Interview: Northrop Grmman
>> welcome back to “after hours.” northrop grumman is in talk with the national aeronautics and space administration about creating a tanker, competing with a similar aircraft made by boeing.
>> the united states government does need to replenish its air re-fueling tankers and the current plan that we understand is there will be a fair and open competition in the united states. this has been the policy of the united states government, a statement made by the deputy secretary of defense. as a result, we’re exploring our options with the a.d.s. and others to determine whether or not we might have an offering that might be of interest to the government. at this point in time, we’re exploring our options and haven’t made final decisions.
>> you must have a time frame, though, in mind.
>> i think we’re watching the progression of the requirements, definition, and requests for proposal coming out of the united states air force and we’re monitoring that closely. it is moving along, but we’re not anticipating it just instantly yet. >> exploratory stage but you must be attaching value to this by now?
>> it’s a very large program that will involve tens of billions of dollars, perhaps 100 billion dollars over time and it’s possible it may be a split buy with more than one type of tanker selected, depending upon th retirements. the united states air force is examining the requirements and until we see the requirements they’ll have, it’s early to decide how we might play.
>> you have been critical of the process that the u.s. government’s employed, really, with regard to the tanker deal. and indeed, many other aspects of defense procurement, as well. do you see this as an open, fair way of doing things or would you see changes to it?
>> we haven’t been critical particularly of this program or any other program but are watching to see how it develops. if there’s going to be a full, fair and open competition, a corporation like ours will clearly look at its options.
>> this comes against a backdrop where some are suggesting we could see defense spending in the u.s. decline. is that something you’re preparing for?
>> we don’t see a decline, we see a slowing of the rate of growth. we’re also mindful that the quadrennial defense review will be underway through the summer and as a result of that, that will set a tone for the force structure of the country in the future and ultimately what equipment will be purchased. i think the issue is not so much decline in defense spending but reduction of rate of growth and what exactly will receive priority and what will be minimized.
>> what that in mind, what does that imply for your business plan as a company?
>> we’re looking very hard at the kind of programs we think involve net rick centric warfare, intelligence surveillance reconnaissance. those are the programs we think going forward will be emphasized and continue to be important for the united states defense posture and as a result we like the hand we’re playing and are working hard on those programs going forward.
>> do you see, because of the rate of growth slowing, more consolidation within the u.s. and perhaps across the border?
>> we might see additional consolidation at the second tier level. i don’t think you’ll see much at the first tier level. we have three major defense companies in the united states, five if you add a couple of almost first tiers. that’s probably the right number. i don’t think the department of defense or department of justice would be amenable to further consolidation unless there’s a dramatic reduction in the market and we don’t see that in the near term.
>> what about abroad?
>> clearly, there will be continuing efforts abroad to make combinations that make sense. many of our european colleagues are very much interested in acquiring businesses in the united states because the market in the united states is substantially larger than it is in europe and elsewhere in the world. perhaps it’s less of interest for american firms to be acquiring businesses in europe.
>> one big hole, i guess, would be china. the arms embargo in place since 1989, the tiananmen square massacre, are you calling on the united states government to lift that embargo because perhaps you’re at a disadvantage vis-a-vis european countries?
>> that’s a matter for the government to work out, a government issue. obviously, we’ll follow the law. we follow the law in all regards in terms of the way we sell or position ourselves in the world. that’s not a matter we’re putting a lot of energy into.
>> you’re missings out in what is, actually, the fastest growing major economy. surely it must be a hole you need to fill in terms of finances.
>> selling military equipment to china is not high on our list of priorities because we’re following the export rules and china is not a country we’re focused on at the moment.
>> what is higher on your list of priorities?
>> the netric centric war far, the global hawk, e-2 hawkeye world, airborne warning and control. we have a number of programs in europe including the awax whole life support program. so there’s a lot going on in the company around the world. those are the things we are focused on.
>> that was chief executive of northrop grumman, ronald sugar. breaking news on the michael jackson trial. we’re getting acquittals, michael jackson found not guilty of counts one through nine in the child molestation trial, in particular, lewd conduct was an acquittal. conspiracy charge, acquittal. not guilty of giving alcohol to a minor, et cetera. nine different counts, so far, we have all acquittals from the michael jackson trial. when we return after the break, we’ll have more business news.
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Listen Market briefing --- Bob (fast)
Market today --- Deirdre
NYSE --- Deb (fast)
Morgan Stanley --- Allan (slow)
Morgan Stanley --- Su (fast)
crude oil jumping more than $2 a barrel on concern refiners will not meet demand. the closing price forud crude for august delivery in new york trading on monday, up almost 4%, at $56.82. that’s an increase of $2.14. checking stocks on the day, rallying although finishing off the highs. on the intraday chart, the dow, s&p and nasdaq, we had an early-morning surge and somewhat of a softening throughout the day once we did that. but the dow up 10 points by the close of trading, 10,522 -- stock markets closed higher on optimism reports this week will show the u.s. economy is growing fast enough to keep a seven-week rally moving. deirdre bolton has more on the stock market story.
>> we did see 17 of the 24 industry groups we track on the s&p 500 close higher. technology stocks led the gains. we had stocks like textronics, select ron, xerox, all advancing. some say technology is benefiting from a shift in sentiment.
>> when people are more optimistic and start buying stocks, the tech group will be a leader.
>> kugel says technology companies’ earnings are expanding and combined with historically attractive valuation, the group will move higher faster than others in the market . in the past year, semiconductor and semiconductor equipment stocks have dropped more than 5%, more than any other group other than auto and auto parts makers. makers of machinery and equipment, such as g.e., 3m and united closed mixed. business at these cyclicals get better depending on the performance of the economy.
