NY Times. Lockheed Faces Many Obstacles in Bid for Satellite Company
February 2, 1999
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By LESLIE WAYNE
ETHESDA, Md. -- From his office in a suburban business park,
John Sponyoe, president of Lockheed Martin Global
Telecommunications, can gaze over to a nearby building that houses his
goal: Comsat Corp., the quasi-government satellite company that
Lockheed Martin Corp. wants to buy for $2.7 billion.
On a straight line, the Comsat building is just a few football fields away.
Without leaving his desk, Sponyoe (pronounced SPAWN-yo) can get
a clear view of the big COMSAT sign that stares back at him every
time he looks up. But for Sponyoe and for Lockheed, Comsat is so
near and yet so far away.
"I've been in the helicopter business before this," Sponyoe said. "And
this deal has got more moving parts than a helicopter. We know we
are going to have a fight on our hands. But we think the deal makes
good business sense and is doable."
For Lockheed, the Comsat deal would leapfrog the company, the
United States' No. 2 military contractor behind Boeing, into the major
leagues of global telecommunications and provide it with much-needed
diversification away from the vagaries of the Pentagon budget and
policies.
But to accomplish the Comsat deal, Lockheed needs approval of the
Justice Department and the Federal Communications Commission, and
even an act of Congress. In effect, it must win a Washington trifecta.
And lining up to make life miserable for Lockheed at every step along
the way is a formidable array of rival commercial satellite companies,
telecommunications giants, consumer groups and unsympathetic
members of Congress, all of whom have different reasons for being
hostile to Comsat and Lockheed. In the scorecard for the new
Congress, this showdown is expected to be one of the biggest
legislative battles affecting business this year -- for reasons that go far
beyond this deal.
This is because Lockheed is walking into a larger
telecommunications-industry minefield as it tries to acquire Comsat, the
U.S. signatory and 19 percent owner of Intelsat, an international
satellite network created decades ago that Congress now wants to
privatize.
To pull off the Comsat merger, Lockheed must delicately thread its
way through the larger issue of Intelsat deregulation. And how
Congress settles that issue could either scuttle the Comsat deal or
create terms so onerous that no corporation -- neither Lockheed nor
anyone else -- would want to buy the satellite company.
"Lockheed wants to be a much bigger player in a much faster-growing
and more profitable business than their core defense business," said
Peter Aseritis, an industry analyst with CSFB Securities. "It's a
technology they feel they understand. But to buy Comsat, they have to
go through all these complicated hurdles. If they can get through all
those wickets, they could move to be one of the biggest players in
global telecommunications."
That prospect is what is keeping Lockheed motivated, especially after
suffering a major setback in Washington last year when the government
halted the company's $8.3 billion bid for Northrop Grumman Corp., a
smaller military contractor. That 11th-hour setback tarnished
Lockheed's legendary reputation as a skilled Washington insider and
sent its strategic thinking in new directions.
Lockheed already manufactures commercial satellites for others and
launches them. So acquiring a commercial satellite network to operate
-- charging others to bounce their signals off Lockheed's satellites --
would be a logical business extension, Washington willing.
Lockheed's telecommunications division has revenues of around $350
million a year. Adding Comsat would bring those revenues to around
$1 billion. More important, the combination could put Lockheed in the
catbird seat to acquire even more of Intelsat's global satellite network,
the world's largest.
Right now Lockheed, a company with $28 billion in 1997 sales, could
use some help. Lockheed angered shareholders -- some sued the
company while others dumped the stock -- after it announced just
before Christmas an unexpected shortfall in the company's
fourth-quarter earnings. Lockheed's stock fell 11 percent to around
$40 a share on that announcement, and it remains there.
(On Jan. 28, Lockheed reported a 66 percent drop in fourth-quarter
earnings, largely because of a one-time write-off. For 1998, earnings
were 23 percent below the year earlier, and it predicted 1999 earnings
would be dismal, too.)
"If Lockheed wants to secure new growth areas, it's got to look
outside of pure defense," said Sponyoe, who heads Lockheed's newly
created telecommunications division. "We're going forward on the
basis that we will close the Comsat deal. This isn't something we did
knee-jerk after Northrop. We want this deal to close, and we are
throwing all the assets of Lockheed behind it."
To that end, Lockheed has assembled an all-star lobbying team. Even
its chief executive, Vance Coffman, has joined Sponyoe and other
Lockheed executives in making three pilgrimages to Capitol Hill just in
the past month.
In addition, Lockheed has hired some of Washington's heaviest hitters.
They include Podesta Associates (run by the brother of John Podesta,
the White House chief of staff); Verner Liipfert Bernhard, McPherson
& Hand (Bob Dole's law firm); and former lawmakers, including
former Rep. Beryl Anthony, D-Ark., a close Clinton associate.
Altogether, 11 lobbying firms have joined Lockheed's in-house
lobbying staff in pursuing the deal.
