The Justice Department warned Lockheed Martin on Thursday that it will file an antitrust suit to block its $11.6-billion merger with Northrop Grumman if the parties cannot resolve the federal government's concerns about the deal by Monday.
Lockheed Martin, which disclosed the government warning, said in a statement that it is continuing to negotiate with the government--but in its own tough language said that "it, too, is prepared to litigate."
Despite the rhetoric, investors were heartened that the two parties are continuing to talk and that the Justice Department will not file suit any sooner than Monday.
As a result, Northrop Grumman shares, which have been hammered over the last two weeks, rose $1.38 to close at $108.88. Lockheed shares rose 56 cents to $116.13. Both trade on the New York Stock Exchange. But analysts said they remain pessimistic that the deal will go forward, given the reluctance of the government to budge from its tough demand that Lockheed make divestitures of $3 billion to $4 billion in Northrop electronics business to win approval.
"I would give it 2 to 1 against getting approval," said aerospace analyst Wolfgang Demisch of BT Alex. Brown Inc. "But I would have given it even lower odds if they were not still talking."
At Northrop's current stock price, investors have almost fully discounted the possibility of the merger being approved. If the deal were to close, Northrop would fetch $138 a share. Based on the trading values of other aerospace stocks, Northrop should be selling at above $110 as an independent company. But investors are taking a negative view of the company's future, analysts said.
Daniel Goure, a defense industry expert at the Center for Strategic and International Studies, said Northrop "is being hung out to dry," facing a difficult future if the deal fails. It will have to compete with substantially larger and more capable rivals for both domestic and foreign weapons sales, he said.
Lockheed has demonstrated its political clout for years, but in getting antitrust approval it faces opposition by both the Defense and Justice departments. Its ability to tap congressional support--so effective in defending its big weapons programs--has been worthless in its antitrust dispute, experts say.
Unless Defense Secretary William Cohen is convinced by Monday that the merger makes sense, the Justice Department is almost certain to file an antitrust suit, Demisch said.
"Even if DOD turns neutral, I don't think that's good enough," Demisch said. "You have to have DOD tell Justice this is a good deal. Without that, it's a nonstarter."
Sources close to the talks say the Justice Department is willing to make some concessions in its position but believes that the two defense contractors have not been dealing in good faith with the agency.
Lockheed has twice offered concessions that the department rejected out of hand. The latest offer was for the sale of business units that generate annual sales of about $1 billion.
A substantially greater divestiture of Northrop assets would make the deal less attractive to Northrop and would probably lead to a substantial devaluation of the merger price for Northrop shareholders.
The divestiture advocated by the Justice Department would include Northrop's electronic warfare, radar and early-warning command systems, headquartered in Illinois, Maryland and Florida. It isn't clear who would purchase the assets and what Lockheed could reasonably expect to get for them, experts say.
The tough deadlines are interpreted as a signal that the government is unlikely to make any big concessions and is seriously opposed to the deal. So far, Lockheed has made the only concessions.
"The government is trying to push this to an early resolution," said Loren Thompson, a defense expert at the De Tocqueville Institution. "We already know the Air Force and Navy have problems with the transaction. What government lawyers know is that the longer they wait, the more obvious will be the gaps in their logic."