THE LOCKHEED-MARTIN MERGER : Powerhouse in the Making : Analysts, Investors Cheer, but Its Size Raises Questions

WASHINGTON â€”  The financial, technical and political power created by the proposed $10-billion merger of Lockheed Corp. and Martin Marietta Corp. left defense industry experts stunned Tuesday as they began to assess its impact.

While they praised the deal for its potential to improve efficiency in the defense industry, they also fretted that it would concentrate too much potency in a single corporation.

Investors gave a strong vote of confidence to the combination, wildly bidding up shares of the stocks Tuesday on the presumption that the new Lockheed Martin Corp. would capture leadership of the defense industry and eclipse rivals with its advantages in cost and technical performance.

“We have been described as survivors, but we aspire to more than mere survival,� said an ebullient Lockheed Chairman Daniel M. Tellep. “This merger is the forward look of two visionary companies.�

But the powerful amalgamation also raises difficult issues for the federal government and for the rest of the defense industry, which must figure out whether the size of the new company gives it unique advantages in future competition.

Lockheed Martin--double the size of its nearest competitor--would control as much as 20% of the Pentagon’s research and acquisitions budget and hold enormous regional political sway. It would employ thousands of people in each of a number of states--California, Texas, Florida, New York, New Jersey, Colorado and Pennsylvania--whose congressional delegations could easily control any vote on future weapons systems.

Tellep rejected those concerns, saying the new company would be no bigger than aerospace rivals such as Boeing Corp. or United Technologies Corp., and that he would not have proposed the merger if he had any concern that it might not survive antitrust scrutiny.

Analysts said they expect the deal to pass muster because there is no major product line in which the new firm would be the sole supplier to the Pentagon and because the Pentagon has been hounding the defense industry for just such consolidations.

But some critics were not so sanguine.

“When Old Man Eisenhower warned us about the undue influence of contractors, he had nothing in mind like this giant corporation,� said Eugene Carroll, director of the Center for Defense Information, a liberal think tank composed of former military officers. “They will have enormous clout in Washington, and it raises concern over the integrity of the political process.�

Aerospace analyst Joseph Campbell of Lehman Bros., while endorsing the merger, said the size of the deal may prompt defense officials to be more cautious than usual in their evaluation.

Deputy Defense Secretary John Deutch, in Kingston, Jamaica, seemed less than effusive. He said the Pentagon will take several weeks to evaluate the proposed merger.

“There are certain to be very serious antitrust questions to be examined,� Deutch told wire service reporters. Still, he added, “it shows the trend that (Defense Secretary) Bill Perry and I have been expecting, and indeed encouraging to an extent.�

Another dark side of the deal would be the inevitable job losses.

So far, executives have acknowledged only 100 to 200 job cuts at Lockheed’s headquarters in Calabasas, which would be closed and sold.

Tellep and Martin Marietta Chairman Norman R. Augustine said Tuesday that the deal will reap hundreds of millions of dollars in savings. Such savings are typically achieved in mergers through the surgical removal of thousands of employees, though the executives insisted that a more efficient merged company would be more robust than their current operations.

“Three full factories are better than six half-full factories,� Augustine said.

Defense industry executives were attempting to assess how the merger would change the stakes in the industry--in particular, whether it would compel a new round of consolidations that would deprive Lockheed Martin of the advantage of size.

Yet some experts dismissed the notion that size alone would give the new firm special clout in specific markets where it might not be bigger than any of its competitors.

“Everybody is treating this like General Motors and Ford are merging, but it is really two diversified manufacturers,� said Robert Paulson, a McKinsey & Co. aerospace consultant.

But if it is unlikely that Martin’s technical prowess would give Lockheed’s aircraft divisions an advantage when they compete with Northrop or McDonnell Douglas for a prime contract, some Pentagon officials wonder just what benefit the merger holds for the Pentagon.

“It’s big, but what else?� asked one defense procurement official. “The next step is for them to buy Utah.�

Tellep would not say specifically how the merger would cut costs, overhead and unused factory capacity. The only sector with obvious overlap between Lockheed and Martin is the satellite business.

John Harbison, an aerospace expert at Booz Allen & Hamilton, said the aerospace industry is not even close to the end of consolidations, because major players such as Boeing, Rockwell International and McDonnell Douglas have yet to act.

The merger that caught everybody by surprise was born on a Saturday afternoon five months ago, Tellep said, when he decided to call Augustine and suggest that the firms merge on equal terms.

