Northrop units may go on block Regulators expected to demand exclusions in Lockheed purchase

Deal nears completion

Linthicum electronics operation is seen as divestiture candidate

Defense industry

March 06, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

Some Northrop Grumman workers in Maryland could find themselves left out of the deal when Lockheed Martin Corp. completes its acquisition of their company, industry experts say.

Most industry analysts believe it is inevitable that federal antitrust regulators will make Lockheed Martin sell parts of some units to win approval of its $11 billion purchase of Northrop Grumman, which is expected to be completed by the end of this month.

The business areas that Pentagon and Justice Department reviewers are most concerned about involve some of the work done at the Northrop Grumman Electronic Sensors & Systems Division (ESSD) in Linthicum, analysts say.

"Yes, I think there is a good chance that something or another there would be sold" as a prerequisite for closing the deal, said Stuart McCutchan, who publishes the newsletter Defense Mergers & Acquisitions.

However, McCutchan and other analysts predict that any divestiture the Justice Department requires will be small.

Overall, speculation puts the value of potential divestitures -- involving parts of ESSD or any other section of Northrop Grumman -- at anywhere from $20 million to as much as $500 million. Given that the new Lockheed Martin will have annual sales of about $36 billion, even the high end is considered negligible.

Regulators will "do enough so they can make a statement that this was the biggest divestiture that was required of any company, but they'd only have to get up in the $50 [million] to $60 million range to be able to do that. Which would be a drop in the bucket," said financial analyst Paul Nisbet of JSA Research Inc.

Shareholders of both companies overwhelmingly approved a deal on Feb. 26 that would convert each Northrop Grumman share to 1.1923 shares of Lockheed Martin. The companies said they expected regulators to approve their deal in the first quarter, which ends March 31.

"We're in constant contact [with regulators] and in the process of completing what has been a very thorough and professional and comprehensive review," said Lockheed Martin spokesman Charles Manor.

The Justice Department declined to comment on the process. Antitrust officials, with involvement from the Pentagon, are examining the combination for areas where the new Lockheed Martin might have an unpalatable monopoly on technology.

When Raytheon bought General Motors Corp.'s Hughes Electronics, for instance, it had to spin off two defense electronics businesses with combined sales of about $50 million -- to date, the largest divestiture required in a defense merger.

The combination of Lockheed Martin and Northrop Grumman will tie up expertise in a long menu of key defense areas. In a recent analysis, McCutchan's newsletter found that the new Lockheed Martin will rank first in 16 of 23 market areas, and rank second in three others. In no area will it rank lower than fourth.

Many experts say antitrust officials will give most scrutiny to areas involving electronic warfare, which includes jammers that foil or dupe an enemy's radar system. Lockheed Martin and Northrop Grumman account for much of the nation's capability in that area.

ESSD builds a number of such systems, but so does the company's Electronics & Systems Integration Division (ESID), based in Florida.

Several analysts said they were keeping their eye on a small unit of the ESID division in Rolling Meadows, Ill., as a possible divestiture candidate.

Brett Lambert, a defense consultant with DFI International, said the area of advanced early warning radars has also received scrutiny from antitrust investigators. That would involve systems such as the AWACS planes that survey hostile airspace and the JSTARS planes that survey battlefields.

The local division builds radars for both systems, which are the only ones of their type built in the United States. "That's an area of some concern, but I don't think it's too serious," Lambert said.

McCutchan said airborne radar in general is an area regulators are scrutinizing. ESSD is probably the world leader in such systems, building advanced radars for the F-16, F-18 and F-22 fighter planes, to name a few.

One source said federal investigators are also concerned about nonairborne radars and undersea weapons -- both specialties of ESSD. Several experts agreed that the Ocean Systems unit of ESSD, a top player in the esoteric and secretive world of unmanned undersea vehicles, could be the kind of piece Lockheed Martin will have to pare off. "We're talking individual bits of technology, but I expect the collective total is not going to be very big," said analyst Wolfgang Demisch of B. T. Securities.

Regulators "haven't blinked" at reducing competition in other areas, Demisch pointed out, noting that only General Dynamics builds tanks, only Raytheon builds air-to-air missiles and the Navy has set up a noncompetitive system for building submarines. For the Justice Department to suddenly get worried about such situations with the Lockheed Martin deal, he said, would be a sharp departure.

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