Wayne Biddle began his 1991 history of the aerospace industry, Barons of the Sky, with the observation that “corporations destroy history.” Unless there is a legal requirement to maintain records, companies are usually too focused on the present to maintain detailed archives about their past exploits. That’s unfortunate, because many of the challenges companies face today are legacies of decisions made long ago. If you don’t remember who made those past decisions and why, it’s harder to understand where the company stands today.
So it is with Northrop Grumman, which announced this week that it is rethinking its commitment to the naval shipbuilding business. To a casual observer, it may seem odd that the biggest shipbuilder in the nation is thinking about getting out only nine years after struggling to get into a business in which it previously had no experience. However, if you understand how Northrop Grumman came to own America’s biggest shipyards, the prospect of an early exit becomes much easier to explain.
The story begins at the end of the Cold War, when defense secretary Dick Cheney decided that the collapse of communism eliminated the need to buy 132 B-2 bombers. The B-2 was the main source of revenues for Northrop, a scrappy Southern California aircraft company that had never quite managed to ascend to the top ranks of the aerospace sector. With half of its revenues coming from the B-2, Northrop was facing a bleak future unless it changed course fast. After much agonizing, newly-minted CEO Kent Kresa decided the company needed to completely remake itself. Kresa was an M.I.T.-educated engineer who had distinguished himself at the Defense Advanced Research Projects Agency before joining Northrop. He made what proved to be a very timely bet that the future of the defense business was in information systems and advanced electronics.
During the mid-1990s Northrop developed many of the ideas that later were appropriated by Pentagon policymakers under the rubric of “military transformation,” while gradually buying up firms that could position the enterprise for the age of information warfare (it was during that time that “Grumman” was added to the company’s name as the result of a merger). But towards the end of the post-Cold-War defense-sector consolidation, Kresa made an acquisition that added something unexpected to his portfolio. In order to acquire the well-positioned military electronics business of Litton Industries, he agreed to also take its two Gulf Coast shipyards. Shipbuilding had never been part of his plan, but he wanted the Litton electronics business so much that he took the shipyards to get it.
What nobody knew at the time was that Northrop and General Dynamics, the nation’s other big naval shipbuilder, were contemplating a merger. Many Northrop executives were headed for early retirement if the transaction occurred, and Kresa’s subordinates may have encouraged him to buy the Litton shipyards knowing that would preclude the career-ending GD deal due to antitrust concerns. Anyway, within a few months GD made a separate bid for Newport News Shipbuilding, the biggest shipyard in the nation. Kresa suddenly realized that the value of his newly acquired Litton shipyards might be permanently impaired if GD managed to combine Newport News with its other yards and become the sole domestic builder of nuclear-powered warships. So he made a counter-bid, which ultimately proved successful.
Thus Northrop Grumman, a company that began the new millennium with no plans to be a shipbuilder, ended up being the biggest shipbuilder in the Western Hemisphere. The rest is history — and not entirely pleasant history for the company’s shareholders, because shipbuilding just doesn’t have much in common with the company’s other high-tech franchises. But what comes through from this brief chronicle is that Northrop Grumman’s leaders backed into being a naval shipbuilder, and were never completely comfortable with that role. Wes Bush, who became the company’s current CEO in January, inherited that legacy at a time when the company once again needed to remake itself. So it didn’t take him long to decide that exiting shipbuilding might be an option. The question now is whether, once that decision is made, it calls into question the future of the rest of the enterprise. If you can find a buyer for the shipyards, the rest of the company would presumably be much easier to sell.
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