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THE LOCKHEED-MARTIN MERGER : Results as Bold as the Idea? Time Will Tell

If giant corporations were interchangeable parts, the success of the big Lockheed-Martin Marietta merger would be assured.

But as even big companies are living organizations with distinct personalities, we’ll have to wait two years or so to see if Lockheed and Martin’s execution of their merger will be as bold as the concept that drove them together.

The merger results from forces driving the post-Cold War aerospace-defense industry, and it offers an insight into the complexity and importance of what is happening for companies, their employees and stockholders and for the military preparedness of the United States.

Sure, the industry has been changing since the fall of the Berlin Wall in 1989 and even before that, as fewer Pentagon contracts separated winners from losers among defense companies.

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But the Lockheed-Martin deal is a new order of magnitude, creating a company with $23 billion in sales. And coming only five months after the merger of Northrop and Grumman, it’s only natural that the first question raised Tuesday was: Who’s next?

Defense analysts in think tanks around Washington wondered aloud whether McDonnell Douglas, a giant itself with $14.7 billion in sales, 60% of them from defense, would need to seek a partner. The answer is not right away, but quick answers only hint at larger events.

Defense spending keeps going down, from 6% of the national economy in the mid-1980s, to 4% this year and 3% or so in the next few years--levels not seen since the aftermath of World War II.

As defense budgets diminish, so inevitably do the number of companies the budget can support. The Pentagon is cutting its roster of suppliers. “We are on a course to reduce the number of major contractors,” Keith R. Hall, an assistant defense secretary, told Congress last year.

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Hall was referring specifically to suppliers of military satellites--and the Lockheed-Martin deal unites two major participants in that business.

Merger action in other defense fields is inevitable. “There are four helicopter makers--McDonnell Douglas, the Sikorsky division of United Technologies, the Bell division of Textron and Boeing,” says analyst Richard Bitzinger of the Defense Budget Project, a Washington research firm. “The Pentagon will want to winnow that to two suppliers at most.”

But mergers achieve efficiencies only if company managements do the tough follow-up work of closing duplicate facilities--combining departments, deciding on a single factory to do the work of two or more. And in that respect, Wall Street’s reaction Tuesday to the Lockheed-Martin deal was revealing.

Lockheed stock shot up $10.75 a share, but Martin Marietta stock edged up only 50 cents, after being down almost $2 a share earlier in the day. Wall Street’s thinking is that Martin Marietta management, led by Chairman Norman Augustine, 59, may not be able to realize the full potential of the merged Lockheed Martin company.

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The merged company, at 170,000 employees, initially will have lower sales per employee--a measure of efficiency--than other major defense firms. It will be imperative that operations be combined and employees be retired or laid off--never a pleasant prospect but a necessary one if the business is to survive.

Lockheed, under Chairman Daniel Tellep, 62--who will lead the new company initially--took tough measures in the last five years to whip itself into shape. It is one of four remaining military aircraft producers--out of seven years ago--and, with its fabled “Skunk Works,” one of the world’s premier aerospace technology organizations.

The challenge will be for Augustine to make hard choices at the more complex merged company, while preserving Lockheed’s research capabilities. And some analysts are skeptical, claiming that Martin Marietta has been slow to achieve gains in efficiency from the General Electric aerospace business it acquired in 1993.

“It will take two years to see how the merger works,” says Robert Paulson, head of aerospace consulting for McKinsey & Co., “but it could be a much stronger company.”

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What does the creation of an industry behemoth mean to Lockheed Martin’s competitors? For the answer, you have to define competitors product-line by product-line, say the experts. Even though Lockheed is an aircraft manufacturer, the new Lockheed Martin will be predominantly a defense electronics firm, says John Harbison, chief aerospace consultant for Booz, Allen & Hamilton. He’s referring to both companies’ satellite communications products, some of them top-secret.

The distinction is meaningful for McDonnell Douglas, which is mainly a fighter plane producer--as well as a commercial airliner maker. The Lockheed Martin merger doesn’t threaten McDonnell directly, although in the defense industry’s battle for survival, the St. Louis-based company may have to form a partnership with Northrop Grumman or Boeing, the big commercial plane builder that keeps a hand in military production.

All this focus on mergers and partnerships underscores the fact that U.S. defense contracting, after 50 years of competitive bidding, is going back to the arsenal system that prevailed in World War II. In such a system, weapons are ordered by the Pentagon from lists of approved suppliers. It is to qualify for such lists that Lockheed, Martin and others are trying to get costs down by combining facilities and cutting back employees.

Paradoxically, the Defense Department itself has not slimmed down. On the contrary, perhaps 500,000 of its roughly 1 million employees--uniformed and civilian--are still engaged in oversight work on fewer and fewer contracts.

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Which makes you wonder, after all the mergers and consolidations, how efficient the arsenal of America will be.


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