The 32,000 participants in Grumman Corp.'s 401(k) plan may be the real victors in the bidding war over the defense contractor.
In a week, the 401(k) participants saw their Grumman holdings increase by $250 million, at least on paper.
With each succeeding offer for outstanding Grumman stock - whether by Martin Marietta Corp. or Northrop Corp. - balances in 401(k) accounts swell. That's because about 38% of the $1.5 billion plan is allocated to company stock. Indeed, employees own almost a third of Grumman's outstanding shares.
Still, it's a bittersweet tonic. Many likely will lose their jobs once Grumman is bought.
The suspense is particularly acute among the nine members of the Grumman pension staff, who oversee the $2.8 billion defined benefit fund as well as the 401(k) plan.
Some projects put on hold
There, William R. Parmentier, assistant treasurer and investment manager, who has managed the Grumman pension plan for the past 15 years, and his eight staffers wait.
One project on hold is plans to attract outside pension assets to be managed by the Grumman pension staff. With that goal in mind, Grumman in December spun off its pension investment management department, creating GQ Asset Management, a wholly owned subsidiary.
But Mr. Parmentier said he's proceeding with a search for two or three core equity managers to run style neutral portfolios for about 20% to 25% of Grumman's internally managed assets. About $2.65 billion is managed in-house.
The plan is - or was before the merger and takeover talks began - to manage the remainder internally as the "value-added component." He said he plans to conduct final interviews soon.
The Grumman staff includes three portfolio managers following three styles of equity management - core growth, small-cap value and a technology fund.
In the midst of the merger and acquisition talks, Mr. Parmentier manages to point with pride at his efforts to control costs at Grumman while managing a large pension fund with a small staff.
"I've been running this pension fund for 15 years. When I took over, the fund was about $400 million and we were running it with 11 people. It is now about $2.5 billion and we are running it with nine people," he said.
Grumman spends about $1.7 million, including custodial fees, on investment management.
"Even at the low end of the fee scale it would cost about three times that amount to use outside money managers," he said. "We are one of the most cost-effective, internally managed pension operations around."
Pension operation may change
But the future of that operation is clouded.
Although it's possible the acquiring company would continue to allow the Grumman staff to manage the assets internally, what happens largely depends on the pension investment philosophy of the acquirer.
It appears Mr. Parmentier and his staff would fare best with Martin Marietta, where $1.2 billion of the $3.9 billion pension fund already is managed in-house with a small staff. Northrop does not manage any of its $3.9 billion pension assets internally.
"Normally if the two businesses are fairly well integrated .*.*. the plans generally are merged together into one plan," said John Westervelt, consultant at Kwasha Lipton, Fort Lee, N.J.
Merging plans simplifies asset management, plan design and administration,
"Martin Marietta, or Northrop, could continue the Grumman plan but it depends on how they treat the Grumman employees. I imagine they would merge Grumman employees with Martin Marietta or Northrop. They probably wouldn't leave the Grumman plan as is unless it was a totally different line of business," said William T. Cleary Jr., national practice leader, defined benefit services at Sedgwick Noble Lowndes, Garden City, N.Y.
One consultant said the Grumman pension fund more closely resembles Martin Marietta's than Northrop's. Both Grumman and Martin Marietta follow conservative investment styles with relatively low equity positions, high-quality fixed-income portfolios and a sizable percentage of assets in cash equivalents, nearly $725 million for Martin Marietta and about $550 million at Grumman. (Grumman's high cash position reflects executives' view of the market; cash was raised by selling bonds because they thought interest rates were going to fall.)
The asset mix at Martin Marietta is also closer to that at Grumman, although far from identical. Grumman has 35% of its assets in equities compared with 45.8% for Martin Marietta and 58% at Northrop. Grumman has 38% in fixed income compared with 23.4% at Martin Marietta and 36% at Northrop. Grumman has 20% in cash equivalents compared with 30.8% at Martin Marietta and 6% at Northrop.
Plans are fully funded
Each of the funds is relatively fully funded, according to their 1992 annual reports. Grumman had about $432 million in excess of its accumulated pension benefit obligation; Northrop, $1.8 billion; and Martin Marietta, $311 million.
Those margins could shrink or evaporate, however, if the companies lower their discount rates this year as anticipated.
Lower surplus and funding levels at Grumman could, to some extent, help head off legal challenges similar to last year's action by employees of General Electric Co.'s GE Aerospace division, which was sold to Martin Marietta for $3.05 billion.
GE employees filed suit in federal court seeking to prohibit GE from transferring about $1.65 billion in retirement assets to Martin Marietta. The suit, which is still pending, claims the transfer removed GE employees from the financial cushion of GE's $9.5 billion pension fund surplus and from GE's regular benefit increases.
"In the GE case, Martin Marietta purchased a piece of GE and were probably going to transfer a piece of the pension plan assets and the associated liabilities to Martin Marietta," said Sedgwick Noble Lowndes' Mr. Cleary.
"But at GE, there was a surplus, and they probably felt that they might miss out on that surplus. However, Martin Marietta is proposing to purchase the entire Grumman company, not just a piece."
And, because Grumman is not dramatically overfunded, there probably would be little motivation for similar action, said Mr. Cleary.
Meanwhile, the usually loquacious Mr. Parmentier confesses to being a bit bewildered by events. He said antitrust regulations limit what he can say.
'Smiling faces' abound in 401(k)
But he did say "there are a lot of smiling faces around here" as a result of soaring Grumman stock prices.
(Meanwhile, those 11.5 million or so Grumman shares in the 401(k) plan represent a powerful voting bloc that could influence the outcome of any merger or acquisition. Trustees of the plan, all Grumman executives, hired investment banker Rothschild Inc. and the law firm of Whitman Breed Abbott & Morgan, both in New York, to assist in evaluating the competing bids and to offer advice on how to tender the stock.)
The 401(k) plan's shares were worth more than $710 million after Northrop entered its $2 billion bid for Grumman, topping Martin Marietta's earlier $1.9 billion offer and pushing the stock price to $61.75 per share. Grumman stock had been trading around $40 before the bids.
And it may not stop there. Many traders believe the bidding will reach $70 per share or higher, which would push the value of Grumman stock in the 401(k) plan to a cool $805 million, almost doubling the value of the plan's company stock fund.
"Everyone was smiling here when the stock hit $55. Now they are really smiling," said Mr. Parmentier.