Bill Gates’ Defense Budget

Mild public notice has been made of the fact that one undisputed winner in the proposed purchase of the Newport News Shipping Company by General Dynamics—assuming the deal meets regulators’ approval and is consummated as expected—is Bill Gates. Cascade Investments, typically described as a personal investment vehicle for the founder of Microsoft (which owns Slate), purchased more than 2.5 million shares, or about 7.8 percent of Newport News, in early 2000. One upshot of the deal, then, is that Gates’ fund is in for an estimated $173 million windfall: GD will pay about $67.50 a share for NNS, a 23 percent premium over the smaller firm’s share price when the deal was announced and a huge increase over the past year. The second upshot is that when the all-stock merger is complete, Gates will own a substantial stake in a company that makes sophisticated weapons systems and effectively controls the business of building nuclear-powered ships for the United States military.

At the time of Cascade’s investment, companies like Newport News were not exactly investor darlings—in fact, defense and aerospace stocks were on the ropes. And while NNS got a mild boost from the disclosure of Cascade’s buy, most observers were still skeptical. “There has been no reaction that I can tell from investors at large that they want any more of these stocks,” a Lehman Brothers analyst told Defense Daily at the time. “In fact, the opposite is going on. More have taken their money and said ‘I want new world companies instead of old world companies.’ ” Such sentiments are less commonplace now, of course. (Defense Daily went on to note that Newport had “little interest in doing anything other than building and maintaining nuclear naval vessels,” particularly aircraft carriers, a specialty in which it enjoys “a monopoly.”)

Evidence of Gates’ shrewd investing prowess? Well, not really. Cascade’s manager has noted that Gates himself did not learn of the investment until after it happened.

General Dynamics participates in a far broader array of businesses than Newport News. An example: Another recent acquisition was Primex Technologies, which according to GD’s most recent annual report is the core of a new business division launched this past January, Ordnance and Tactical Systems. One project here is “the development of the Army’s next-generation tactical weapon, the Objective Crew-Served Weapon.” That sounds handy. This all falls under Combat Systems, one of four business units at GD, whose goal to be “the preferred supplier to armored forces around the world.” Newport News’ business will presumably fit into another unit, Marine Systems, which among other things is “the U.S. Navy’s leading supplier of combat vessels.”

Of course, all of this would be a lot more compelling if some kind of case could be made that Gates has even the mildest active involvement in this particular investment. Certainly his portfolio manager seems to have served him well here, demonstrating yet again that the right gamble on an unpopular sector can pay off spectacularly. But apart from the fact that Gates himself does not appear ever to have expressed any particular interest in Newport or its business, it wouldn’t even be especially surprising to see Cascade cash out of GD when this merger is all over, given what a home run NNS has been already. But I sort of hope Gates keeps his stake. Really, if some conspiracy theorists were to conclude that Bill Gates might be prepared to deploy an Objective Crew-Served Weapon or two to deal with—for example, some pesky Moneybox critic—well, who am I to dissuade them?