Could LMT be a take over target? This article came over the newswires. I could not find the link but here is the article. interesting...
Lockheed Martin: Is the Predator Now the Prey?
The defense giant looks like a tempting takeover target. And bidders could come from both sides of the Atlantic
Through the 1990s, Lockheed Martin grew into a defense contractor behemoth, with $25
billion in annual sales, thanks to a spate of mergers and acquisitions. Now a succession
of downbeat earnings estimates has pounded its stock, slashing the company's market
capitalization from a 52-week high of $21.6 billion to a mere $9.3 billion. Some now think
the Bethesda (Md.) company is ripe for a takeover.
Company watchers say potential suitors range from buy-'em-and-bust-'em-up firms such
as Kohlberg, Kravis, Roberts (KKR) to foreign arms makers. "The idea has certainly
been kicked around," says one investment banker. Robert J. Sanborn, portfolio manager
of the Oakmark Fund, which owns nearly 2% of Lockheed Martin stock, adds: "If I was
working for KKR, I would probably look at it very carefully."
You don't have to look hard to see that the company's shares are at fire-sale prices. The
stock has been pummeled by Lockheed Martin's repeated downward revisions in
earnings estimates, prompted by quality problems and delivery delays. It didn't help when
rival Raytheon lowered its earnings projections on Oct. 12, casting a pall over the entire
defense sector.
WHAT A DEAL. Lockheed is trading at roughly nine times earnings and free cash flow, says Sanborn. "The only stock that cheap is Phillip Morris," he adds. A buyer would look at
the current market capitalization plus long-term debt, less free cash. That calculation
comes out to roughly $18 billion. Add a 35% premium to the current price, and you'd get
a $21.3 billion price tag, or about 85 cents for each dollar of sales.
That's a tempting deal. When Raytheon bought defense-electronics businesses from
Texas Instruments and Hughes Electronics several years ago, it paid more than $1.50
for each $1 in sales. And Lockheed Martin was willing to pay $1.26 for $1 of Northrop
Grumman sales in a transaction the government blocked last year.
A Lockheed spokesman insists that the company isn't for sale, and notes that the
Pentagon has frowned on recent hostile bids, such as General Dynamics' offer to buy
Newport News Shipbuilding. But since Lockheed Martin Chairman Vance D. Coffman
pledged to unlock shareholder value with a plan he unveiled on Sept. 27, the stock price
has only plummeted further. A bid with a healthy premium over the stock's current price
would accomplish Coffman's goal far faster.
A EUROPEAN BUYER? And the fact is, Lockheed Martin could attract quite a few bargain-hunters. European weapons makers are one possibility. Deputy Defense Secretary John J.
Hamre is holding a dinner in Williamsburg, Va., on Oct. 25 for a group of European
defense execs, and Wall Street expects him to tell them that shopping sprees in the U.S.
would be welcome.
Despite Lockheed's assertions that the Pentagon would frown on a hostile takeover, top
Defense officials have been saying for some time that they would like to see the
development of trans-Atlantic combos to avoid a Fortress America and Fortress Europe
mentality that could lead to protectionist arms-buying strategies. What's more, U.S.
officials fret that unless there's more technology-sharing across the Atlantic, the
high-tech gap between the U.S. and Europe will make coalition warfare more difficult.
Mergers would be one way to level the high-tech playing field.
Such a deal would face several hurdles. For one thing, two of the most likely buyers
have just announced big deals of their own: British Aerospace's purchase of GEC's
defense business and the merger of DaimlerChrysler's aerospace unit, DASA, with
Aerospatiale Matra. Also, any proposal for a foreign company to buy a crown jewel of the
U.S. defense industry during a Presidential election year could be a powder keg.
After the Pentagon torpedoed Lockheed Martin's purchase of Northrop Grumman, the
industry grumbled that it would be easier for a foreign company to buy a U.S. defense
concern than for an American company. Privately, industry execs frequently remind the
Pentagon that Germany and Italy weren't U.S. allies until recently, and that there's no
guarantee they always will be. Better to keep key technology in the hands of domestic
companies, they argue.
Even a bid from a domestic company would pose problems. Typically, companies take
on debt and pay it down by cutting costs and selling off assets in a takeover. But that
may be difficult to do with Lockheed. An internal review of Lockheed operations argues
the company already has focused too much on cost-cutting at the expense of quality.
That led to a variety of problems with rockets, aircraft, and weapons systems that helped
put the stock in its current tailspin.
Of course, Lockheed Martin may simply have been cutting the wrong costs. While KKR,
which declined comment, may not know what to cut and what to keep, an outfit such as
Washington (D.C.)-based Carlyle Group might. Its chairman, Frank C. Carlucci, is a
former Defense Secretary. Carlyle, whose execs weren't available for comment, may be
one of the few purchasers that could pass muster and give the Pentagon confidence that
any breakup of Lockheed Martin wouldn't disrupt ongoing weapons programs.
TOC
Wire Services, 10-20-99 |
