Bad news seems to come with the good these days at Lockheed Martin Corp., where reaction was grim yesterday to new congressional legislation that both advances and threatens the company's goal of buying telecommunications stalwart Comsat Corp.
The House passed a long-awaited bill Wednesday night that clears the way for Lockheed Martin to complete its $2.5 billion purchase of Comsat. But the bill also contains provisions that company officials say make the deal less attractive.
"It could clearly and adversely affect the economic rationale for the entire transaction," said Charles Manor, a spokesman for Lockheed Martin Global Telecommunications. "If it destroys the value of the deal, then it is not in the best interests of either party [to go forward]."
Announced in September 1998, the acquisition has always been complicated. First, Bethesda-based Lockheed Martin had to win regulatory approval to buy 49 percent of Comsat, which is also based in Bethesda.
That part of the deal came through in September, with Lockheed Martin shelling out $1.2 billion in cash.
Next, the companies needed congressional intervention to complete the rest of the sale.
Comsat was created by the government in 1962 to represent the United States in the then-exotic world of international communications satellites. Because of Comsat's unique status, no company was allowed to own a majority interest in it.
The Senate passed a bill over the summer that cleared the way for Lockheed Martin to buy the whole company, but the House was reluctant to follow suit.
The House bill approved Wednesday night changes the ownership rule, but also addresses other issues related to the privatization of international satellite partnerships Intelsat and Inmarsat, in which Comsat has been the sole U.S. member.
The House and Senate versions will have to be reconciled by a conference committee. It was unclear yesterday whether the conferees will meet before Congress goes into recess next week. If not, they will meet after the first of the year.
According to Comsat, the House bill -- introduced by Commerce Committee Chairman Thomas J. Bliley Jr., a Virginia Republican -- would severely cut into the company's business.
"Effectively, it would cap our revenues and ability to provide services to our customers in a number of areas," said Jay Ziegler, Comsat's vice president for corporate affairs.
First, Ziegler said, the House bill would allow any company to bypass Comsat and invest directly in Intelsat. That is seen as undermining the 20 percent stake Comsat has built up over the years in the international partnership.
The Senate version would require other companies to pay a surcharge to Comsat for access to Intelsat.
Also, Bliley's bill would restrict the ability of Intelsat -- and, by extension, Comsat -- to provide Internet, high-speed data and interactive services, Ziegler said.
"These are precisely the high-growth areas of the global telecommunications market," Ziegler said.
Such restrictions would make Comsat much less valuable to Lockheed Martin as the aerospace giant attempts to build its new Global Telecommunications business unit, experts said.
But Todd B. Ernst, a financial analyst for Prudential Securities in New York, said he expects the kinks to be worked out in the conference committee and the deal to ultimately go through.
Not that Ernst welcomes the merger. Like many on Wall Street, Ernst has been skeptical of Lockheed Martin's venture into the relatively unstable world of global telecommunications at a time when its own finances and future are in disarray.
"We've never really liked the deal for a variety of reasons, including the price, the fit and, actually, the financial condition of Lockheed Martin," Ernst said.
Now Lockheed Martin needs to "make the best out of it that they can," he said -- which could mean either selling the telecommunications unit or bringing in a large investment partner.
Others are more optimistic. Stuart McCutchan, who publishes the Defense Mergers & Acquisitions newsletter, said the Comsat acquisition is a creative way for Lockheed Martin to seek new avenues of growth.
"Another word for stability is stagnation," McCutchan said. "There's a lot of that going around in the defense industry right now. It's a mature market, and companies are not being allowed to make the acquisitions they once made, so where are they going to go for growth?"
Lockheed Martin intends to trade its stock 1-for-1 with Comsat stock to acquire the remaining 51 percent. At the close of markets yesterday, Lockheed Martin stock bounced up 62.5 cents to close at $19.8125, while Comsat rose 25 cents to $18.75.
If Congress winds up with a bill that the companies find acceptable, Lockheed Martin will still need Federal Communications Commission approval of the purchase, a process that could take two to four months, said Manor, the Lockheed Martin spokesman.