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General Dynamics Corporation is a leading defense contractor, with nearly 60 percent of the company's net sales coming from contracts with the U.S. government. The company's largest operating unit is Marine Systems, which accounts for about one-third of sales, is the leading supplier of combat vessels to the U.S. Navy, and includes Electric Boat Corporation (the founding company), maker of the Seawolf and Virginia-class submarines; and Bath Iron Works (acquired in 1995), maker of destroyers and amphibious assault ships. The Combat Systems unit, which generates about 12 percent of net sales, produces the M1 tank for the U.S. Army (a business purchased from Chrysler Corporation in 1982) as well as other land and amphibious assault vehicles; it also makes gun and ammunition handling systems, reactive armor, and ordnance. Accounting for nearly one-quarter of sales is the Information Systems and Technology unit, which offers to both defense and commercial customers a wide range of technologies, including communication, computer, defense, electronic, information, and telecommunications systems. The Information Systems unit was created out of a series of acquisitions that began in 1997. Generating the bulk of General Dynamics' revenues from commercial customers is its Aerospace unit, which consists of Gulfstream Aerospace (acquired in 1999), one of the world's leading makers of business aircraft. Approximately 30 percent of overall revenues are derived from the operations of Gulfstream.
The Early Decades As Electric Boat
General Dynamics has a long history in weapons production, originating in the late 19th century with an Irish-American inventor named John Holland. Associated with the Fenians, a secret New York City organization sympathetic to the struggles of the Irish nationalists, Holland was commissioned to construct a submarine capable of destroying British naval vessels. While previous submarine designs had been attempted by other inventors, none were effective warships, and, in fact, several of Holland's first submarines sank. Moreover, his ill-conceived attempts at secrecy soon drew the attention of American law enforcement authorities, who prevented Holland from achieving his mission for the Fenians. Nevertheless, Holland remained interested in building a viable submarine, and, toward that end, he founded the Electric Boat Company in 1899, with financial backing from investors that later would include various members of Congress.
Once he developed a prototype, Holland had difficulty finding a market for his submarine, as the U.S. Navy was not initially interested in the project. Then, lawyer, financier, and battery and electronics magnate Isaac Leopold Rice offered to finance the development of subsequent Holland submarines in return for an interest in Electric Boat. Holland was persuaded to relinquish his patent rights and management authority to Rice, who successfully made sales to the U.S. Navy and several other foreign naval services. Holland effectively lost control of the company and found himself earning a salary of $90 per week as chief engineer, while the company he founded was selling submarines for $300,000 each.
Electric Boat gained a reputation for unscrupulous arms dealing in 1904-05, when it sold submarines to Japan and Russia, who were then at war. Holland submarines were also sold to the British Royal Navy through the English armaments company Vickers. Submarines, which had once been denounced in Britain as 'damned un-English'--considered too sly and cowardly for use in a proper gentleman's war--were now legitimized as genuine naval weapons by the world's most powerful navy.
During this time, Holland lost patience with Rice and resigned in protest at being excluded from his company's affairs. A frail man plagued by a respiratory condition since birth, Holland died shortly thereafter in 1914. He was replaced as chief engineer by Lawrence Spear who, in close association with Vickers, redesigned the Holland submarine. Speed was improved, a conning tower and periscope replaced the Holland observation dome, and torpedo tubes were incorporated for the first time. The full potential of the submarine, however, was not fully recognized until World War I, when German U-boats caused serious disruptions in British shipping.
Isaac Rice died in 1915 and was replaced by his associate Henry Carse. Under Carse, Spear was given greater control over the company's operations. Electric Boat had a substantial backlog of profitable orders and was financially strong enough to purchase several companies, including Electro Dynamics (involved in ship propulsion), Elco Motor Yacht (builders of pleasure boats), and New London Ship & Engine of Groton, Connecticut (manufacturers of diesel engines and civilian ships). The company's name was changed to the Submarine Boat Corporation in 1917.
When the United States became involved in World War I, Carse made the crucial decision to devote the company's resources to the construction of disposable cargo vessels rather than submarines. Eventually realizing his mistake, Carse began to retool for submarine production; before the process could be completed, however, the war had ended, and the company had lost a great deal of money. Moreover, the U.S. Navy then decided to devote most of its reduced postwar budget to surface ships. Faced with bankruptcy, Carse reorganized the company, emphasized production of surface ships, and brought back the Electric Boat Company name in 1925.
