Lockheed, Northrop deal isn't dead yet Antitrust allegations don't hold up, say sources, analysts

Companies hope to win suit

But sophistry aside, Pentagon's opposition is enormous obstacle

Aerospace

March 30, 1998|By Greg Schneider | Greg Schneider,SUN STAFF

Lockheed Martin Corp.'s fight against the federal government to purchase Northrop Grumman Corp. might not be as hopeless as analysts have warned, say several sources familiar with the companies' legal strategy.

The Bethesda company's lawyers are compiling responses to the antitrust lawsuit the Justice Department filed last week against the $11 billion deal.

The fact that the Department of Defense also opposes the merger is an enormous obstacle, because the companies were counting on Pentagon support.

While most analysts on Wall Street and in the industry are composing epitaphs, a few voices say the companies have persuasive responses to the government's concerns.

"If the shareholders are patient enough, I think that these companies can probably prevail on the merits," said Loren B. Thompson, executive director of the Alexis de Tocqueville Institution, a moderate-to-conservative think tank in Virginia.

Interviews with several sources indicate the companies' strategy is taking shape as follows:

Monopolies

The government argues that the new company would have monopolies in radar, missile warning systems, anti-submarine warfare systems and radar jammers.

Antitrust officials want Lockheed Martin to divest business units with annual sales of more than $4 billion, or about half of Northrop Grumman's yearly revenue.

But, the companies say, the value of the programs on the government's list amount to a "low single-digit percentage" of the $37 billion in sales of the combined firms, far below the amount the administration wants divested. What's more, sources close to the company say, Lockheed Martin already has offered to divest all the programs that raise monopoly concerns.

Vertical integration

One of the biggest issues for both the Justice Department and the Pentagon is vertical integration, which is a company's ability to be its own supplier.

If Lockheed Martin buys Northrop Grumman, the government argues in its lawsuit, the company will have "strong economic incentives" to not only reject buying components from outsiders, but also to refuse to sell components to rivals.

Lockheed Martin has offered to sign consent decrees aimed at avoiding such conflicts. It would construct organizational "fire walls" to separate parts of the company that either do business with rivals or compete with outsiders for subcontracts from Lockheed Martin.

Company executives insist that such steps are already successful. For instance, Lockheed Martin is competing with Boeing Co. to build the Joint Strike Fighter warplane, yet supplies electronics to Boeing's entry in the race, the executives say.

Lockheed Martin also buys computers from Raytheon Corp. for the F-16 fighter, and supplies Raytheon with computer circuits designed to withstand radiation.

Aircraft

The industry's mergers have left Boeing and Lockheed Martin as the nation's primary builders of high-performance military airplanes.

The government insists Northrop Grumman is still a competitor in this vital area. And because the field requires so much expertise and expense, no other competitor is likely to emerge.

But Kent Kresa, Northrop Grumman's chief executive, says the company has decided against being a prime contractor of any military aircraft

Northrop Grumman has not designed a successful fighter plane in more than 25 years, and the last time it was chosen as prime contractor for a major warplane was for the B-2 bomber in the early 1980s.

"Northrop Grumman will not be in a position to compete with Lockheed Martin or Boeing as a prime contractor," Kresa said.

Stealth technology

The government's lawsuit warns that the merger dangerously concentrates radar-evading stealth technology in the hands of one company. The technology is now being used only in Lockheed's F-117 fighter and Northrop's B-2 stealth bomber.

The companies deny they would have a corner on the market. Boeing is developing its own stealth techniques for the Joint Strike Fighter, and industry experts note that other companies are working on the technology in a number of classified military programs.

Logicon

Northrop Grumman last year bought Logicon, a company that has a $250 million contract to help evaluate how other companies perform on the Navy's AEGIS ship electronics program -- for which Lockheed Martin is the prime contractor.

The government's lawsuit says it would be a conflict of interest for Logicon to continue such work as a part of Lockheed Martin.

A source familiar with the companies' position argues that Logicon, with yearly sales of just over $600 million, is too small to be considered a deal-killer.

"It's a bit player," the source said. "That's just raising the noise level."

Change in policy?

Defense Secretary William S. Cohen insists the administration's opposition to the Lockheed-Northrop marriage does not represent a change in its policy of fostering consolidation in the defense industry.

The Pentagon considers each merger on its own merits, he said, and has never encountered one with so many problems.

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