Merger subsidies inder attack Are payments crucial for efficiency, or just 'payoffs for layoffs'?

March 30, 1997|By Greg Schneider | Greg Schneider,SUN STAFF

Congress is rattling its bill hoppers at the merger-crazed defense industry, threatening to undo the payment of subsidies that opponents have labeled "payoffs for layoffs."

A Vermont congressman who last year almost halted the practice says he thinks he now has support to finish the job.

Industry executives warn that mega-deals like the impending consolidation of Boeing Co. and McDonnell Douglas Corp. might not take place if the government backs out of paying some of their costs.

The practice now lets the Defense Department reimburse merging companies for certain expenses of consolidating -- including layoffs -- in return for future savings from the more efficient new company.

Lockheed Martin Corp., the Bethesda giant that has already collected about $348 million in federal subsidies, is watching the situation with concern.

But the Linthicum unit of Northrop Grumman Corp. has a more complicated perspective. While executives there generally favor having the government pay some merger costs, sources say the company wants to make an exception for rival Raytheon Corp.'s pending purchase of Hughes Aircraft Co.

At Northrop Grumman's urging, Democratic U.S. Rep. Ben Cardin has joined four other members of the House Ways and Means Committee in encouraging Defense Secretary William Cohen to deny payments in that deal.

They charge that Hughes is a special case because the $8 billion transaction has been structured to allow parent company General Motors Corp. to avoid about $2.7 billion in federal taxes.

"There is simply no need for the Department of Defense to make tax avoidance even more profitable" by kicking in payments for restructuring costs, a letter to Cohen from the five House members says.

Beyond that, Cardin said, the Hughes purchase combines with Raytheon's pending acquisition of part of Texas Instruments to create a bad situation for Northrop Grumman.

"This [merger] is creating a competitive environment that is questionable and that affects Northrop Grumman," Cardin said. Northrop Grumman's Electronic Sensors and Systems Division employs about 7,300 workers in Linthicum, some of them in Cardin's district.

Company spokesman Jack Martin said only that "there are areas of serious concern, and we've expressed those concerns to the appropriate agencies."

But sources say Northrop Grumman is working relentlessly to convince Pentagon brass that Raytheon can't be allowed to swallow both acquisitions whole.

"It's getting pretty nasty, even in the [Pentagon]," one source said.

Northrop takes its stand

The Raytheon/Texas Instruments deal may be producing the most acrimony. Northrop Grumman's ESSD in Linthicum buys microchips from Texas Instruments for combat radar on the F-22 fighter plane -- an area of direct competition with Raytheon. Sources say Northrop Grumman would like to see that portion of Texas Instruments excluded from the acquisition.

As for Hughes, Northrop Grumman is taking a somewhat riskier strategy by arguing that the transaction should not get federal reimbursements -- a position that fits into the growing move to eliminate such payments across the board.

One industry source says Northrop Grumman is willing to take that chance because it is aghast that one crucial supplier -- Texas Instruments -- and two major rivals -- Raytheon and Hughes -- could be allowed to join forces.

The government will have to hope that Northrop Grumman is able to keep producing combat aircraft radar, the source said, to preserve competition in the nation's industrial base.

"But if it comes to pass that it's not in the interest of Northrop's shareholders to keep investing in that competition, they may exit that line of business and focus on other systems, and then the government is going to be stuck," the source said.

The possible denial of reimbursement for restructuring costs concerns others in the industry.

Lockheed Martin, whose $348 million in government underwriting would draw fire from competing companies if the program were suddenly cut off, casts the prospect in dire terms.

"If such legislation was adopted, the much-needed restructuring the U.S. defense industry would be jeopardized; overcapacity would fuel inefficiency; more jobs would be eliminated than will have been lost through consolidation; and the viability of the U.S. defense industry itself would be threatened," corporate spokesman Charles Manor said.

Billions in savings?

The Defense Department projects that its investment in the merger-created Lockheed Martin will lead to savings of at least $2.375 billion. Overall, in the last three years, the Pentagon has agreed to pay $720 million in reimbursements to a number of companies in return for expected savings of $3.95 billion, according to Defense Department figures.

The savings, though, are hard to pinpoint on particular programs. And because the money is going to multibillion-dollar corporations for transactions that often involve laying off thousands of workers, the program is easy to attack.

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