Justice Dept. opposes Lockheed-Northrop merger
Fort Worth Star-Telegram
WASHINGTON -- The Justice Department says it is ''fundamentally
opposed'' to a merger of Lockheed Martin and Northrop Grumman, but
the chairmen of the two defense industry giants say they will
''vigorously oppose any attempt to block'' the proposed deal.
The chairmen, Vance Coffman of Lockheed Martin and Kent Kresa of
Northrop Grumman, issued a joint statement on Monday in response to
concerns about a loss of competitiveness expressed by the Justice
Department and the Defense Department.
Lockheed Martin officials said that Justice Department examiners
raised questions about the dominant position the emerging company
would have in surveillance radar and ground-based systems that detect
missile launches.
Pentagon spokesman Ken Bacon said on Monday, ''We have serious
concerns about the competitive effects of the transaction.''
But the companies' chairmen said: ''We continue to believe that the
significant savings of $1 billion per year are available from the merger,
the majority of which will accrue to our government customers.''
The companies said the Justice Department had informed the two
companies that it is ''fundamentally opposed'' to the merger.
The deal, overwhelmingly approved by shareholders in February, is
valued at $8.3 billion. Under the merger, which was expected to close
March 24, each Northrop Grumman share would be converted into
1.1923 Lockheed Martin shares. Lockheed Martin has also said it
would assume about $3.3 billion in Northrop Grumman debt as part of
the deal.
Lockheed Martin and Northrop Grumman are the only makers of
airborne early warning radar, most commonly found on Air Force E-3
AWACS aircraft and the Navy's EA-6B Prowler.
Both firms are also major players in infrared systems that detect
missiles in flight and systems used to jam weapons that transmit
electronic countermeasures to confuse radio communications.
Lockheed Martin also produces the F-16 fighter and is also building a
major share of the coming F-22 Raptor, the Air Force's next-generation
stealth fighter. Northrop Grumman produces parts for the C-17, a giant
Air Force cargo jet, and portions of several commercial airliners.
The Defense Department examiners and high-ranking officials in both
firms met during the weekend in an attempt to resolve problems, but
were unsuccessful. The discussions are continuing.
''If the companies' attempts to resolve the (Justice Department's)
concerns are not successful, it is anticipated the government will move
to block the transaction,'' the chairmen's statement said.
Industry analysts said that they found the timing of the complaint
unusual.
''It would not have been surprising if they had objected to it six months
ago,'' said Jon Kutler, president of Quarterdeck Investment Partners, a
Los Angeles firm that specializes in aerospace mergers and
acquisitions. ''But now I think the timing is very unusual -- to let this
drag on after the shareholder approval in February.''
The Justice Department objection to a defense industry combination
also is surprising at a time when the government has allowed the
industry to pare its ranks substantially. The industry is on the verge of
having just three major companies, all the result of massive
consolidations.
The merged Lockheed Martin and Northrop Grumman would be the
industry's biggest competitor, with sales of $37 billion. It would be
followed by the combined McDonnell Douglas and Boeing Co. Third
would be Raytheon Co., which recently acquired Hughes Electronics
from General Motors and the defense electronics unit of Texas
Instruments, renaming the unit Raytheon TI.
Kutler said that if the government objects to the deal, it would cause far
more harm to Northrop Grumman than Lockheed Martin.
''Lockheed Martin is still going to be a dominant player in this industry,
with or without Northrop Grumman,'' he said. ''The damage will be to
Northrop Grumman.''
On the New York Stock Exchange, Northrop Grumman stock dove
$20.125 per share, or 14.6 percent, to close at $117.50. Lockheed
Martin rose 81.25 cents per share to $116.00.
Wolfgang Demisch, an industry analyst at Bankers Trust in New York,
questioned why the Justice Department would call into question
Northrop Grumman and Lockheed Martin holdings in defense
electronics. He said the government could probably be satisfied with a
divestiture of elements of the companies valued between $200 million
and $500 million.
Lockheed Martin, based in Bethesda, Md., had 1997 sales of $28.1
billion, compared to $9.1 billion for Los Angeles-based Northrop
Grumman.
Lockheed Martin and Northrop Grumman employ about 19,000
workers in North Texas, with a payroll totaling almost $1 billion a year.
The two companies operate huge manufacturing and assembly
facilities. Lockheed Martin's mile-long assembly plant, where 11,000
workers make the F-16, is on the west side of Fort Worth. Lockheed
Martin Vought Systems also has eight missile engineering design sites
in the Dallas suburb of Grand Prairie.
Northrop Grumman employs 5,000 workers at two mammoth plants,
one straddling the Dallas-Grand Prairie border, and the other in Grand
Prairie along Marshall Street, next door to one of Lockheed Martin's
missile division plants.
The Northrop Grumman Commercial Aircraft division operates
primarily as a subcontractor for Boeing Co., making tails and wings for
the 747, 767 and 777 aircraft.
It also makes wings for Gulfstream executive jets, engine coverings for
McDonnell Douglas C-17 transports and some fuselage parts for
Northrop Grumman B-2 bombers.
The missile division and its 2,900 employees have worked primarily for
more than a decade on the Army's workhorse multiple launch rocket
system. It recently received a contract to design the upgraded Patriot
missile. The missiles that Lockheed Martin designs in Grand Prairie are
assembled in Camden, Ark.
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