Lockheed's purchase of Grumman in danger Antitrust regulators suddenly stall buyout

March 10, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

Military and government investigators surprised the defense industry yesterday by confirming that they have potential deal-breaking problems with Lockheed Martin Corp.'s pending purchase of Northrop Grumman Corp.

The companies characterized the government as "fundamentally opposed" to the $11 billion transaction. The revelation of antitrust concerns surfaced over the weekend and reportedly angered company executives, who thought the deal was on track to close by the end of this month. Now it will be delayed until at least April 24.

The companies met again yesterday with antitrust officials, and a government spokesman said the scope of the impasse had been overstated.

"We're still meeting with them. I think that speaks for itself," said Justice Department spokesman Michael Gordon. He disputed the term "fundamentally opposed," saying, "I don't think that's correct, because we're trying to work out our concerns with the companies."

Still, news of significant objections by federal regulators who have approved one defense industry merger after another with little tinkering caught observers by surprise.

"It is a lightning bolt out of the clear blue sky," said Stuart McCutchan, managing editor of the newsletter Defense Mergers & Acquisitions.

The jolt sent Northrop Grumman stock plummeting $20.125 to $117.50. Lockheed Martin shares, on the other hand, rose 81.25 cents to close at $116.

The Bethesda-based Lockheed Martin said yesterday that it will submit a proposal responding to the Justice Department's concerns.

Announced in July, Lockheed Martin's purchase of Northrop Grumman has been seen as a dramatic coda to the consolidations that have remade the U.S. defense industry in the post-Cold War era.

But sources said top military officials, including Secretary of Defense William S. Cohen, are drawing a line at the latest buyout attempt by Lockheed Martin, which is already made up of about 20 former companies.

That view was supported by Pentagon spokesman Kenneth Bacon's statement yesterday that "we have serious concerns about the competitive effects of the transaction."

Without Pentagon enthusiasm, some experts said, the Justice Department's worries about monopolies in particular areas of technology will carry more weight. If Justice fails to reach an agreement with the companies, it can file suit in federal court to block the merger.

Electronic alarm

One source close to executives in both companies said much of the concerns involve work done by Northrop Grumman's Electronic Sensors & Systems Division in Linthicum. The former Westinghouse facility, which employs more than 7,000 workers, is a prime reason Lockheed Martin wanted to buy Northrop Grumman.

ESSD's industry-leading work on advanced radar systems would give Lockheed Martin a lock on the technology for airborne battlefield surveillance. That and ESSD's work with undersea weapons -- anti-submarine warfare and unmanned undersea vehicles -- are said to be among the top issues for antitrust and military reviewers.

The reason those issues could torpedo the Lockheed-Northrop lTC deal at a time when other giant defense mergers win clearance is that Lockheed Martin is a different sort of company than its two biggest competitors, Boeing and Raytheon.

Both of those corporations are "horizontally" integrated, meaning they build a wide variety of systems but go to outside suppliers for parts. Lockheed Martin is highly "vertical" -- it builds the systems and their components.

Northrop Grumman was set to occupy a unique position in the industry. Smaller than the Big Three but far bigger than the rest of the pack, the builder of the B-2 bomber had set itself up as a super subcontractor that would supply components to every major program of its huge cousins.

Being bought by Lockheed Martin "was not a deal that the country needed," said McCutchan, the mergers expert. "I think the reverse is true -- the country benefits from having Northrop Grumman in position as an independent supplier."

Fateful meeting

The fact that the Pentagon apparently shares that belief came as news to the leadership at Lockheed Martin.

Top executives there and from Northrop Grumman went into a Friday meeting with Pentagon brass expecting to hear that the deal was basically on track, save for some small business units that might have to be sold to satisfy antitrust concerns, sources said.

"They came out in shock," said one source close to the executives. "They feel as though they were completely blindsided. They spent the weekend trying to come up with something that would make the deal go forward and did not succeed."

After another meeting that dragged late into Sunday night, the companies issued a frustrated-sounding, two-paragraph statement in which they said they expect the government to try to block the acquisition.

Vance Coffman, chief executive officer of Lockheed Martin, and Kent Kresa, his counterpart at Northrop Grumman, said in the joint statement that they will "vigorously oppose" any such attempt.

Shareholders for both companies overwhelmingly approved the deal on Feb. 26, and the source familiar with the executives said the vote would never have gone forward if there had been any inkling of such serious concerns.

Even with the antitrust concerns, some experts said it is too early to write off the deal. "I don't think it's an arrow in the heart of the deal," said Renee Gentry, an analyst with the Teal Group.

"Lockheed Martin plays the political game very well," she said. "They've been very successful in the past in using their leverage to get things to go through."

Pub Date: 3/10/98

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