On the eve of World War II, the business practices of Electric Boat came under investigation by the U.S. government and several independent groups; the company was accused of being a 'financial beneficiary' of foreign wars. Electric Boat was also found to have inadvertently given design secrets to officials of the increasingly hostile government of Japan. In an investigation led by Senator Gerald Nye, Electric Boat was accused of profiteering, graft, and unethical business practices. Carse responded that, because the U.S. Navy had suspended all major contracts for ten years, Electric Boat had been forced to deal with foreign governments--many of which were corrupt--in order to remain financially solvent.
During this time, the German remilitarization and hostile Japanese activities forced the Roosevelt Administration to reassess its position on military preparedness. Consequently, the government placed orders for submarines and PT (patrol/torpedo) boats from Electric Boat facilities at Groton and the Elco plant in New Jersey. The new orders led to the revitalization of Electric Boat, now led by John Jay Hopkins, appointed in 1937 by the retiring Lawrence Spear, who himself had taken over when Henry Carse retired. While Spear continued to offer advice from his retirement, Hopkins was thoroughly in charge and fully responsible for the company's strong reemergence.
Following the American declarations of war against the Axis powers, Electric Boat and its Elco Yacht and Electro Dynamic subsidiaries mobilized for production at full capacity. This sudden expansion in output caused a serious labor shortage, which was filled by women, who took jobs as welders and riveters. During the war, the Electric Boat companies produced hundreds of submarines, surface ships, and PT boats, contributing greatly to the success of island fighting in the Pacific. When the war ended in 1945, the Navy reduced its orders for new vessels. Only 4,000 of the company's 13,000 wartime employees were retained after the war, and Electric Boat stock fell in value from $30 per share to $10.
Diversifying in the Postwar Era As General Dynamics
As a result, Hopkins initiated another reorganization of Electric Boat, which included a diversification into related commercial and defense industries. In 1947 Electric Boat purchased Canadair Limited from the Canadian government for $22 million. Canadair produced flying boats and modified DC-4s during the war, but had greatly diminished sales during peacetime. A series of events, including the Berlin Blockade, Soviet detonation of an atomic bomb, and the war in Korea, stimulated demand for new aircraft, including the T-33 trainers, F-86 Sabres, and DC-6s built under contract by Canadair. By the early 1950s, Canadair's success began overshadowing that of Electric Boat; some business advisers even suggested that Canadair purchase Electric Boat and operate it as a subsidiary. Instead, on February 21, 1952, a new parent company called General Dynamics Corporation was established to manage the operations of Canadair and Electric Boat.
With substantial profits from its Canadair subsidiary, General Dynamics purchased Consolidated Vultee Aircraft from the Atlas Corporation in 1954. Consolidated, which became General Dynamics' Convair Division, manufactured a variety of civilian and military aircraft, including the 440 passenger liner, F-102 and F-106 fighters, Atlas and Centaur rockets, and the B-24, B-36, and B-58 Hustler bombers.
Convair led the development of the American nuclear aircraft program, enthusiastically supported by the Pentagon. CEO Hopkins was a strong advocate of nuclear power and its numerous applications, but the nuclear airplane, or 'N-bomber,' was later found to be impractical, and the project was abandoned. Electric Boat enjoyed greater success with nuclear power; in 1954 it launched the first nuclear submarine, the Nautilus.
The company's development of commercial jetliners came near the end of Hopkins' tenure. While Douglas and Boeing were developing their DC-8 and 707 passenger jets, Convair was unable to introduce its jetliner because the company was delayed by contractual obligations to TWA and its eccentric and intrusive majority shareholder Howard Hughes. Specifically, Convair was bound to incorporate numerous design changes suggested by Hughes. As the result of a financial crisis that postponed TWA's purchase of jetliners and eventually forced Hughes out of TWA, Convair was unable to recover from the delayed entry of its 680 and 880 models into the jetliner market. General Dynamics was forced to write off the entire passenger liner program with a $425 million loss.
