Martin Marietta May Cut 2,400 Jobs in Purchase

As part of its pending deal to buy General Dynamics’ space systems business, Martin Marietta has told the Defense Department that it may eliminate 2,400 jobs by moving the San Diego operation to Denver, The Times has learned.

The giant aerospace firm is also seeking extraordinary government concessions during the next 10 years that would reimburse the firm for more than the $208-million cost of the acquisition, arguing that the deal will also save the Pentagon money, internal Defense Department documents show.

Critics say that what Martin Marietta has proposed amounts to asking U.S. taxpayers to subsidize the closure of a key aerospace plant in Southern California at a time when the region can least afford it. A big winner would be the shareholders of General Dynamics.

If the government agrees to share the cost savings, it would set an important precedent as the defense industry confronts its difficult future. Historically, the government has claimed virtually all cost savings that occur on military programs. The issue is hardly ever raised, however, because defense costs have seldom gone down.

The loss of the space systems operation would deal another sharp blow to California’s aerospace industry, which has lost dozens of critical aerospace plants in recent years. For San Diego, struggling through the impact of military base closures, it would mark the loss of one of the city’s remaining major aerospace firms.

Martin Marietta’s brash proposal is being made by Chairman Norman Augustine, a highly respected expert on defense procurement issues. If the proposal had come from anybody else it might have been rejected out of hand. But Augustine carries perhaps more clout than any chief executive in defense and he was considered last month for the job of defense secretary.

Martin Marietta officials have acknowledged that they are weighing an option to move production of the Atlas rocket system from San Diego to Denver, but insisted that they have made no decision.

Indeed, they say another option is moving the operations from Denver to San Diego--a possibility most experts consider remote. Under terms of the proposed sale, Martin Marietta has not even agreed to acquire the General Dynamics plant in San Diego.

Based on the pattern of many aerospace consolidations since 1985, it appears all but certain that the company will leave California, according to one Defense Department official who asked not to be identified.

At a series of meetings in early February in San Diego, Martin Marietta officials told Pentagon administrators and auditors that the acquisition will reduce government contract costs by $450 million in the next decade, and Martin Marietta wants 50% of those savings, according to Pentagon documents obtained by The Times. (In addition to the plant consolidation, the savings would also come from combining the companies’ launch pad operations at Vandenberg Air Force Base and Cape Canaveral.)

Government officials who attended those meetings came away with the understanding that the savings would be achieved by shutting down the San Diego plant, moving about 200 employees to Denver and laying off the other 2,200 employees. But a Martin Marietta spokesman said that was only one of several options raised during the meeting.

The precipitous downturn in defense procurement has left the industry saddled with massive overcapacity. The industry has been slow to cut back, in part because federal regulations have provided little profit incentive for major companies to merge or shut down, according to investment industry experts.

In a July policy memo, Undersecretary of Defense John Deutch said the government should be willing to pay for the restructuring costs of industry that arise in a merger or acquisition if the government benefits.

The Martin Marietta proposal goes much further in asking for a sharing of future cost savings.

Martin Marietta has until mid-March to obtain government approvals for the deal, which was announced in December. Thus, the aerospace firm, based in Bethesda, Md., wants government approval of its controversial proposal in the next 30 days.

“The bottom line on this deal,” said one government official opposed to it, “is that General Dynamics shareholders are going to get rich, Martin Marietta is going to get a company for free, and 2,200 workers are going to lose their jobs.”

However, a New York investment executive said that if the government turns down the Martin Marietta proposal it would represent a serious blow to future defense consolidation. The compelling need for cutting defense industrial capacity demands this kind of flexible approach, he said.

Martin Marietta has agreed to pay General Dynamics $10 million if the deal fails and has insisted that it will not go through with the deal without concurrence by the government to share the cost savings.

According to Pentagon documents obtained by The Times, defense officials have not made up their minds about the proposal.

“The proposed shared savings clause is considered unique,” according to one Defense Department memo. “Martin Marietta is pursuing policy level decisions through formal briefings with senior (Department of Defense) and Air Force personnel.” Defense officials turned down requests for interviews.

LeRoy Haugh, vice president of the Aerospace Industries Assn., said his industry trade group supports the concept of the government sharing cost savings that result from mergers.

“This is the first of its kind,” Haugh said. “I am not aware of any other case where the same set of circumstances have come up. In principle, we would support it.”

Rather than buying the plant in San Diego, Martin Marietta is taking out a two-year lease. The arrangement is similar to one that General Dynamics struck with Hughes Aircraft on the sale of the missile business in Pomona, which resulted in Hughes shutting down the Pomona operation and taking the business to Arizona.

San Diego Mayor Susan Golding said this week that she does not believe Martin Marietta has decided to move, based on discussions that city officials are having with the company. Although San Diego has higher housing costs than Denver, its workers’ compensation rates are now lower than Denver’s.

San Diego submitted a proposal to Martin Marietta last week, outlining a case for keeping the operation in the city. Golding declined to say whether the city has offered any concessions.

Even if Martin Marietta has decided to leave San Diego, it would be precluded from saying so because it does not yet own the General Dynamics business and any announcement would make it subject to federal plant closing laws, the investment executive said.