Lockheed Scraps Yearlong Effort to Buy Northrop
Faced with a protracted government battle over antitrust concerns, Lockheed Martin Corp. on Thursday scrapped its yearlong effort to buy Los Angeles-based Northrop Grumman for $8.4 billion.
The deal, which would have joined two of the nation’s four largest defense companies, collapsed after talks broke down Wednesday between government antitrust officials and company executives.
The two sides had been exploring ways to alter the deal to alleviate government concerns that the combined companies would wield too much power in several defense specialties--particularly defense electronics, a field in which Northrop excels.
“We have worked closely with the government to find an amicable solution to their concerns and we have not been able to find a satisfactory solution,” said John Montague, Lockheed’s vice president for financial strategies. “We’re disappointed, but ready to move on.”
Montague said Lockheed’s board of directors voted to terminate the planned Northrop merger Thursday during a special meeting called after it became clear that the company could not satisfy the government and would have to proceed with a court fight.
Lockheed told Northrop of its decision after the vote.
The news was announced after the stock market closed, but Northrop shares plummeted before that, losing $5.69, to $97.38. Lockheed shares lost 56 cents, to $103.94. Both trade on the New York Stock Exchange. Northrop shares have tumbled 30% from their high of $139, reached after the bid was announced.
While Northrop reiterated that it believed the merger would have been good for the company, executives there nonetheless were optimistic about Northrop’s future as an independent firm--a strategy it was pursuing before Lockheed made its offer July 3, 1997. The company employs 50,500 people nationwide, including 14,800 in Southern California.
“We’re more than alive, and better than well,” said Kent Kresa, Northrop’s chairman, chief executive officer and president. “I’m relieved that we’re no longer in limbo, and now we can get on with building a company.”
But some employees weren’t as confident. For Julie Morrisey, a subcontracts administrator for Northrop’s Military Aircraft Systems facility in El Segundo, Thursday’s news marked the beginning of “scary times” for the aerospace giant.
“I’m worried about Northrop’s future as a company. I’m afraid they might not be able to play with the big boys,” said Morrisey, who has worked at Northrop for 21 years. “It’s very difficult to win new contracts if you don’t have the funds, the employees or the wherewithal to compete.”
The procurement administrator for the company’s F-18 project also worries about her own future. Even before Lockheed’s pullout, rumors had been circulating that Northrop would have to lay off at least 20% of its work force, she said. Now Morrisey fears that number could climb. “I just don’t know what’s going to happen to this company,” she said.
The decision to end merger plans apparently freezes the places of the defense industry’s four largest firms--Boeing, Lockheed Martin, Raytheon and Northrop Grumman--with Northrop a distant fourth.
“This is going to leave us with three elephants and a pony,” said Robert Paulson, chief executive officer of Aerostar Capital Investment Co. in Wilson, Wyo.
Analysts said the government’s strong opposition to the Lockheed-Northrop deal speaks volumes about the regulators’ discomfort with further consolidation at the top.
“This is a not-so-subtle message that they are really concerned about the state of concentration of the industry,” said Byron Callan, an aerospace analyst with Merrill Lynch.
But “consolidation and rationalization of the industry will continue,” he said, with smaller deals in which companies add new capabilities to their portfolios instead of giving a single company too much control in a single market.
Northrop employee Wayne Kamiya said he opposed the planned merger “out of loyalty to the company.”
“It’s been Northrop for 45 years,” said Kamiya, a manager in the Materiel Administrative Services Division who has worked for the firm 20 years. “If the government wants us to stay in business and remain competitive, they had better give us work.”
Lockheed Caught in Ticklish Position
The Justice Department applauded the decision to abandon the acquisition, the first it challenged in the post-Cold War consolidation era and the biggest merger transaction it ever tried to block.
It “ensures that America’s fighting men and women have the best equipment that anyone can develop, at prices that the U.S military can afford,” said Joel Klein, the Justice Department’s antitrust chief.
Lockheed, however, never wavered in its belief that the merger would stimulate competition in some markets, and that it would win the case in court. But the company ultimately decided that it did not want to be in the ticklish and expensive position of suing its largest customer.
“The prospect of facing your customer in court and going through what could have been a potentially lengthy litigation process just was unpalatable,” said Merrill Lynch analyst Callan.
The Lockheed-Northrop merger would have capped a stunning wave of defense industry consolidation that was strongly encouraged by Defense Department officials who forecast flat or diminishing military budgets.
Several years of aggressive deal-making created three colossal defense contractors: Lockheed, Boeing and Raytheon. Northrop Grumman--itself the product of several mergers--found itself stuck far behind the Big Three but still bigger than other second-tier defense subcontractors.
Even after losing out to Raytheon in expensive bidding wars for the defense assets of Hughes Electronics and Texas Instruments, Northrop officials expressed confidence that the company could survive independently. Some analysts agreed, but others had their doubts.
The planned Lockheed-Northrop merger, worth $11.6 billion the day it was announced, forced the U.S. government to rethink its preference for a small number of huge defense contractors.
Boeing had grown huge by buying McDonnell Douglas, but a combined Lockheed-Northrop would have been even bigger.
That disturbed antitrust officials at the Justice Department. While consolidation advocates argued that the deal would help competition by ensuring the financial strength of Northrop programs, others worried that the combined company would have too much market share in critical areas such as defense electronics.
Defense Electronics the Key Obstacle
Government officials stunned company executives by demanding that Lockheed divest nearly all of Northrop’s defense electronics programs. But it was those very businesses that made Northrop an attractive acquisition for Lockheed.
“The magnetic attraction was the defense electronics business, and that was the area of concern for the government,” Paulson said.
Besides, Lockheed Martin felt that it was an underdog in some markets. Raytheon had a bigger electronics business, and Boeing surpassed it in aircraft.
The companies tried to negotiate a settlement with the government, but those talks never made much progress. The Justice Department filed suit to block the planned merger in March, saying the deal would produce lower-quality weapons at higher prices.
The lawsuit charged that the proposed merger would create monopolies in markets ranging from airborne radar to jet fighters.
Since then, the federal government has consistently prevailed in pretrial skirmishes in court. Most recently, the companies had been unable to see key government documents, which the court ruled were confidential.
The string of defeats left many analysts--and, ultimately, the companies--pessimistic about Lockheed’s chances when the trial was scheduled to begin Sept. 8. If Lockheed and Northrop had fared better in the courtroom, they might have been in a stronger position to wrangle a compromise from the government, analysts said.
Times correspondent Steven Gregory contributed to this story.
* NORTHROP’S NEXT STEP: Northrop Grumman is likely to look at buying companies itself to stay competitive. D1
