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Martin Marietta, Lockheed to Form Aerospace Giant : Business: Biggest defense consolidation yet is called a merger of equals. Firm will be based in Maryland, but the overall effect on Southland operations is unclear.

August 30, 1994|RALPH VARTABEDIAN and JAMES F. PELTZ | TIMES STAFF WRITERS

WASHINGTON — Lockheed and Martin Marietta, the nation's second- and third-largest defense contractors, disclosed late Monday an agreement to merge the two firms, creating an aerospace colossus with $23 billion in annual sales.

The deal dramatically accelerates the pace of defense industry consolidation, which is concentrating arms-making in the hands of a few major contractors and boosting the industry's efficiency--but at the cost of thousands of jobs nationwide.

The deal, described as a "merger of equals," will involve a stock swap valued at $10 billion and create a company with 170,000 employees, making this by far the biggest in a series of successively larger defense industry combinations.

Though the company will be called Lockheed Martin, Lockheed's Calabasas headquarters will be dismantled and the new firm will be based in Bethesda, Md., Martin Marietta's headquarters city.

It was unclear what the transaction would mean for Lockheed employees and the firm's other operations in California. The company--an integral part of the Southland's aerospace lore--now has about 20,000 California employees and major operations in Palmdale and Sunnyvale.

Lockheed Chairman and Chief Executive Daniel M. Tellep, 62, initially will head the new firm, and Martin Marietta Chairman and Chief Executive Norman R. Augustine, 59, will succeed him. Lockheed shareholders will receive 1.63 shares of Lockheed Martin stock for each of their Lockheed shares. Martin stockholders will get shares in the new firm on a one-for-one basis.

Senior defense officials have encouraged the defense industry to consolidate, hoping eventually to reduce costs and develop a healthier supply base for the government. However, one senior defense official contacted late Monday said he had not been notified of the Martin-Lockheed deal and expressed shock at its magnitude.

"This is a feeding frenzy in the defense industry to buy things," said Jack Modzelewski, a Paine Webber aerospace analyst in New York.

The new firm would control as much as 20% of U.S. defense spending, leaving rivals struggling to match its unparalleled financial, technical and political power. Including contracts and subcontracts, it would have twice the defense sales of its nearest competitor, McDonnell Douglas.

Martin already has a dominant position in military spacecraft and launch systems and makes products for a vast number of electronics programs. Lockheed is a principal supplier of aircraft, military spacecraft and electronics.

The combination would give the firm market power in virtually every major high-technology market segment, dwarfing such traditional high-tech giants as Hughes Aircraft Co., Northrop-Grumman Corp., Loral Corp. and TRW.

Those competitors "will have to come up with some kind of a response," Modzelewski said. "It is a contest of cost and technology, but it is also a game of political muscle and political maneuver. This allows Martin and Lockheed to play the game more effectively than everybody else."

Tellep said the merger would result in significantly lower costs to the federal government, benefiting taxpayers, shareholders and employees.

Analysts said they expect one of the two firms to emerge as the dominant entity. But it is not clear which firm will come out on top.

Lockheed posted higher sales in 1993--$13.1 billion compared to Martin's $9.4 billion. And at $422 million last year, Lockheed's profits bested Martin's $20.9 million (though Martin earned $450.3 million before an accounting charge).

But the stock market puts a value on Martin's shares of $6.1 billion, topping Lockheed's $4.1 billion.

Despite the size of the deal and the market power that it would create for the new firm, experts said they were not strongly concerned that it would be contested by the government on antitrust grounds. The combination of Lockheed and Martin would not clearly increase market concentration in any single area of defense manufacturing. And in most important defense markets, there would continue to be at least two competitors.

Under a recent agreement by a federal task force, a deal's impact on the defense industrial base is an important part of evaluating defense mergers. So if the Lockheed-Martin deal is considered good for the Pentagon, it may get quick approval.

"It's saying that there's so much overcapacity and restructuring that has to be done that doing it in bite-size pieces is not sufficient in a reasonable amount of time," said C. Donald Scales, director of aerospace practice for EDS Management Consulting Services in Los Angeles.

Over the past few years, both Lockheed and Martin have grown substantially through acquisitions.

Lockheed acquired General Dynamics' Ft. Worth-based jet fighter division and Sanders Associates, a large defense electronics supplier. Martin acquired General Electric's defense business, which previously had swallowed up RCA's satellite business.

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