Raytheon-TI lag may slow deal for Hughes

Electronic News, March 24, 1997 by Carol Haber

Lexington, Mass.--The time frame for the Raytheon purchase of Hughes Electronics' Hughes Aircraft military unit is lengthening, as the Justice Department continues to plow through the regulatory details and ramifications of Raytheon's previous proposal to merge with the Defense and Electronics unit of Texas Instruments.

Justice has asked for a second round of documentation on the Raytheon-TI proposal, extending the review period, with the blessing of Northrop Grumman which acknowledged to Electronic News: "There are areas of concern as it relates to the Raytheon-TI deal, and we have expressed those concerns to the appropriate regulators."

Northrop Grumman was Raytheon's chief rival in the bid for both the TI and Hughes units, losing both competitions; now Northrop faces the possibility of having to go to a competitor (Raytheon) for crucial components, should the deal with TI go through.

At issue may be the TI unit's monolithic microwave electronics semiconductor chips (MMICs), according to some, with Raytheon and TI considered primary suppliers. In addition, Raytheon and TI have been in a long-term joint venture generating a version of the product, microwave and millimeter-wave ICs, for a Defense Advanced Research Projects Agency/Department of Defense program. The product is one of the components of DoD's high-speed anti-radar missile (HARM), and is also used in telecom applications, for defense and commercial purposes.

The focus of the second round of documentation relating to the Raytheon-TI transaction remains a mystery to many, but not a secret is the likely delay it may cause for General Motors and Hughes.

Said Wolfgang Demisch of BT Securities, New York: "There was a second request in the Hart-Scott-Rodino area on the TI transaction, which is not unusual in these types of mergers. But more interesting is that a delay might result in the transaction with Hughes--that possibility is very real."

The deal will go through, Mr. Demisch predicted, but there could be some required pruning by Raytheon or TI. "I would be very surprised if the Raytheon-TI deal were blocked," he said. "I would assume that any problems that are found could be addressed by some selective disposition of the portion of the enterprise that is causing the problem. The monolithic microwave products are the most vulnerable to that, with Raytheon and TI being two domestic suppliers. But that's not a huge business either, in the tens of millions.

"In the macro, this (Raytheon-TI) transaction is sensible and industry appropriate, and I would think that the regulatory authorities would eventually accept that logic, even if there are some small modifications that have to be made to retain competitive competition in some specific technology."

Asked about Northrop Grumman's role in the extended negotiations, Mr. Demisch commented: "They are a buyer of TI products, so I'm sure they would be sensitive to their own ability to compete if they were forced to go to a direct competitor like Raytheon for critical components."

Said military analyst Paul Nisbet of JSA Research, Inc., Newport, R.I.: "Although not much has been divulged on the second request for information, the first request was fairly definitive on the monolithic microwave product...Involved in the situation seemed to be a complaint registered by Northrop relative to suppliers to the Army, which would end up being 95 percent Raytheon. There are many suppliers of monolithic microwave electronics semiconductor chips; they just don't happen to sell to the U.S. Army. I believe it was more of a delay tactic on the part of Northrop than it was a real complaint. They have to be a little piqued at not winning TI themselves, to say nothing of Hughes."

He continued: "Nevertheless, the issue under discussion is a relatively minor part of the total purchase. There shouldn't be any significant area of concern as far as antitrust. Either TI's or Raytheon's own monolithic microwave chip operation may have to be divested for the deal to go through, though."

A delay in the progress of the two transactions is a distinct possibility, he said. "Even if Raytheon is submitting information on Hughes early, which has been suggested, I would guess that the regulatory bodies would want to look at these transactions in sequence. They really don't know where the potential conflicts might be until they know what the Raytheon-TI combination will look like."

A sticking point in the Raytheon-Hughes transaction may be missiles, it has been said, with those companies considered the two largest missile producers in the world. Also a flashpoint may be airborne radar systems, made by Hughes and TI operations.

Meanwhile, the players in this defense drama continue to make--or not make--their moves, and Raytheon said it had not filed papers with the Justice Department on the upcoming Hughes deal. It is an option, though, a spokesperson stressed. "We have been holding back on filing those papers, but it is an option. We may change that as we move forward."