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The Peace Dividend Pays Off for Boeing

By Alex Planes - Dec 6, 2012 at 10:30AM

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Learning from the market's past to understand its present.

On this day in economic and financial history...

Two major defense contractors became one huge defense contractor on Dec. 6, 1996, when Boeing (BA 5.64%) completed its $3.2 billion acquisition of Rockwell International's aerospace and defense segments. The deal added 21,000 employees to Boeing's expansive payroll, creating an aerospace and defense segment with more than 50,000 employees that had generated $8.7 billion in combined revenue the year before.

Rockwell International had been the largest defense contractor in the United States during the 1980s. The Soviet Union's dissolution at the end of that decade temporarily reduced the flow of money to defense contractors (an effect known as the "peace dividend"), compelling Rockwell to divest substantial chunks of its wide-ranging operations. After the defense divestiture, Rockwell International spun off its semiconductor division as Conexant Systems (acquired in 2011 by a private-equity firm), spun off its automobile component manufacturer as Meritor (MTOR -0.19%), and in 2001 finally split into two public companies that both bear its name: Rockwell Automation (ROK 1.97%) and Rockwell Collins (COL).

Whatever void Rockwell International left behind in the defense sector has been readily filled. Boeing was the second-largest defense contractor in the 2012 fiscal year, trailing leader Lockheed Martin (LMT 2.05%) by just more than $1 billion in contract revenue. To put Boeing's defense revenue in perspective, seven of the company's fellow Dow Jones Industrial Average (^DJI 2.68%) components are on the defense contracting top 100 list -- and Boeing made more than twice as much in defense revenue as all seven of them combined.

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Warning sign or outlier?
On Dec. 6, 1994, California's Orange County filed for Chapter 9 bankruptcy, marking the largest municipal bankruptcy in American history. The county's bankruptcy was later discussed in When Government Fails, a policy paper by Mark Baldassare of the Public Policy Institute of California. Here is his summary:

The financial difficulties leading to the bankruptcy were the direct result of an enormous gamble with public funds taken by a county treasurer who was seriously under-qualified to deal in the kinds of investments he chose. Because of his shortcomings, because of Orange County's national reputation as a land of rich, spoiled, archconservatives, and because the bankruptcy did not play out as other municipal financial crises have, many observers have dismissed it as an anomaly. It may have been a nasty surprise for Wall Street, they argue, but it is not something that is likely to happen again, even in Orange County.

Baldassare argues otherwise. Orange County lost $1.6 billion in its bankruptcy, which far exceeded all previous municipal bankruptcies between 1937 and 1994. The underlying reasons, beyond the bad bets of one official, were political fragmentation, voter distrust, and state fiscal austerity. These problems are acutely felt in California, and little has been done to solve them.

The state has since become a possible breeding ground for municipal bankruptcies, particularly in the aftermath of the 2008 financial crisis. At least three California cities declared bankruptcy in 2012, and ratings agency Moody's issued a warning several months ago that many more Californian municipal bankruptcies might be inevitable. California's cities issue a fifth of all municipal bonds in the U.S., making this threat a dangerous one indeed.

The voice of the District
The first edition of the Washington Post (GHC 2.25%) was published on Dec. 6, 1877. The front page of this first-ever edition of the newspaper is nearly impossible to find in good condition, but here is a sample of its subheadings:

  • Conkling vs. Hayes: The New York Custom House Appointments -- Rumors of a Truce
  • Suicide Mania in New York
  • A Man of Rather Small Things
  • The Turks Win a Great Victory: McMahon's Government Defined -- The Pope Believed to be Breathing His Last -- British Marine Disasters
  • The Huron Disaster: Eight Officers and Sixty-three Seamen Buried

An exciting day in news, indeed.

The Washington Post soon became prominent in the nation's capital, but in the early years of the 20th century, poor management nearly led it to ruin. By 1933 it had fallen into bankruptcy but was rescued by Federal Reserve governor Eugene Meyer at a bankruptcy auction.

The paper consolidated its power throughout the middle of the 20th century, with the acquisition of the rival Washington Times-Herald marking a turning point in its success as a corporate entity. The Post went public in 1971, purchased the Kaplan education company in 1984, and built a network of television stations that reached its largest size by the 1990s. Today, it's one of the few successful national news publishers left, with annual revenue of more than $4 billion and a consistent streak of profitability that makes it the envy of publishers everywhere in this cutthroat digital age.

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Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
^DJI
$31,500.68 (2.68%) $823.32
The Boeing Company Stock Quote
The Boeing Company
BA
$141.53 (5.64%) $7.56
Lockheed Martin Corporation Stock Quote
Lockheed Martin Corporation
LMT
$419.04 (2.05%) $8.42
Meritor, Inc. Stock Quote
Meritor, Inc.
MTOR
$36.16 (-0.19%) $0.07
Graham Holdings Company Stock Quote
Graham Holdings Company
GHC
$563.69 (2.25%) $12.39
Rockwell Collins, Inc. Stock Quote
Rockwell Collins, Inc.
COL
Rockwell Automation Inc. Stock Quote
Rockwell Automation Inc.
ROK
$201.06 (1.97%) $3.88

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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