management to navigate some treacherous business conditions over the past decade, most notably the sub-prime crisis that nearly wiped out its finance unit. At different times, all of the company’s units have experienced soft demand, and the fact they were part of a larger mix made it easier to preserve the health of the overall enterprise. So if those units are now spun out into stand-alone businesses or sold off to financial buyers, that could lead to a significant weakening in the military’s industrial base. But don’t expect that to deter the bankers who have been trying to get investors and reporters interested in a run on Textron for the last year. They’re all about making money now, and view the long run as somebody else’s problem.