Lockheed deal running out of time U.S. gives company week to meet concerns on Northrop purchase

Last proposal 'insufficient'

Antitrust suit likely

firms' original plan called 'obviously dead'

Mergers

March 19, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

The government will give Lockheed Martin Corp. about one more week to come up with a way to salvage the purchase of Northrop Grumman Corp. before going to court to block the deal, officials said yesterday.

Observers had expected the Department of Justice to go ahead and file an antitrust suit yesterday, and the decision to hold fire didn't halt spreading pessimism about the $11 billion merger.

The companies "are now examining whether they think they have any options for going forward with the deal," said one source close to executives at both companies.

Wall Street remained gloomy. Northrop Grumman shares fell $2.50 to $107.50, and Lockheed Martin dropped 81.25 cents a share to $115.5625.

The Justice Department rejected a plan Lockheed Martin submitted Monday for shedding about $1 billion worth of electronics-related businesses, sources said. That was about twice what the company had planned to unload to win approval for the deal, but "it was insufficient," a government official said.

Secretary of Defense William S. Cohen, speaking to reporters yesterday on Capitol Hill, said the companies "are going back to the drawing board for the next week [to] see what can be resolved."

Justice and Defense officials told the firms March 6 that they have serious concerns that the marriage of Bethesda-based Lockheed Martin and Los Angeles-based Northrop Grumman would harm competition in the defense industry.

Specifically, the resulting $36 billion company would have a dominant position in areas of military electronics such as radars, electronic jamming devices and missile guidance systems.

The government wants the companies to shed virtually all of Northrop Grumman's electronics business, amounting to some $4 billion in annual sales. Lockheed Martin is adamant that it wants to keep the Electronic Sensors & Systems Division in Linthicum, which is the country's leading maker of airborne radars.

Sources said the Defense Department, eager to realize the $1 billion a year in savings that executives have promised from the combination, is beginning to waver on its initial opposition to the deal. But the Justice Department's momentum may be too great to stop.

"We're working together on it, but we're not going to agree on everything," acknowledged one government official.

Spokesmen at Justice and the Pentagon declined to comment. Lockheed Martin spokesman Charles Manor repeated the companies' frequent refrain: "We're still talking, and we talked // again today."

But the source close to company executives said Monday's counterproposal was about as far as the companies can cut their holdings and still feel that the deal makes financial sense. If that is insufficient, then "the deal as originally contemplated is now obviously dead," the source said.

What remains is for executives to decide whether a smaller-scale marriage is worth doing.

The government official said the one-week deadline could turn out to be shorter. "It could be less, because things are very fluid. But the thinking at this time is about a week."

Lockheed Martin -- already the Pentagon's top supplier and builder of the F-16 and F-22 fighter jets and the C-130J transport plane -- wanted to acquire Northrop Grumman primarily to get its highly regarded military electronics business, especially ESSD.

Without that, it remains unclear whether Northrop Grumman's other businesses -- such as building the B-2 stealth bomber and supplying parts to Boeing Co. commercial jetliners -- are as attractive. What's more, such a major restructuring of the deal would require further approval from shareholders, who approved the original plan Feb. 26.

But some experts are holding out hope that the deal will go through. "I still think at the end of the day, rational minds will prevail and the government will understand what's at stake here," said Brett Lambert of the defense consulting firm DFI International.

The Pentagon has been counting on billions in savings from industry consolidation to help it modernize forces during tight budgetary times. A holdup of the Lockheed Martin-Northrop Grumman deal, after years of approving every merger that came down the pike, would set a precedent that jeopardizes those savings, Lambert said.

"I think the government has put itself in an incredibly precarious position, both from a business standpoint and also a legal standpoint," Lambert said, adding that government antitrust reviewers should have made known such serious objections long ago.

"The fundamental question that has to be answered," Lambert said, "is how many pounds of flesh do they want?"

Pub Date: 3/19/98

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