Martin Marietta, Lockheed to Form Aerospace Giant : Business: The biggest consolidation yet in the defense industry is called a merger of equals. Its effect on Southland employees and operations is unclear.

Lockheed and Martin Marietta, the nation’s second- and third-largest defense contractors, disclosed late Monday an agreement to merge the two firms, creating an aerospace colossus with $23 billion in annual sales.

The deal dramatically accelerates the pace of defense industry consolidation, which is concentrating arms-making in the hands of a few major contractors and boosting the industry’s efficiency--but at the cost of thousands of jobs nationwide.

The deal, described as a “merger of equals,” will involve a stock swap valued at $10 billion and create a company with 170,000 employees, making this by far the biggest in a series of successively larger defense industry combinations.

Though the company will be called Lockheed Martin, Lockheed’s Calabasas headquarters will be dismantled and the new firm will be based in Bethesda, Md., Martin Marietta’s headquarters city.

It was unclear what the transaction would mean for Lockheed employees and the firm’s other operations in California. The company--an integral part of the Southland’s aerospace lore--now has about 20,000 California employees and major operations in Palmdale and Sunnyvale.

Both Lockheed and Martin Marietta have operations in Orange County, the largest of which is Lockheed’s CalComp Inc. subsidiary in Anaheim.

Lockheed Chairman and Chief Executive Daniel M. Tellep, 62, initially will head the new firm, and Martin Marietta Chairman and Chief Executive Norman R. Augustine, 59, will succeed him. Lockheed shareholders will receive 1.63 shares of Lockheed Martin stock for each of their Lockheed shares. Martin stockholders will get shares in the new firm on a one-for-one basis.

Senior defense officials have encouraged the defense industry to consolidate, hoping eventually to reduce costs and develop a healthier supply base for the government. However, one senior defense official contacted late Monday said he had not been notified of the Martin-Lockheed deal and expressed shock at its magnitude.

“This is a feeding frenzy in the defense industry to buy things,” said Jack Modzelewski, a PaineWebber aerospace analyst in New York.

The new firm would control as much as 20% of U.S. defense spending, leaving rivals struggling to match its unparalleled financial, technical and political power. Including contracts and subcontracts, it would have twice the defense sales of its nearest competitor, McDonnell Douglas.

Martin already has a dominant position in military spacecraft and launch systems and makes products for a vast number of electronics programs. Lockheed is a principal supplier of aircraft, military spacecraft and electronics.

The combination would give the firm market power in virtually every major high-technology market segment, dwarfing such traditional high-tech giants as Hughes Aircraft Co., Northrop-Grumman Corp., Loral Corp. and TRW.

Those competitors “will have to come up with some kind of a response,” Modzelewski said. “It is a contest of cost and technology, but it is also a game of political muscle and political maneuver. This allows Martin and Lockheed to play the game more effectively than everybody else.”

Tellep said the merger would result in significantly lower costs to the federal government, benefiting taxpayers, shareholders and employees.

Analysts said they expect one of the two firms to emerge as the dominant entity.

But it isn’t clear which firm would come out on top or how particular operations would be affected.

Lockheed’s CalComp unit employs 700 workers in Anaheim developing and making computer graphics peripherals such as printers and plotters that transfer electronic images to paper.

CalComp, which has seen a recent surge of demand for its equipment, could be one of the most attractive assets of the new combination, said a person familiar with the operation.

Lockheed and Martin Marietta also have consultants in Orange County on various projects.

Lockheed’s IMS subsidiary, for instance, is responsible for collecting fees along the new Foothill toll road that will eventually link San Clemente and Irvine. The company has been working on a system that allows dashboard-mounted transponders to automatically pay tolls so that motorists don’t have to stop.

Martin Marietta has about 120 employees in Santa Ana at the Orange County Data Center, which performs computer tasks like payroll and tax assessments.

Lockheed posted higher sales in 1993--$13.1 billion compared to Martin’s $9.4 billion. And at $422 million last year, Lockheed’s profits bested Martin’s $20.9 million (though Martin earned $450.3 million before an accounting charge).

But the stock market puts a value on Martin’s shares of $6.1 billion, topping Lockheed’s $4.1 billion.

Despite the size of the deal and the market power that it would create for the new firm, experts said they were not strongly concerned that it would be contested by the government on antitrust grounds. The combination would not clearly increase market concentration in any single area of defense manufacturing.

Under a recent agreement by a federal task force, a deal’s impact on the defense industrial base is an important part of evaluating defense mergers. So if the Lockheed-Martin deal is considered good for the Pentagon, it may get quick approval.

Vartabedian reported from Washington and Peltz reported from Los Angeles. Times staff writer Chris Woodyard contributed to this report.

* FLYING HIGH: Lockheed has been one of the strongest survivors of a shrinking defense industry. D1