ATLANTA -- Flying back into the civilian airplane market, defense contractor General Dynamics Corp. will buy Gulfstream Aerospace Corp., the Savannah-based maker of luxury business jets, for about $4.6 billion.
The one-for-one stock swap furthers General Dynamics' goal of expanding beyond its core naval and armored vehicle defense businesses.
The purchase announced Monday also gives General Dynamics an immediate income source -- $4.1 billion in firm orders Gulfstream plans to deliver through 2007. Gulfstream controls about 60 percent of the world market for business jets.
"This is clearly the best brand name in the long-range business jet market," General Dynamics Chairman and CEO Nicholas Chabraja said in a conference call with analysts. "For my money -- and I've spent my own money -- it is clearly the best product."
The deal, initially priced at $5.3 billion when announced, dropped in value as General Dynamics stock plummeted $7.87 1/2 to $63.56 1/4 in afternoon trading Monday on the New York Stock Exchange. Gulfstream stock was up $4.75 to $60.37 1/2 as investors took advantage of the premium offered while bidding General Dynamics stock down.
General Dynamics, based in Falls Church, Va., was blocked last month in a bid to acquire Newport News Shipbuilding Inc. after the Pentagon cited concerns about its dominance in the field. Mr. Chabraja said the Gulfstream acquisition was unrelated to that failed deal.
Gulfstream Chairman and CEO Theodore Forstmann said the merger was appropriate for the company because it would allow Gulfstream -- which he will continue to manage -- access to General Dynamics' larger resources and a chance to expand.
"I'm very happy we've found a strong parent and a good home," Mr. Forstmann said.
Gulfstream was founded in 1978 by Allen E. Paulson from properties that were previously owned by Grumman Corp. He sold it to Chrysler Corp. in 1985, but teamed with Forstmann's New York-based investment firm, Forstmann Little & Co., to buy it back in 1990 for $825 million.
Forstmann Little took the company public in 1996 but still owns 23 percent of its stock. Paulson is a director.
The acquisition moves General Dynamics back into civilian aircraft seven years after it sold Gulfstream rival Cessna to Textron for $600 million. Chabraja called that sale, which occurred before he was named CEO, a mistake.
"It's not a decision that I embrace as one of the great moments in GD history," he said. "It was driven by the economics of the moment. ... But we've moved up, haven't we? This is really the market leader, and it's where I want to be."
Gulfstream's flagship is the $38 million Gulfstream V, which can fly nonstop from New York to Tokyo and Los Angeles to London. It also sells the smaller, $28 million Gulfstream IV.
Both have become popular among Fortune 500 company executives and Hollywood celebrities. Gulfstream has sold its planes in 50 countries and to 34 governments.
Making the deal even sweeter, Gulfstream requires a $2 million nonrefundable deposit on airplane orders. It has 129 planes on back order and has had only one cancellation, Forstmann said.
Analysts expressed some surprise at the transaction, citing Gulfstream's non-defense focus. In recent years, however, Gulfstream has begun selling to the Air Force and is exploring other "special mission" sales to the government.
"It's slightly unusual, but I'm not going to bad-mouth it," said Glenn Stewart, an aerospace analyst with A.G. Edwards in St. Louis. "I think what the management of General Dynamics saw, bottom line, was a very good business at a very low price. Gulfstream was tremendously undervalued."
The boards of both companies have approved the merger, though it is subject to shareholder and regulatory approval. The companies expect the transaction to be completed in three to four months.
The agreement allows either party to withdraw if General Dynamics' stock trades at an average close below $63 in the 15 trading days before Gulfstream shareholders meet to vote on the deal.
Gulfstream had 1998 revenues of $2.4 billion and earnings of $225.3 million. It employs 7,800 people at plants in Savannah, Oklahoma City, Long Beach, Calif., and Mexico.
General Dynamics has 29,000 employees and had earned $364 million in 1998 on sales of $5 billion.