Justice aims to block merger

The Justice Department is suing to block an $11.6 billion merger between Lockheed
Martin Corp. and Northrop Grumman Corp. on the grounds that it would stifle competition
for military contracts and raise the price tags on critical Defense Department systems.


Justice filed the anti-trust lawsuit in U.S. District Court in Washington late last
month after negotiations broke down between the government and Lockheed Martin. If the
merger is successful, the defense industry will be left with three major players: Boeing
Co., Lockheed Martin and Raytheon Co.


The marriage of Lockheed Martin and Northrop Grumman would strengthen significantly the
new company's grip on information technology contracts, government officials said. But it
is in the areas of electronic countermeasures and radar systems that Justice and DOD
officials said they are most concerned.


"If this merger were to go forward, America could face higher prices and lower
quality in advanced tactical and strategic aircraft, airborne early warning radar systems,
sonar systems and several types of countermeasure systems," said Attorney General
Janet Reno at a press conference last month with Defense Secretary William Cohen.


According to DOD, Lockheed Martin had the largest slice--$11.6 billion--of prime
Defense contract awards last year. Northrop Grumman was third with $3.5 billion in
contracts. Boeing Co. was second with $9.6 billion in contracts.


"The proposed transaction increases market concentration and adversely affects
competition in a number of critical areas of Defense electronics," Cohen said.


Justice officials have said the department would have approved the merger had Lockheed
Martin agreed to divest itself of about $4 billion in Northrop Grumman electronics
businesses, such as the company's electronic sensors and systems division in Linthicum,
Md., and its systems integration division in Bethpage, N.Y. But Lockheed Martin officials
told Justice the company is willing only to divest only $1 billion in assets from the
company.


Lockheed Martin and Northrop Grumman officials vowed to fight the anti-trust suit.


"We stand by our conviction that this merger is in the best interests of
taxpayers, customers, suppliers, the companies and our employees, shareholders and the
armed forces of the United States," said Vance Coffman, Lockheed Martin chief
executive officer and vice chairman, and Kent Kresa, Northrop Grumman chairman and CEO, in
a joint statement.


Company officials said that although overlapping program areas are a small percentage
of the pair's overall revenues, the divestitures Justice seeks equal more than half of
Northrop Grumman's $8 billion in annual sales.


Industry observers said any deal that excludes the Linthicum division--the crown jewel
of Northrop Grumman's defense business--would hurt Lockheed Martin's megamerger. Northrop
Grumman bought the division from Westinghouse in 1996 for $2.9 billion.


But even if Lockheed Martin divests the $4 billion in business, the rest of Northrop
Grumman's defense information business and commercial aircraft operations would make the
deal attractive, said Richard Aboulafia, senior analyst with the Teal Group of Fairfax,
Va.


Last year, Northrop Grumman bought Logicon Inc. of Torrance, Calif., for $750 million.
The company has a data systems and services division in Herndon, Va., a commercial
aircraft division in Dallas and a military aircraft division in El Segundo, Calif.


Lockheed Martin officials are puzzled about the government's blocking of the merger
after allowing a string of previous defense industry mergers. Boeing acquired McDonnell
Douglas Corp. last year, and Lockheed Martin bought Loral Corp.'s defense electronics and
systems integration businesses in 1996.


"Having permitted other recent large defense electronics combinations, it is not
in the government's interest to now challenge this merger," Coffman said.


The proposed Lockheed Martin-Northrop Grumman merger is complex; no previous defense
merger has included so many technologies nor affected so many markets, Cohen said.
Shareholders from both companies recently approved the merger, in which Lockheed Martin
would buy Northrop Grumman for $8.3 billion while assuming $3.3 billion of the company's
debt.


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