>> the fundamentals for the economy are getting better and better after we had a rather weak period there in march and a little bit soft in may. i think june is back on track and my guess is that we’re going to see some upward revisions in some of the past economic data streams and we’ll see pretty good numbers when the second quarter comes out.
>> transportation stocks were pretty much the only group that did not benefit from a better economic outlook. northwest airlines down more than 11.5%. chairman disclosing sale of close to 60% of his stock over the past month, reported in the “wall street journal.” the journal also saying the airline company may be near bankruptcy. over the past year, northwest airlines has dropped more than any other stock on the amex airlines index, the stock down 43% compared to a 3.5% drop for that index. bob, back to you.
>> thank you very much. markets had a difficult time holding to early gains. for more on the day’s trading action, here’s a report from our deborah kostroun at the new york stock exchange.
>> the dow ended monday’s session with a nine-point gain, a far cry from the 77-point gain seen earlier in the session. couldn’t hold on to the gains. one of the reasons, the increase in oil. crude oil rose $2.08 a barrel on concern about global demand. we also have the opec meeting this week in vienna to discuss production quotas. so oil services, a mixed market and mixed across many of those stocks although crude oil performed well. financials, second worst performer of the 10 industry groups in the s&p 500. however, morgan stanley performing well after chief executive philip purcell saying he will step down following a two-month campaign by former executives to oust him. morgan stanley saying their fiscal second-quarter earnings dropping as much as 20% as the firm’s earnings continue to trail competitors. we also have a lot of earnings coming up on tuesday with lehman brothers releasing their earnings. on wednesday, we have bear stearns. lazard’s first public quarterly earnings will be released on wednesday, as well. on thursday, goldman sachs releases their earnings. we’ll be talking quite a bit about those brokers this week. retail sales will be released tomorrow. economists tell bloomberg that sales at u.s. retail sales probably fell in may for the first time in eight months as consumers bought fewer cars and less gasoline. a powm of retail earnings coming out tomorrow including pier 1 imports and best buy. materials, one of the better performers in the s&p 500 and paper stocks, within the materials, some of the better performing stocks within materials. gold stocks putting in an impressive performance as gold rose to a five-week high as investors bought the precious metal as an alternative to the euro and u.s. dollar. i’m deborah kostroun at the new york stock exchange for bloomberg news.
>> as we said, morgan stanley chairman and c.e.o. philip purcell will be leaving his job at the world’s largest securities firm. mr. purcell is being pushed out by the board of directors following the departure of three more managing directors on friday. purcell discussed his exit on a conference call today with analysts.
>> phil purcell told the morgan stanley board he no longer wanted to be the lightning road. in a video statement to morgan stanley’s employees, purcell said he thought it was best for the firm if he left.
>> i believe this is the best thing i can do for you, our clients and our shareholders. what matters is not one person, but the over 50,000 people of morgan stanley and our many clients and shareholders.
>> during the call with analysts, purcell again defended his eight-year reign at morgan stanley, blaming the firm’s disappointing results on the market environment rather than on his management and the performance of the world’s largest securities firm. board member miles marsh put purcell’s departure this way.
>> in the last week or so, phil came to the board with his conclusion, which was basically that things would not settle down so he removed himself as a lightning rod. the board considered this. we’d obviously been thinking about it and regretfully, we had to accept that conclusion.
>> today, as the firm announced purcell would leave no later than next march, it also said its second-quarter earnings fell 15% to 20% from last year. no successor has been named by the board for the 61-year-old c.e.o. purcell said the lack of immediate successor does not mean he expects the board to consider a possible merger or sale. he said departures from the firm this year were about average, the difference being that this time each one is reported in the newspapers. bob?
>> thank you, allan dodds frank. we take a closer look at the past three months of infighting and the significant events leading up to purcell’s resignation. su keenan has that story.
>> it’s been mainly in the last three months that growing concerns over morgan stanley’s lagging performance in terms of revenue, profit, stock gains, started grabbing the headlines. it was late march, c.e.o. philip purcell replaced president stephen newhouse with two co-presidents, zo cruz and steven crawford. the next day, two key resignations. the head of sales, banking and deputy in equities both left. at this point, the dissident group of eight former executives released its letter to the board saying purcell must go. two days later, the group took out full-page newspaper ads saying his management changes caused “the worst kind of crisis.” they criticized purcell for stifling profit and while he defended his actions, enjoying the board’s support until late may, he also called the attacks unfair. by last week, at least 55 executives and staffers had left the firm. early today, the financial services analyst called the resignation overdue. >> there were dissident actions and employee defections and all kinds of distractions so i think it is a good move. the stock is looking higher in the premarket so i think it avoids the big, ugly proxy fight we would have seen next spring.
>> by the end of the session, the stock was up 2%. analysts say, when the board changed rules in late april on what it would take to vote purcell out, the writing was on the wall. sandler o’neill’s jeff harte has reason to believe that the board wants an outsider as c.e.o.
>> i think the fear might be, if you promote someone from inside, and that further the civil war, some of the power struggle across the entities. i think it makes sense to look outside of the firm.
>> the board indicates that is what it will be doing. for today’s gain, morgan stanley’s stock had dropped 10% since the late march management change.
>> thank you. when we return after the break, northrop grumman is talking about stepping up competition with boeing. we’ll hear from the company’s chief executive coming up next.
