Martin, Lockheed agree to $10 billion merger

August 30, 1994|By Los Angeles Times

WASHINGTON -- Lockheed and Martin Marietta, the nation's second- and third-largest defense contractors, disclosed an agreement last night to merge the two companies, 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, Calif., headquarters will be dismantled and the new company will be based in Bethesda, Martin Marietta's headquarters city just outside the nation's capital.

Martin employs 4,300 Marylanders. In addition to the Bethesda headquarters, Martin Marietta's Maryland operations include Aero & Naval Systems, Martin Marietta Laboratories and Martin Marietta Software Services, all in the Baltimore area; and Martin Marietta Space & Aeronautic Services in Landover.

Lockheed has done work with the Goddard Space Center in Greenbelt on the Hubble Space Telescope, in which it was a principal subcontractor. The company had an important role in the repair mission and is working with NASA out of Goddard on the next Hubble servicing mission, planned for 1997.

Lockheed Chairman and Chief Executive Daniel M. Tellep, 62, initially will head the new company, and Martin 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 company 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 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 company would control as much as 20 percent of U.S. defense spending, leaving rivals struggling to match its unparalleled financial, technical and political power. Including prime 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.

A combination would give the company 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," Mr. 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." Mr. Tellep said the merger would result in significantly lower costs to the federal government.

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

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