WASHINGTON -- The government filed suit yesterday to block Lockheed Martin Corp.'s $11 billion purchase of Northrop Grumman Corp., saying the deal would cause "higher costs, higher prices and less innovation" for the military.
The Pentagon, which had encouraged a great wave of consolidations in the defense industry, agreed with Justice Department antitrust investigators that this acquisition goes too far.
"No previous merger has raised so many interrelated problems," Defense Secretary William S. Cohen said yesterday in a joint news conference with Attorney General Janet Reno.
"This is the single largest merger ever challenged," said Reno, adding that the government's interest went deeper than traditional antitrust concerns. "This merger isn't just about dollars and cents. It's about winning wars and saving lives."
The companies' chief executives vowed to fight back.
"We stand by our conviction that this merger is in the best interests of taxpayers, customers, suppliers, the companies and our employees, shareholders and the armed forces of the United States," said Vance D. Coffman of Lockheed Martin and Kent Kresa of Northrop Grumman in a joint news release.
Defense and Justice investigators have been reviewing the proposed purchase since shortly after it was announced in July.
In the lawsuit filed yesterday, the government said the combined companies "would substantially lessen, and in several cases eliminate, competition in major product markets critical to the national defense."
Many of those markets involve military electronics produced at Northrop Grumman's Electronic Sensors & Systems Division in Linthicum.
The lawsuit also contends the two companies are the only makers of radar-evading aircraft: Lockheed Martin's F-117 stealth fighter and Northrop Grumman's B-2 bomber. The government also said Northrop Grumman is the only company that can still compete with Lockheed Martin and the Boeing Co. to build new warplanes.
A source familiar with the companies and the situation said Lockheed Martin plans to file a response to the suit within the 20 days allowed by law and to ask for a trial date in the next couple of months.
The source said that the company is still prepared to negotiate, but that it expects to have a strong case -- in part because it has already offered to shed any electronics programs that amount to new lines of business, such as radar jammers.
Moreover, government documents will show the top officers of the military services support the acquisition, the companies said.
Company executives have said they first learned of the government's complaints March 6. Since then, Lockheed Martin has offered to divest more than $1 billion in businesses.
But the government wanted them to cut more than $4 billion out of the deal -- effectively all of Northrop Grumman's military electronics business.
"We've concluded that the partial remedies proposed by the parties pose significant risk and will not resolve the competitive problems of this transaction," Cohen said.
Kresa and Coffman say the divestitures the companies proposed would leave Lockheed Martin supplying less than a quarter of the defense electronics purchased by the government, "well below levels that should create antitrust concerns."
They insist Lockheed Martin needs the acquisition to stay competitive with Raytheon Corp., which became a military electronics powerhouse last year by acquiring the defense operations of both Texas Instruments and Hughes Electronics.
The government required only a token $50 million divestiture in that deal, leading industry experts to assume that Lockheed Martin would get similar treatment.
Cohen and his acquisitions chief insisted they have not changed standards in midstream.
"The decisions we reached in this review were not based on new policies. What has changed rather dramatically, though, is the [industry's] environment," said Jacques Gansler, the undersecretary of defense for acquisitions.
Gansler pointed to a chart that showed more than 50 defense companies shrinking to just five in less than a decade.
Charles F. Rule, a Washington lawyer and former head of the Justice Department's Antitrust Division, said the government's case may be strengthened by having the Pentagon as its trump card.
Instead of hearing an economist theorize that the merger will hurt competition, the judge will hear from the companies' actual pTC customer, Rule said. What's more, that customer is the military, whose needs go straight to national security.
The companies say the merger would cut enough costs to save the Pentagon $1 billion a year.
Cohen said the government took those savings into consideration, but determined that the threat of "vertical integration" in the new company could be far more costly.