The financial position of General Dynamics was so seriously weakened by the Convair jetliner program that the company was targeted for a takeover by Henry Crown, a Chicago construction materials magnate. Crown offered to merge his profitable Material Services Corporation with General Dynamics in exchange for a 20 percent share of the new company's stock, and the proposal was accepted in 1959. Two years later, Crown appointed Roger Lewis as chairperson of General Dynamics. Under Lewis, General Dynamics purchased the Quincy shipbuilding works from Bethlehem Steel in 1963 for $5 million. Quincy, then an outdated facility requiring costly improvements, held promise as a builder of surface ships.
In the early 1960s, the U.S. Defense Department invited American defense contractors to bid for the production of a new aircraft, the F-111, slated to replace the Department's aging fleet of B-52 bombers. General Dynamics entered the competition in partnership with the Grumman Corporation, against a design submitted by Boeing. Even though many regarded the Boeing F-111 as the better built and the more capable plane, the General Dynamics/Grumman version was consistently declared superior by Pentagon officials and industry experts. An investigation of impropriety in the selection process was interrupted when President Kennedy was assassinated in November 1963 and was not concluded until 1972.
General Dynamics continued to develop its version of the F-111 at its Convair facility in Fort Worth, Texas. The Air Force and Navy amended their design specifications and requested the addition of so many devices that the prototype could barely fly. With its utility as a replacement for the B-52 greatly diminished, the aircraft's role was reassessed, and the project was eventually identified by congressional critics as an example of gross mismanagement, organizational incompetence, and financial irresponsibility. The F-111 project consumed an inordinate amount of the defense budget and delayed by six years the introduction of Grumman's similar--and in many ways superior--F-14 Tomcat.
In 1966, Lewis removed Crown from the company by repossessing his 18 percent share of nonvoting company stock. Crown was paid $120 million for his shares, but lost control of both General Dynamics and Material Services Corporation. Over the next few years, Crown continued to purchase substantial numbers of shares of voting stock, expanding his interest until he emerged in 1970 with control over the board of directors. Lewis was summarily fired and replaced by David Lewis (of no relation). Crown subsequently moved the company from New York to St. Louis in February 1971.
That year, the Electric Boat division of General Dynamics and its chief competitor, Newport News Shipbuilding, were awarded contracts to manufacture a new submarine, the 688, or Los Angeles class. Two years later, General Dynamics hired Takis Veliotis to take charge of the Quincy shipbuilding yard. Once in charge at Quincy, Veliotis concluded an agreement to build liquefied natural gas tankers in conjunction with a cold storage engineering firm called Frigitemp.
During this period, the Defense Department announced a $200 million competition for the production of a new jet fighter. Careful to avoid the problems that plagued the F-111, General Dynamics initiated its development of the F-16. The F-16 program closely followed its development and budget schedules, and the first prototype exceeded specifications.
Although it was apparently chosen over the Northrop F-17 Cobra, the F-16 faced an unexpected challenge from McDonnell Douglas's independently developed F-15 Eagle. The lower-priced F-15 took a significant portion of the fighter market away from General Dynamics, whose Fort Worth Division began producing the F-16 in 1978. The U.S. government, however, compensated General Dynamics by promoting sales of the F-16 to NATO countries and other American allies. Canadair, which manufactured aircraft for Commonwealth countries, was sold back to the Canadian government in 1976 for $38 million.
The following year, Admiral Rickover publicly berated Electric Boat for poor workmanship and cost overruns on 18 Los Angeles class submarines. Rickover was particularly upset about the U.S. Navy's contractual obligation to absorb a large portion of the overruns, which were running as high as $89 million per vessel. A dispute then arose between the Defense Department and Electric Boat, wherein Electric Boat threatened to halt production of the submarines unless its share of the losses were covered as well. General Dynamics sought the protection of Public Law 85-804, which was originally intended to protect 'strategic assets,' such as Lockheed and Grumman, from bankruptcy due to cost overruns.
General Dynamics won a settlement from the Pentagon but soon realized that its problems at Groton were not merely financial. Productivity was seriously compromised by absenteeism and an employee turnover rate of 35 percent. Management lost control over inventories, and poor workmanship resulted in costly reconstruction. In October 1977, David Lewis transferred Takis Veliotis from Quincy to Groton, with instructions to reform the operation. Within months Veliotis had restored discipline, efficiency, and financial responsibility at Electric Boat.