The deal got started just as Martin was backing away from a bidding war with Northrop for Grumman. Over the next several months, the two firms held a succession of detailed discussions, examining their products, technologies, facilities and cultures.

Since both firms had made major acquisitions in the past, neither had the sort of intense and unique culture for which aerospace firms such as Northrop and Hughes Aircraft have long been famous. But they did share common emphases as integrators of major high-technology systems, including some of the most sophisticated satellites used by the government. What resulted was an effort to construct a deal that would make neither company top dog.

Tellep would be chief executive, but Augustine would succeed him. Lockheed’s name would be first; Martin’s headquarters would be the new main office. Two major sectors would be headed by Lockheed executives and two by Martin executives. Shares would be apportioned by a ratio that would preserve each set of shareholders’ respective position in terms of their claims to future earnings.

Tellep and Augustine said the combined companies would generate $4 billion to $5 billion of free cash over the next five years. The merger would not add debt. And already, shareholders have reaped about $700 million in value: Lockheed shares surged $10.75 Tuesday to close at $76.75; Martin shares rose 50 cents to close at $48.875 in New York Stock Exchange trading.

Mapping Out a Merger

The new Lockheed Martin Marietta will be an aerospace giant, with 170,000 employees and hundreds of facilities spread across more than 20 states. The new company will close Lockheed’s headquarters in Calabasas. Overlapping space systems, satellite and electronics operations also are among the likely candidates for cut backs and consolidation.

WHERE LOCKHEED AND MARTIN MARIETTA OVERLAP

Points indicate operations with potential for consolidation.

Lockheed: TEXAS, SO. CAROLINA, NEW HAMPSHIRE

Martin Marietta: NEW MEXICO, LOUISIANA, NEW YORK, MASSACHUSETTS, PENNSYLVANIA, MARYLAND, VIRGINIA, KENTUCKY, TENNESSEE, NO. CAROLINA

Both companies: CALIFORNIA, COLORADO, OHIO, NEW JERSEY, GEORGIA, FLORIDA

* Sunnyvale, Calif.: Lockheed Missiles & Space Co.

* Denver: Martin Marietta Astronautics (satellites, launch systems)

* Valley Forge, PA.: Martin Marietta Astro Space (satellites, military spacecraft)

* E. Windsor, NJ.: Martin Marietta Astro Space (satellites, military spacecraft)

Domestic geographic employment

California 27,600 Colorado 7,300 Florida 15,500 Georgia 12,500 Kentucky 2,100 Louisiana 2,400 Maryland 4,300 Massachusetts 2,200 New Hampshire 4,700 New Jersey 7,700 New Mexico 8,700 New York 8,500 North Carolina 2,000 Ohio 3,100 Pennsylvania 7,400 South Carolina 1,200 Tennessee 18,600 Texas 19,500 Virginia 4,000

MAJOR CALIFORNIA FACILITIES

LOCKHEED

Calabasas: Headquarters

Sunnyvale: Missiles and Space Co. Formtek (information management systems), Technical operations

Palmdale: Advance Development Co. “Skunk Works�

Ontario: Aircraft Services

Burbank: Lockheed Air Terminal

Anaheim: Calcomp (computer printer and plotter maker)

MARTIN MARIETTA

San Diego: Advanced Development Operations

Sources: Lockheed Corp.; Martin Marietta Corp.

Researched by JESUS SANCHEZ / Los Angeles Times

Defense Stocks Surge

How leading defense stocks reacted to news of the Lockheed-Martin Marietta merger:

52-week Tues. Tues. Stock high-low close change Boeing 50 1/8-35 3/8 45 1/8 unch. E-Systems 48-36 3/8 42 1/2 +1 5/8 General Dynamics 49 5/8-38 44 7/8 + 3/8 Litton Indus. 40-25 3/4 39 1/4 +1 3/4 Lockheed 72 3/8-58 3/4 76 3/4 +10 3/4 Logicon 31 1/4-25 1/8 30 1/8 + 1/4 Loral 42 3/4-29 41 1/8 + 3/4 Martin Marietta 49 1/8-40 3/8 48 3/4 + 1/2 McDonnell Douglas 124 7/8-78 118 7/8 +1 3/8 Northrop Grumman 45 7/8-33 3/8 44 +1 3/8 Raytheon 68 7/8-59 1/8 67 1/2 +1 1/8 Rockwell 44 1/8-33 36 1/8 +1

* LOCAL FALLOUT: The merger’s impact in California. A1

* RICH HERITAGE: Lockheed’s place in aerospace lore. D3

* STEADY HAND: How Daniel Tellep guided Lockheed. D3