WASHINGTON — The aerospace industry is bracing for major consolidation among contractors, and Boeing could lead the way in a colossal merger with Northrop Grumman that would create the world’s largest defense contractor.
The possibility of such a combination arose last week after a Boeing executive disclosed that the Chicago aerospace and defense contractor is actively looking at potential acquisition opportunities amid prospects of sharp cuts in defense spending.
Neither company would comment.
Defense industry analysts said a possible merger of the two makes financial sense for Boeing. But government approval of such a deal would be far from certain, they said.
Speculation was fueled by public comments last week from Dennis Muilenburg, chief executive of Boeing’s defense, space and security division. He said the company was targeting purchases of such businesses as unmanned aircraft, cyber security and intelligence and surveillance systems. Northrop already is a key player in those markets.
“We continue to see acquisitions as an opportunity area for us,” Muilenburg said at the Reuters Aerospace and Defense Summit. “It’s one of the tools that we use to grow.”
After nearly a decade of double-digit growth in Pentagon spending, Defense Secretary Robert Gates has said the overall Pentagon budget would climb only about 1 percent annually over the next five years.
After the Cold War ended two decades ago, military budgets were slashed. The excess capacity in the defense industry resulted in a barrage of mergers.
In 1993, then-Deputy Defense Secretary William Perry held the so-called “last supper” and warned the defense industry’s top suppliers that the budget was going to shrink and that consolidation was essential to their survival.
Boeing and Northrop are the nation’s second- and third-largest defense contractors, behind Lockheed Martin. A merger would put about half of defense work with one giant company, said Rick Phillips, managing director at Janes Capital Partners, an Irvine, Calif., aerospace and defense investment bank.
In addition, the deal might not be so attractive to Northrop and its new chief executive, Wesley G. Bush, who took over in January. Bush is reorganizing the company.
Bush has cut some of Northrop’s top executives and has said the company would consider abandoning its $6 billion-a-year shipbuilding business.