Comsat has seven more lobbying firms at its disposal, and Democratic
fund-raisers, including Peter Knight, a top political adviser to Vice
President Al Gore, on its board.
Lockheed and Comsat need this firepower because a measure to
privatize Intelsat passed the House last year, 416-17, on terms
Lockheed considered so onerous that it said it would walk away from
the deal if the same bill was approved by Congress this year. The bill
died in the Senate in the last days of the 105th Congress. It would also
privatize Immarsat, a sister organization with four satellites providing
marine communications. Comsat owns 23 percent of Immarsat.
Comsat's foes say it has enjoyed a monopoly franchise on U.S. access
to Intelsat's 24 commercial satellites for too long, and they want to strip
Comsat of many of the privileges it enjoys -- most important, immunity
from the antitrust laws.
Lockheed has expressed willingness to give up these privileges. In a
company statement now being circulated in Washington, it said it
wanted Intelsat privatized in a "meaningful, pro-competitive way --
soon." But opponents of the Lockheed-Comsat deal, mainly other
satellite companies, dismiss Lockheed's statement, saying in a position
paper that it "offers only the appearance of reform."
More to the point, the foes have an array of other proposals that could
undermine long-term contracts Comsat has already signed and could
allow customers to bypass Comsat entirely to get to Intelsat --
measures that would sharply diminish the value of Comsat to
Lockheed.
The Intelsat privatization bill would establish the future rules of the
game for global satellite communications in the same way that the
Telecommunications Act of 1996 set rules for the ground-based
industry.
"Who Lockheed is hiring tells me they are deadly serious about this
deal," said Henry Goldberg, a lobbyist for Panamsat, a rival leading the
opposition. "They have a belt-and-suspenders approach and are hiring
everyone they can."
Howard Marlowe, president of his own lobbying firm and past
president of the American League of Lobbyists, concurred. "This issue
is a lobbyists-full-employment act," he said. "Every major player is
signed on on one side of this or another."
Besides Panamsat, whose ultimate parent is General Motors, other
opponents of the takeover are Loral, Iridium, Boeing, Motorola,
Echostar, Teledesic and satellite users like AT&T, General Electric,
NBC, MCI Worldcom and Sprint.
On top of that, various ethnic groups -- Cubans, Armenians, Latinos
and Poles among them -- joined the anti-Comsat fray, seeking lower
international phone rates. Each group, besides having formidable
in-house lobbyists, has hired powerful outside lobbying and public
relations firms.
"Acquiring Comsat is a smart strategic move, but it is tactically
challenging," said Loren Thompson, a military industry analyst at the
Lexington Institute, an Arlington, Va. research firm. "In the long run,
this is something Lockheed needs to do. But the transaction is difficult
to assess because of all the political imponderables."
For starters, Lockheed must first push the deal over an antitrust hurdle
at the Justice Department. That should be the easiest step, but
regulators have asked Lockheed for more information before deciding.
Then there is the Federal Communications Commission. Lockheed
needs to be declared a "common carrier" to increase its ownership
stake in Comsat from the 10 percent now permitted under law to 49
percent. Not surprisingly, all those against Lockheed in Congress are
submitting briefs to the FCC opposing this request.
Among those opposing Lockheed before the FCC are Sen. Conrad
Burns, R-Mont., and Rep. Tom Bliley, R-Va., chairmen of the two
congressional committees that will be passing on the Intelsat
deregulation bill. The satellite bill that overwhelmingly passed the
House last year -- and was opposed by Lockheed -- was sponsored
by Bliley.
Most analysts, however, say it appears that in the end, Lockheed
should prevail before the FCC. But to do so will take time and legal
talent. Right now the FCC is in the process of reviewing comments,
and a spokesman for the commission said it intended to act soon but
would not give a specific date.
Then, to clear the final hurdle, Congress would have to lift a statutory
ownership cap so that Lockheed could increase its ownership of
Comsat to a full 100 percent. What worries Lockheed is that
Congress, in privatizing Intelsat, might set terms making Comsat less
valuable.
"Once you put a bill into Congress, all kinds of things can come out,"
said Armand Musey, an analyst with C.E. Unterberg, Towbin, a
brokerage firm. "Intelsat and Comsat have always been
underperformers, because they have never been able to move quickly.
If privatized, they will wake up. Comsat's competitors will want to
cripple it. So you are going to see a real food fight in Congress."
Lockheed has made it clear that it wants 100 percent of Comsat, not
just a 49 percent stake. Lockheed would then be in a position to
expand its holdings in Intelsat over time, depending on the legislation.
With that in mind, Sponyoe is formulating the company's preliminary
message to Congress: While it is willing to forsake many of the
privileges Comsat now enjoys, it opposes a "fresh look" at existing
Comsat contracts. And it wants to have Intelsat itself privatized in a
way that keeps it largely intact so that it is easier to acquire.
"Some people would just as soon not see us in the business or want
Intelsat to explode into many small parts," Sponyoe said. "Our whole
effort will be getting our message out and position understood."
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