Lockheed Martin Corp., seeking to dramatically alter the landscape of the defense industry for the second time in less than a year, said Monday that it has agreed to buy the defense electronics business of Loral Corp. in a deal valued at more than $9 billion.
The other part of Loral--its satellite and telecommunications arm--would be reorganized into a new company that would be 80% owned by Loral's stockholders. Lockheed Martin would buy the other 20% with a $344-million investment.
It was only last March that Lockheed Martin became the nation's biggest military contractor with the $10-billion merger of Lockheed Corp. and Martin Marietta Corp.
The Loral pact would boost Lockheed Martin's annual sales another 25% to roughly $30 billion--more than twice those of the second-largest defense contractor, McDonnell Douglas Corp. The merged company would have 203,000 employees, including 1,100 in Orange County and 20,000 in Palmdale, Ontario, and Sunnyvale and in other cities in the Bay Area.
The deal would accelerate the rapid consolidation of the nation's defense industry, which has been going on since the Cold War ended. Major defense contractors have been merging furiously to increase sales and counter the drop in U.S. weapons spending.
Only last week, Los Angeles-based Northrop Grumman Corp.--maker of the B-2 Stealth bomber--agreed to buy Westinghouse Electric Corp.'s defense electronics group for $3 billion and the assumption of $600 million in debt.
The nation's 10 largest contractors now account for 38% of the annual prime contracts awarded by the Defense Department, up from 29% six years ago. And Daniel M. Tellep, Lockheed Martin's chairman, told reporters by telephone Monday that more deals are coming.
"The industry consolidation has not run its course," he said.
Loral, based in New York, is itself the result of a flurry of recent acquisitions engineered by Bernard L. Schwartz, the company's chairman and chief executive. Schwartz will head the new company, to be known as Loral Space & Communications, and become vice chairman of Lockheed Martin.
Lockheed Martin said it plans to pay $7 billion, or $38 a share, for Loral's common stock, and assume Loral's $2.1 billion in debt. After the announcement, Loral's stock soared $8.25, closing at $44.50 a share on the New York Stock Exchange, while Lockheed Martin's stock rose $2.88 to $80.25 a share.
In response to questions about possible layoffs, Tellep and other officials played down the prospect of mass job cuts after the deal closes, saying "minimal" overlap exists between their operations. The deal is expected to close by March 1.
But company officials did not rule out layoffs completely.
"We do realize the realities of the marketplace are such that we have to be efficient to survive," said Norman R. Augustine, Lockheed Martin's chief executive. "We will devote the next year . . . to determine the best way to structure this new organization."
Most of the previous defense mergers have come at a heavy human cost. As companies have joined forces, they have slashed thousands of jobs to generate the cost savings that help pay for the deals. In June, for example, Lockheed Martin announced plans to eliminate 12,000 jobs and close 12 plants as part of a massive streamlining effort.
Tellep also said the deal did not raise antitrust concerns. "If you look at the defense electronics marketplace, there are at least a dozen prominent players," he said. "There will still be other competitors out there."
Lockheed Martin, headquartered in Bethesda, Md., has a broad product lineup that includes the F-16 and F-117 fighter jets, the proposed F-22 tactical fighter, C-130 transport planes, Trident II ballistic missiles, Titan and Atlas rocket launchers and the Air Force's Milstar communications satellites.
Formerly a dominant presence in Burbank and headquartered in Calabasas, Lockheed Martin's only large remaining Southern California operations are its famed "Skunk Works" design center in Palmdale and its aircraft-maintenance site in Ontario. The company's space and satellite group is in Sunnyvale.
Loral's products and systems are more likely to be found inside airplanes, missiles, ships and ground-based communications sites. The company makes radar, airborne early warning and air-traffic control systems, along with training and simulation systems. It also builds missiles in Rancho Santa Margarita and other tactical weapons and satellites.
Loral Space & Communications would focus on Loral's satellite and telecommunications interests, including Globalstar, a proposed $2-billion satellite-based system for mobile communications worldwide.
Companies such as Loral that make defense electronic systems have become increasingly appealing to military contractors such as Lockheed Martin that are so-called "platform" makers--meaning builders of airplanes, missiles and ships.
With the Pentagon ordering fewer aircraft and vessels, demand is increasing for the electronic gadgets and systems that help the Defense Department upgrade its existing fleets with new technologies. For the same reason, demand is growing for electronic training and simulation systems that Loral and others design.
The Lockheed Martin-Loral pact would put even more pressure on other big aircraft makers, namely McDonnell Douglas and Boeing Co., to consider buying defense electronics firms in order to grow, analysts said.
"Boeing and McDonnell Douglas are really the ones who have to react," said Lior Bregman, an analyst at the investment firm Oppenheimer & Co. in New York, who just last week speculated in a report that Loral was ripe to be bought.
Boeing and McDonnell Douglas do not comment on their proposed acquisitions, but a few weeks ago sources said the two companies were holding preliminary talks concerning a variety of possible transactions, including an outright merger of the two giants.
Given the other mergers announced lately, "The fact that they were believed to be talking should not come as a surprise," Bregman said.
Some analysts expressed concern about whether Lockheed Martin can smoothly absorb Loral's operations while it is still in the process of melding the far-flung Lockheed and Martin Marietta divisions.
"The question is how well can you consolidate [Loral] when you're still digesting the last merger," said Kent A. Newcomb, an analyst at the investment firm A.G. Edwards & Sons Inc. in St. Louis. "There's a fair amount of work left to go" on the previous merger he said.
Augustine downplayed any problem, saying Lockheed Martin's streamlining efforts are "well ahead of schedule."
* HOT FIELD: Defense electronics is growing in appeal for defense firms. D1
* RELATED STORIES: D14