The big got humongous yesterday when defense industry powerhouse Lockheed Martin Corp. announced an $11.6 billion deal to buy Northrop Grumman Corp.
The surprise transaction tested the limits of a defense industry reconfiguration that had already worn out most adjectives, as the nation's crop of prime military contractors has dwindled to three in the past few years.
The new company will have sales of about $37 billion and nearly 230,000 workers -- an aerospace colossus second only to the pending merger between Boeing Co. and McDonnell Douglas Corp. in overall size, but No. 1 in defense contracting.
"It's another historic day in the annals of the U.S. aerospace and defense industry," said Norman R. Augustine, who will step away from the mammoth company he created when he retires at the end of the month as Lockheed Martin's chief executive officer.
Augustine has cooked up a gigantic acquisition each of the past three years, partnering Martin Marietta with Lockheed in 1995 and buying most of Loral Corp. last year. He and Northrop Grumman President and Chief Executive Kent Kresa pioneered the drastic, post-Cold War consolidation of the defense industry -- Kresa even outbidding Augustine to acquire Grumman Corp. in 1995.
Now their joint company will stand with Boeing and the proposed combination of Raytheon Co. and the defense operations of Hughes'Electronics Corp. and Texas Instruments Inc. as kings of the field.
Kresa said yesterday that he remains convinced Northrop Grumman could have thrived as a stand-alone company, smaller than the giant prime contractors but bigger than any other second-tier player.
But Augustine came to him during the second quarter with "a vision of the future, which, as I looked at it, was certainly an alternate positive way for the company to go forward," Kresa said. What's more, he added, the deal was a boon for Northrop Grumman shareholders.
"It really came down to shareholder value, as well, and in that regard I'm very pleased with the transaction," Kresa said.
Lockheed Martin -- which will consolidate Northrop Grumman's California headquarters into its own in Bethesda -- will pay 1.1923 shares of its stock for every share of Northrop Grumman stock and will assume more than $3 billion in debt. Lockheed Martin President Vance D. Coffman will succeed Augustine as chief executive of the new Lockheed Martin and Kresa will take a seat on the board of directors.
Wall Street rewarded the smaller company by boosting its shares up $21.125 to close at $110. Lockheed stock fell $4.875 to close at $99.125. Augustine said the deal should not affect earnings next year and should begin adding value in 1999.
Whether Northrop Grumman should find a buyer had been an industry water-cooler issue for months, ever since electronics rival Raytheon's victorious bids for Hughes' and Texas Instruments' defense operations created a new landscape for the industry: three companies at the top -- Boeing, Raytheon and Lockheed Martin -- with Northrop Grumman on a level by itself a few steps down.
Many surprised by deal
Even those who could see affinities between Lockheed Martin and Northrop Grumman, though, were surprised by yesterday's announcement.
"I thought they would wait until Boeing and everything kind of died down," said Brett Lambert, a defense consultant with DFI International. Boeing won clearance this week from the Federal Trade Commission for its merger with McDonnell Douglas, but ** still faces a sticky review by the European Union.
The secrecy surrounding the deal was almost absolute, with some insiders learning about it only last weekend and others not until yesterday morning.
"These are the two companies in the world that are best known for stealth," Augustine quipped, referring to the fact that his company's F-117 and F-22 and Northrop Grumman's B-2 bomber are the only production aircraft in the world that use radar-evading stealth technology.
Getting Northrop Grumman will significantly increase Lockheed Martin's expertise in military electronics, the fastest-growing segment of the defense industry, and will bring a sizable new chunk of business building parts for Boeing commercial airliners.
Both fields affect businesses in the Baltimore area. Northrop Grumman's premier electronics arm is its Electronic Sensors & Systems Division in Linthicum, and Lockheed Martin's main manufacturing center for aircraft parts is its Aerostructures plant in Middle River.
James G. Roche, vice president and general manager of Northrop Grumman's ESSD, said his shop already had so many close ties to Lockheed Martin -- building radars, for example, for the bigger company's F-22, Joint Strike Fighter and C-130 aircraft -- that it had already discussed forming deeper partnerships.
And Ray Roquemore, vice president and general manager at Middle River, said the tighter ties to Northrop Grumman would give him leverage to win more work building commercial aircraft parts.