BOSTON — In the latest defense mega-merger, Raytheon Company agreed to buy Texas Instruments' defense business yesterday for $2.95 billion.
The cash buyout will create a missile, radar, and electronics powerhouse that promises to be one of three or four remaining US defense giants in a new era where survival depends on size.
The deal also strengthens Raytheon's effort to buy Hughes Electronics Corp., one of the last Pentagon suppliers that remain up for grabs. Bids for the Hughes defense business are due today.
Raytheon is expected to face heavy competition in the bidding from Northrop Grumman, the Los Angeles maker of the B-2 bomber.
The Pentagon has encouraged the merger wave - highlighted by last month's buyout of McDonnell Douglas Corp. by the Boeing Company - as a way to keep defense contractors healthy in a time of leaner contracts.
The Pentagon strategy is "working very well. Maybe too well," says Paul Nisbet, an analyst at JSA Research in Newport, R.I. "It does create some very powerful companies. In some cases there will be just two main suppliers of certain types of defense systems.
"That's the downside," Mr. Nisbet says. Given the political clout the giant companies already wield, "the politics of all this could be quite interesting." Still, it only takes two to compete, he notes.
Even without Hughes, Raytheon becomes a more formidable player with yesterday's buyout. The Dallas-based Texas Instruments unit, which Northrop had also eyed, makes air-to-ground missiles (used heavily in the Gulf war), and electronic sensor and seeker systems. Raytheon, based in Lexington, Mass., makes ground-to-air and air-to-air missiles.
No major job cutbacks are expected, says Robert McWade, a spokesman for Raytheon.
In early trading yesterday, shares of both Raytheon and Northrop rose. A climbing share price is key to making an attractive stock offer for Hughes, which makes missiles and radar systems.
Northrop is seen as the underdog, since it has big debts from its $3 billion buyout of a Westinghouse defense unit.
Prudential Securities analyst Charles Gabriel sees no antitrust "showstopper" to a Hughes buyout by Raytheon. Northrop has overlap with Hughes on jet-fighter radars.
If Raytheon wins Hughes, it would control perhaps three-fourths of the missile industry. Later, Raytheon might even buy Northrop itself, Nisbet says, creating a missile/electronics king.
Raytheon is expected to spin out its Amana consumer-appliance business and other nondefense businesses to help pave the way for a stock buyout of Hughes.