SECRETARY COHEN ANNOUNCES DECISION ON GENERAL DYNAMICS AND NEWPORT NEWS SHIPBUILDING MERGER PROPOSAL

Secretary of Defense William S. Cohen today announced that the Department of Defense does not support the proposed General Dynamics Corp. acquisition of Newport News Shipbuilding Inc. The Department determined that the savings projected by General Dynamics did not now outweigh potential competitive disadvantages from the proposed merger.

Cohen said: "On balance, we decided that the considerable potential savings made possible by the proposed merger were offset by efficiency opportunities at Newport News. While there was still an important differential, we felt that this differential was not now so great as to override the management and competitive challenges we could face from the merger."

The Department reviewed the cost savings expected by the companies to accrue as a result of the proposed merger and assessed the possible negative effect the merger could have on future competitions for Navy ships. The Department's determination also took into account the DoD management challenges that might arise as a result of the merger.

DoD concluded that the proposed merger offered the prospect of substantial potential savings, but the Department also believed that savings could be realized if Newport News became more efficient. The Navy and Newport News entered into discussions to this end. The result of these discussions was an understanding on aggressive cost management that could achieve more than half of the potential savings that would be predicted from General Dynamics' acquisition of Newport News.

In addition to savings, the Department believes that any merger analysis must consider the effect of the merger on competition, and here there were several concerns. Both Newport News and General Dynamics' Electric Boat Division build nuclear submarines. Because the merger would collapse the two existing companies into a single entity, there would be a reduction in the likelihood of future competition.

In the non-nuclear yard area, the Department determined that the merger would have more complicated effects and was concerned that the merger might reduce effective competition. DoD analysis showed that over 75 percent of the total shipyard engineering talent and over 95 percent of the Navy research and development investment over time would exist in a combined General Dynamics-Newport News entity. If the two companies were to merge, there would be a concentration of that engineering talent and of the technology advantages from Navy-funded research and development.

Cohen noted that the decision was a very difficult one and was reached after extensive analysis and in consultation with the Department of Justice Antitrust Division.