Lockheed Makes Bid For Northrop

Lockheed Martin Corp., the nation’s leading defense contractor, just keeps getting bigger.

The maker of the F-16 Falcon jet fighter and the Trident missile announced Thursday that it is buying Northrop Grumman Corp. for about $8 billion, adding the B-2 stealth bomber and the MX missile system to its storied weapons arsenal.

Combining what had been five independent defense contractors just three years ago, the deal represents yet another round of shrinkage in an industry struggling with decreased defense spending.

“This action carries on the monumental changes taking place,” said Norman R. Augustine, chairman and chief executive of Lockheed Martin. He added that it represents the combination of two companies that have been at the forefront of the industry’s consolidation.

The acquisition would build a competitor with revenue of $37 billion and 230,000 employees.

From a business perspective, that size will allow the bigger Lockheed Martin to become more efficient and competitive in producing and selling its wares. The post-Cold War world has made it virtually impossible for all but the most efficient defense contractors to survive.

Lockheed Martin, itself the product of a mega-merger, went on to buy Loral, a defense electronics maker. Northrop and Grumman themselves reached a deal to merge in 1994.

Separately, Boeing and McDonnell Douglas received federal regulators’ approval to combine earlier this week.

The purchase of Northrop Grumman, while not the largest defense merger in recent years, may be one of the last mammoth deals for a while.

“There’ll be the Big Three U.S. competitors,” said Jon Kutler, president of Quarterdeck Investment Partners. Those would be Lockheed/Northrop, Boeing/McDonnell and Raytheon Co., which recently agreed to purchase General Motors’ Hughes Electronics.

Kutler added: “It’s surprising it wasn’t done years ago.”

Because of its relatively small size, Northrop Grumman had been seen as a potential takeover target, particularly since it lost out earlier this year to Raytheon in bidding for Hughes Electronics.

Executives at both companies lauded the deal as a good fit for the two sometime partners. Lockheed Martin and Northrop Grumman have collaborated on the Joint Strike Fighter and early warning systems.

James Fetig, a Lockheed Martin spokesman, said “no significant layoffs” are expected from the merger and no major plant closing are anticipated. In fact, Augustine noted that Lockheed plans to hire more than 2,000 engineers out of college this year.

Terms of the deal call for Northrop Grumman shareholders to receive 1.1923 shares of Lockheed Martin common stock for each share of Northrop Grumman stock they own. In addition to paying about $8 billion worth of stock, Lockheed will assume $3.3 billion of Northrop’s debt.

Northrop Grumman’s stock rose 23.5 percent, or $20.87 1/2 per share, to $109.75 by early afternoon on the New York Stock Exchange. Based on early afternoon share prices, the Lockheed Martin bid is worth about $117.75 to Northrop Grumman shareholders.

Lockheed Martin was down about 5 percent, or $5.25 per share, at $98.75.

Kent Kresa, chairman and chief executive of Northrop Grumman, the nation’s No. 6 defense contractor, noted the deal not only brings together two strong competitors but two with rich heritage.

“It’s very exciting,” he said.

The Northrop side of Northrop Grumman produced the P-61 fighter during World War II as well as the famous Flying Wing bombers. Grumman built the Wildcat and Hellcat fighters during the war and later the craft that landed men on the moon. Lockheed was behind the P-38 Lightning fighter and, later, the U-2 spyplane. Martin made the first U.S. built bombers.

In the modern Lockheed Martin, Kresa has found a powerful partner. It won a contract last year to develop the nation’s next space shuttle and another that keeps it in the competition to build the nation’s next light strike-fighter jet for the military services.

Northrop Grumman, based in Los Angeles, employs more than 45,000 people and had 1996 sales of about $8 billion. Lockheed Martin, based in Bethesda, Md., employs 190,000 and had annual sales of almost $30 billion. Discussions between the two companies began early in the second quarter of this year and became serious last month.