Air Force Rejects Proposed Merger of Technical Firms

The proposed merger of two California-based aerospace technical houses, Science Applications International Corp. and Aerospace Corp., was rejected Friday by the Air Force as “not in the best interest of the U.S. government.”

The Air Force said it disliked the prospect of losing the “objectivity, independence and freedom from conflict of interest” that nonprofit Aerospace provides U.S. space operations.

SAIC’s proposed purchase of El Segundo-based Aerospace, announced Aug. 27, would have converted Aerospace into a for-profit entity that could have competed with other aerospace contractors for government business and commercial contracts. The Air Force and other Pentagon agencies account for 93% of Aerospace’s $350 million in annual revenue.

“Our dependence upon this [nonprofit] organizational structure has made Aerospace a critical asset in the nation’s space program,” Arthur L. Money, assistant secretary of the Air Force for acquisition, said in a letter to Aerospace announcing the rejection of the deal between the two privately held companies.

Aerospace is one of the nation’s federally funded research and development centers created to perform engineering analysis and other research services for the military. Therefore, it does not compete against other defense contractors for business.

The much larger SAIC, based in San Diego, is an employee-owned expert in space technology that also provides consulting and other services for national security and health care, among other fields.

“We’re disappointed, obviously,” Aerospace Chief Executive Edward C. “Pete” Aldridge Jr. said in a telephone interview. “We were looking forward to doing something new and different.”

Aldridge said he was not entirely surprised by the decision because even though Aerospace works closely with senior Air Force officials, the service had not endorsed the merger plan until it could review the details.

SAIC also was “disappointed with this decision,” Chairman J. Robert Beyster said in a statement. But he noted that SAIC--with 22,000 employees and $2.2 billion in annual revenues--previously had said it would not proceed with the deal without the Air Force’s blessing.

“We sincerely wish Aerospace the very best,” Beyster said.

The Air Force’s decision means Aerospace, like the other federally funded centers, will have to keep justifying its budget before a Congress that has grown increasingly stingy with funding for them, just as it has for private defense contractors in the wake of the Cold War.

The spending cuts have forced Aerospace to slash its employment 30% since 1991, to about 3,000. Aldridge had said in August that a key purpose of the SAIC deal was to loosen Aerospace’s close links with Uncle Sam so that it could compete in burgeoning new markets, such as commercial space programs.

Aldridge, a former secretary of the Air Force, said Aerospace would not look for another deal to end its federal status. “We have concluded . . . that there is no alternative that is acceptable,” he said.

The proposed deal called for SAIC to invest more than $200 million in Aerospace to fund new research and development, build up Aerospace’s ability to compete for work, and provide stock in the combined companies for Aerospace’s employees. They had hoped to close the merger Jan. 31.

On space projects, Aerospace effectively acts as the Air Force’s technical arm. It provides specifications for the payload, launch and ground equipment that industry will build, then has technical oversight for the launch and orbital operations.