Addition of Tanks/Land Systems: 1980s
Veliotis left Electric Boat in 1981 to take a seat on the General Dynamics board of directors and to serve as international salesperson and 'company ambassador.' Later that year, however, Veliotis resigned in protest over a dispute with David Lewis, whom Veliotis claimed had promised him the position of chief executive officer. Soon thereafter, Veliotis was indicted by government prosecutors for illegal business practices. He fled to Greece, maintaining that he had possession of damaging evidence of fraudulent overcharges made by General Dynamics.
In 1982, General Dynamics purchased the Chrysler Corporation battle tank division, with plants located in Warren, Michigan, and Lima, Ohio. The division, renamed Land Systems, had already secured a government contract to build the Army's next main battle tank, the M-1. Developed in response to newer Soviet tanks such as the T-72, the M-1 was to be powered by a jet turbine and capable of speeds of up to 50 miles per hour. The M-1 also included a computer-guided gun-aiming mechanism designed to assure a high degree of accuracy while the tank was traveling over rough terrain at high speeds.
When the first M-1 prototypes were delivered from Land Systems, several basic design flaws were noticed by Pentagon officials. First, exhaust from the engine was so hot that infantry could not come near the tank for cover under fire. Moreover, the M-1 was fast but prone to breakdown, and it required so much fuel that logistical support became questionable. Finally, the M-1's ammunition bay was too small to carry more than 40 shells. Critics recommended that the M-1 project be canceled in favor of its predecessor, the durable, battle-tested M-60. During this same period, General Dynamics won a government contract to service and maintain TAKX supply ships for the American Rapid Deployment Force.
Also at this time, Lewis and other company officials were called to testify before a congressional subcommittee, which suggested that the company had overcharged the government for supplies and personal expenses. The proceedings initiated separate investigations by the Justice Department and the Internal Revenue Service. Soon after Admiral Rickover was involuntarily retired by Navy Secretary John Lehman, General Dynamics was awarded a government contract to manufacture a number of new boats, including the $500 million Ohio class Trident submarine. The contract eliminated many of the company's disputed charges to the Pentagon and, as a result, led to the cessation of the congressional investigation. Wisconsin Senator William Proxmire criticized these developments by remarking that 'defense contractors like General Dynamics have so much leverage against the government they can flout the laws that govern smaller companies and individuals.'
David Lewis retired in 1985 and was replaced by Stanley C. Pace, formerly head of TRW. Oliver Boileau, president of General Dynamics, was passed over for the position at the insistence of the board of directors and the Crown family, all of whom wished to see an end to the policies of Lewis and his protégés. Pace made several changes at General Dynamics, even before Lewis had left the company. He sold the Quincy shipyard and founded a new division called Valley Systems, established to win contracts for the Reagan Administration's Strategic Defense Initiative. In 1985 he purchased Cessna Aircraft Co. Pace also helped clean up General Dynamics' image by instituting an ethics program, which resulted in the firing of 27 employees.
Post-Cold War Transformation
Several external forces helped shape the conduct of business at General Dynamics in the late 1980s and early 1990s. The U.S.S.R.'s collapse revealed it a much weaker military foe than had previously been believed. The subsequent end of the Cold War soon brought Congressional and public pressure to cut domestic defense budgets. These factors compelled General Dynamics to transform itself into a smaller, more focused company with a higher concentration of international sales. The Persian Gulf conflict helped boost General Dynamics' tank and F-16 fighter sales to Turkey, Egypt, and Saudi Arabia and opened Middle East markets to the military manufacturer.
In January 1991, William A. Anders was assigned to reorganize General Dynamics according to the new market realities. He assumed the chief executive office, while Stanley Pace took a seat on the company's board of directors. Anders's strategy in the face of industry changes was to cut employees, trim research and development, divest peripheral businesses, and reduce capital spending. By June 1992, Anders had cut 25 percent of the workforce (24,800 employees) and put $1.7 billion in assets up for sale. Gains from divestments were rolled back to shareholders, and, by 1993, almost $600 million in debt was paid, which helped boost the company's share price. General Dynamics, which had suffered a $578 million loss in 1990, recovered to realize a $305 million profit the following year.
