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Lockheed to buy Northrop
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July 3, 1997: 12:50 p.m. ET
$11.6 billion mega-deal leaves three giant players in defense industry
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NEW YORK (CNNfn) - Lockheed Martin Corp. said Thursday it agreed to acquire Northrop Grumman Corp. for $11.6 billion in the second-largest aerospace transaction in history.
The mega-merger -- Lockheed's fourth multi-billion-dollar combination within five years -- underscores the importance that consolidation has played in the industry, which is down to three primary participants: Boeing-McDonnell Douglas Co.; Lockheed Martin; and Raytheon Co.
"We're getting to the time in the cycle where there are very few contractors, especially at the prime contractor level. And, because of that, they have a significant amount of control over the process," said Jon Kutler, president of Quarterdeck Investment Partners Inc.
Because of decreased defense spending, the federal government in recent years has been calling for a reduced number of participants in hopes that vertical integration would bring costs down.
"This deal clearly creates a vertically integrated, comprehensive supplier," said Wolfgang Demisch, defense analyst at Bankers Trust.
Combined, Lockheed Martin -- with contracts such as the F-16 Falcon jet fighter and the F-22 (which Lockheed shares with Boeing) -- would add Northrop's B-2 stealth bomber and STARS battlefield surveillance system, among others.
In terms of size, Northrop and Lockheed have an estimated 230,000 employees and 1997 revenues of about $37 billion, making it the second-largest player in the aerospace industry. Boeing-McDonnell, if consummated, would be the industry's leader with $48 billion in revenue. Raytheon would trail as a distant third with $20 billion.
To be sure, Lockheed currently competes directly with Boeing on the next-generation Joint Strike Fighter program -- a defense contract that likely will determine the fate of the defense companies in the coming millennium. And, should they lose out to Boeing, at least one analyst viewed the latest transaction as Lockheed preparing for the worst.
"Lockheed is hedging its bets just in case it lost out on the Joint Strike Fighter contract. Northrop has a lot of the avionics that go onto military aircraft," said Nicholas Heymann, analyst at Prudential Securities.
Under terms of the agreement, Northrop shareholders will receive 1.1923 shares of Lockheed common stock, translating to a purchase price of $124 a share. Shares of Northrop Thursday were rallying on the New York Stock Exchange, up 21-5/8 at 110-1/2. Lockheed stock was down 4-7/8 to 99-1/8.
The transaction, which is subject to a break-up fee of $200 million, is expected to close by the end of 1997. The deal is subject to approvals from shareholders and government regulators.
Analysts and company officials don't believe the deal will face strong regulatory scrutiny. "The Defense Department realized that it was inefficient for them to have so many contractors and actually encourage this consolidation," Kutler said.
Still, the deal comes just a day after Federal anti-trust regulators approved Raytheon's $2.9 billion purchase of Texas Instruments' defense electronics business only on the condition it sells a unit that produces a key radar component.
In a joint statement, the companies said it is anticipated that the transaction will be accounted for as a pooling-of-interests. However, the impact of other transactions under consideration could, if consummated, result in accounting for the transaction as a purchase. Financially, the transaction is expected to be neutral to 1998 earnings and increasingly accretive thereafter.
Kent Kresa, chairman, president and chief executive of Northrop Grumman, will join the Lockheed Martin board along with two other members of the Northrop Grumman board to be determined. Kresa also will serve as vice chairman of Lockheed Martin and will have a strong role in the transition.
Vance D. Coffman is still expected to become vice chairman and chief executive of Lockheed Martin on Aug. 1.
Bear, Stearns & Co. and Lehman Brothers served as financial advisors to Lockheed Martin. Northrop Grumman was advised by Salomon Brothers.
-- Robert Liu
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