Lockheed to acquire bulk of Loral Defense company will pay $9.1 billion for contractor

January 09, 1996|By Ted Shelsby | Ted Shelsby,SUN STAFF

The rapidly shrinking defense industry was rocked again yesterday when the Lockheed Martin Corp. announced that it will acquire the bulk of Loral Corp., the nation's fifth-largest defense contractor, for $9.1 billion.

The move comes nine months after Martin Marietta Corp. merged with Lockheed Corp. to form the nation's largest defense and aerospace company, and five days after Northrop Grumman Corp. agreed to buy the Linthicum-based defense electronics arm of Westinghouse Electric Corp. for $3.6 billion.

The purchase of Loral's defense electronics and systems integrations businesses will form a company with sales of about $30 billion a year, a business backlog approaching $50 billion, and more than 200,000 employees.

Norman R. Augustine, president and chief executive of Lockheed Martin, said the lure of Loral is that it gives the company a strong presence in a market where it was not considered a major player.

The acquisition will make Lockheed Martin the biggest defense electronic company in the nation with sales of between $10 billion and $12 billion annually in that segment alone, said Paul H. Nisbit, president of JSA Research Inc. in Newport, R.I.

"This was a big surprise," said Mr. Nisbit. "Nobody expected them to make an acquisition of this magnitude so soon after their mega-merger."

Defense electronics companies are in demand at this time because of the Pentagon budget cuts. As military funding declines, the Department of Defense will be spending more on electronics to upgrade old aircraft and ships than to purchase new ones.

Loral, headquartered in New York, had sales of $6.7 billion last year and employs 38,000 workers.

Loral is best best known for its production of military electronic equipment, including radar detection and jamming devices used the F-18 fighter plane, components for the advanced Patriot missiles, targeting and navigation equipment for fighter planes, and military computers and software.

It has about 5,000 workers in the Washington area, including more than 2,000 at its Federal Systems division, next door to Lockheed Martin's Bethesda headquarters.

Loral's satellite and telecommunications businesses are not included in the purchase. They will be reorganized into a new company, called Loral Space and Communications Corp., in which Lockheed Martin will buy a 20 percent stake for $344 million.

It will be a publicly traded company that will begin with $700 million in cash and no debt.

Under terms of the acquisition, Loral shareholders are to receive $38 in cash for each share held through a tender offer set to begin no later than Friday. They will also receive one share of stock in Loral Space for each share of Loral stock currently held.

The deal has been unanimously approved by the boards of directors of both companies.

Bernard L. Schwartz, chairman and chief executive of Loral, will become vice chairman of Lockheed Martin and be added to the board of directors. He will also serve as chairman and chief executive of the new space company.

Mr. Schwartz, who turned 70 recently, said he will also invest $10 million of his own money in Lockheed Martin.

Mr. Augustine said the negotiations with Loral started in mid-September when he and Mr. Schwartz had a chance meeting in a hallway at the Pentagon.

He said the negotiations with Loral were also a factor in Lockheed Martin decision not to pursue the purchase of Westinghouse Electric Corp.'s defense electronics division based in Linthicum.

"We had conversations with Westinghouse, but those talks didn't seem to go anywhere," Mr. Augustine said. "We looked at Westinghouse, but Loral fits us much better."

Mr. Augustine said he has been impressed with Loral's rise in recent years from a small company with sales of about $20 million to one of the nation's leading defense companies.

By separating the space- and satellite-related parts of Loral, Mr. Augustine said the acquisition is not likely to meet federal antitrust restrictions.

The acquisition is still subject to the approval of the Justice Department's antitrust division.

"That shouldn't be a problem," Mr. Nisbit said. "There is very little overlap among the two companies, maybe 3 or 4 percent."

It is also contingent on the tendering of at least two-thirds of Loral's outstanding stock.

To safeguard the agreement, Loral announced that it has adopted a stockholders rights plan -- a so-called poison pill -- that is designed to deter any unwanted attempts by other companies to acquire Loral.

A bank group consisting of Morgan Guaranty Trust Co. of New York, Bank of America and Citicorp USA, has agreed to lend Lockheed Martin $3.5 billion for the merger. The banks are also arranging a $10 billion line of credit for the purchase of the Loral stock.

The stock market gave its blessing to the transaction. Loral's share soared 24 percent percent, or $8.75, to close at $45. It was the most actively traded stock in the New York Stock Exchange.

Lockheed Martin, the sixth most active stock, rose $2.125, to close at $80.25.

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