Despite the improving financial picture, General Dynamics came under criticism from the Pentagon and Department of Defense for a lucrative executive Gain-Sharing plan that was tied to increases in the company's share price. In 1991 alone, as General Dynamics whittled away at its employee roster, Business Week reported that 25 top managers received $18 million in incentive bonuses. The company, meanwhile, relocated its headquarters from St. Louis to Falls Church, Virginia, in 1992.
Anders pronounced the transformation of General Dynamics complete in 1993's annual report. After selling its Missile Division to Hughes Aircraft Company for $450 million and Cessna Aircraft to Textron Inc. for $600 million, both deals coming in 1992, and its Fort Worth Division to Lockheed for $1.5 billion in 1993, as well as reaching an agreement to sell its Space Systems Division (which had been created out of Convair in 1985) to Martin-Marietta (a $209 million deal that was completed in 1994), the company emerged with two primary business segments: nuclear submarines and armored vehicles. The corporate workforce had shrunk from about 86,000 in 1991 to 30,500 in 1993, and debt decreased 94 percent during this period. Government contracts still comprised 94 percent of the company's annual sales, which remained essentially flat over the reorganization period. Operating earnings, however, increased by $98 million, from $211 million in 1991 to $309 million in 1993. That year, Anders relinquished the chief executive office to former president James Mellor and assumed General Dynamics' chair as a transitional measure through April 1994.
Even after the special distributions to shareholders, the company still had more than $1 billion in cash and virtually no debt by late 1994. From this position of strength, Mellor began pursuing acquisitions of related niche businesses to build on General Dynamics' two remaining units. In September 1995 the company acquired Bath Iron Works for $300 million from an investor group led by Prudential Insurance Co. As a result of the deal, General Dynamics owned two of the six major private naval shipyards in the United States: Electric Boat's submarine facility in Groton, Connecticut, and Bath's shipyard in Bath, Maine. Bath, which traced its origins back to the founding of Bath Iron Foundry in 1833, was under contract with the U.S. Navy to build 11 guided-missile AEGIS destroyers. Around the time of the acquisition, the Seawolf submarine program was nearly killed by Congress, an event that might have shut down Electric Boat's shipyards. Despite objections that the Navy did not need a third Seawolf submarine, Electric Boat was awarded a $1.5 billion contract to build the final such sub, to be called the USS Jimmy Carter.
In 1996 the company's Land Systems Division was awarded a $217 million contract to build a new amphibious assault vehicle for the U.S. Marines. Eventual production of more than 1,000 of these vehicles was projected to be worth more than $4 billion through 2014. That same year, Bath was part of an alliance that won a contract to build 12, $800 million amphibious assault ships, the LDP-17, for the Navy. In January 1997 General Dynamics continued its acquisition program with the purchase of two businesses from Lockheed Martin Corporation for $450 million: Armament Systems, a maker of advanced gun and fire-control systems, and Defense Systems, producer of turrets and transmissions for combat vehicles. The bulk of these operations were combined within a new Armament Systems Division, which became part of General Dynamics' Combat Systems unit alongside the Land Systems Division.
In mid-1997 Nicholas D. Chabraja took over as CEO from the retiring Mellor, having previously served as an executive vice-president and general counsel and having played a prominent role in the company's post-Cold War transformation. He almost immediately faced a setback when the company, seeking to expand its position in the area of Army vehicles, was blocked from acquiring United Defense L.P., a maker of military vehicles, because of potential antitrust concerns. Undeterred, Chabraja shifted his immediate acquisition focus to a new niche area: electronics and systems integration, a growth area in which he felt General Dynamics had some expertise. Thus came the formation of a third company operating unit: the Information Systems and Technology unit (Marine Systems and Combat Systems being the other two). The new unit was built through a series of acquisitions that began in 1997. In October of that year Advanced Technology Systems was acquired from Lucent Technologies Inc. for $267 million. Advanced Technology produced undersea surveillance systems, signal processing, and vibration control systems. In December 1997 General Dynamics acquired Computing Devices International, a division of Ceridian Corporation, for $500 million. From this deal came three more pieces of the Information Systems puzzle: General Dynamics Information Systems, Inc.; Computing Devices Canada Ltd.; and the U.K.-based Computing Devices Company Limited. In June 1998 the company acquired another systems integration business called Computer Systems & Communications Corporation.
