Defense Merger Takes Flak

WASHINGTON — Officials from Lockheed Martin and Northrop Grumman said yesterday they expected the Justice Department to attempt to block a $12 billion merger of the defense companies if antitrust concerns cannot be resolved.

The Pentagon also expressed reservations about the deal yesterday. “We have serious concerns about the competitive effects of the transaction,” said Ken Bacon, assistant secretary of defense for public affairs.

The two defense companies said the Justice Department had informed them that it was ``fundamentally opposed'' to the merger.

The two defense companies said the Justice Department had informed them that it was “fundamentally opposed” to the merger.

But Lockheed Martin chairman Vance Coffman and Kent Kresa, Northrop Grumman’s chairman, still hope to convince the government of the benefits of the proposed combination.

“We continue to believe that the significant savings of $1 billion per year are available from the merger, the majority of which will accrue to our government customers,” they said in a joint statement.

Both chairmen warned that they would “vigorously oppose any attempt to block the merger.”

The proposed defense deal was not the only one encountering roadblocks. Yesterday, Compaq Computer Corp. and Digital Equipment Corp. said the Federal Trade Commission wanted more information from them about their proposed merger. Both companies said they believe the request would not delay the merger, which is expected to close by June. The deal was worth $9.6 billion when it was announced in January and would be the technology industry’s largest ever.

The two defense companies said the Justice Department had informed them that it was “fundamentally opposed” to the merger.

Lockheed Martin sources said Justice Department examiners have raised questions about the dominant position the emerging company would hold in surveillance radar and ground-based systems that detect missile launches.

Lockheed Martin and Northrop Grumman are the only makers of airborne early warning radar, most commonly found on Air Force E-3 AWACS aircraft and the Navy’s EA-6B Prowler.

Both firms also are major players in infrared systems that detect missiles in flight and systems used to jam weapons that transmit electronic countermeasures used to confuse radio communications.

Lockheed Martin also produces the F-16 fighter and is building a major share of the coming F-22 Raptor, the Air Force’s next-generation stealth fighter. Northrop Grumman produces parts for the C-17, a giant Air Force cargo jet, and portions of several commercial airliners.

The Defense Department examiners and high-ranking officials in both firms met over the weekend in an attempt to resolve problems. The discussions are continuing.

The deal was overwhelmingly approved by shareholders in February. Lockheed said in a statement yesterday it had postponed the planned closing of the deal from March 31 to April 24 and would submit a proposal responding to the government’s “antitrust concerns.”

Industry analysts said they found the timing of the government’s complaint to be unusual.

“It would not have been surprising if they had objected to it six months ago,” said Jon Kutler, president of Quarterdeck Investment Partners, a Los Angeles firm that specializes in aerospace mergers and acquisitions.

“But now I think the timing is very unusual to let this drag on after the shareholder approval in February.”

The Justice objection to a defense industry combination also is surprising in an era when the government has allowed the industry to pare its ranks substantially. The industry is on the verge of having just three major companies, all the result of massive consolidations.

The merged Lockheed Martin and Northrop Grumman would be the industry’s biggest competitor, with sales of $37 billion. It would be followed by the combined McDonnell Douglas and Boeing Co. Third would be Raytheon Co., which recently acquired Hughes Electronics from General Motors and the defense electronics unit of Texas Instruments, and renamed the unit Raytheon TI.

Kutler said that if the government objects to the deal, it would cause far more harm to Northrop Grumman than Lockheed Martin.

“Lockheed Martin is still going to be a dominant player in this industry, with or without Northrop Grumman,” he said.

Wolfgang Demisch, an industry analyst at Bankers Trust in New York, questioned why Justice would call into question Northrop Grumman and Lockheed Martin holdings in defense electronics and said the government could probably be satisfied with a divestiture of elements of the companies valued between $200 million and $500 million.

By Michael D. Towle, INQUIRER WASHINGTON BUREAU

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