Chabraja continued to look for acquisition targets in shipbuilding as well. In November 1998 General Dynamics spent $415 million to acquire NASSCO Holdings Incorporated, parent company of National Steel and Shipbuilding Company (NASSCO), which owned a Naval shipyard in San Diego. The addition of NASSCO helped diversify the line of ships built by the Marine Systems unit as the newly acquired company produced hospital ships and combat support ships for the U.S. Navy as well as commercial ships such as oil tankers. General Dynamics now owned half of the six private yards that made Navy ships but when the company made an unsolicited $1.4 billion bid for Newport News Shipbuilding Inc. in early 1999, touting the potential cost savings of the combination, the Pentagon blocked the takeover attempt, citing the dominate position in shipbuilding that General Dynamics would thereby gain.
Once again hardly skipping a beat, General Dynamics concluded two large deals later in 1999. In July 1999 the company returned to the aviation market and also greatly increased the percent of revenues it generated from the commercial market with the acquisition of Gulfstream Aerospace Corporation, a leading maker of business jets, in a stock swap valued at about $5 billion. In September 1999 General Dynamics further bolstered its Information Systems and Technology unit through the $1.01 billion purchase of three business units from GTE Corporation. The units, reorganized within a new entity called General Dynamics Government Systems Corporation, specialized in command, control, communications, and intelligence systems; electronic defense systems; and information systems for defense, government, and industry. The acquisition spree helped propel revenues from the $4.97 billion mark of 1998 to $8.96 billion in 1999. Net income more than doubled, from $364 million to $888 million.
During 2000 NASSCO won a $650 million contract to build three double-hull oil tankers for BP Amoco plc. Also that year a joint venture between the Land Systems Division and General Motors Corporation was selected by the U.S. Army to build an eight-wheeled armored vehicle, the LAV III. The program had a total cost of $4 billion for about 2,100 units. General Dynamics reported net income of $901 million on sales of $10.36 billion for 2000. Early in 2001 the company acquired Primex Technologies Inc., maker of munitions, propellants, satellite propulsion systems, and electronics products, for $520 million. Primex was renamed General Dynamics Ordnance and Tactical Systems and was integrated into the Combat Systems unit.
Principal Subsidiaries: American Overseas Marine Corporation; Bath Iron Works Corporation; CD Plus S.A.R.L. (France); Computer Systems & Communications Corporation; Concord I Maritime Corporation; Concord II Maritime Corporation; Concord III Maritime Corporation; Concord IV Maritime Corporation; Concord V Maritime Corporation; Convair Aircraft Corporation; The Elco Company; Electric Boat Corporation; Electrocom, Inc.; GDIC Corp.; General Dynamics Advanced Technology Systems, Inc.; General Dynamics Armament Systems, Inc.; General Dynamics (C.I.) Limited (Cayman Islands); General Dynamics Defense Systems, Inc.; General Dynamics Foreign Sales Corporation (Virgin Islands); General Dynamics Government Systems Corporation; General Dynamics Information Systems, Inc.; General Dynamics International Corporation; General Dynamics Land Systems Inc.; General Dynamics Limited (U.K.); General Dynamics Manufacturing Limited (Canada); General Dynamics Marine Services, Inc.; General Dynamics Properties, Inc.; General Dynamics Shared Resources, Inc.; Gulfstream Aerospace Corporation; Material Service Resources Company; NASSCO Holdings Incorporated; Patriot I Shipping Corp.; Patriot II Shipping Corp.; Patriot IV Shipping Corp.; S-C 1969 Credit Corporation.
Principal Operating Units: Aerospace; Information Systems and Technology; Marine Systems; Combat Systems.
Principal Competitors: Lockheed Martin Corporation; Raytheon Company; The Boeing Company; Textron Inc.; Newport News Shipbuilding Inc.; Airbus Industrie; Bombardier Inc.; Dassault Aviation SA; Electronic Data Systems Corporation; Harris Corporation; L-3 Communications Holdings, Inc.; Litton Industries, Inc.; Racal Electronics Plc; United Defense Industries, Inc.