Defense industry locked in battle over its future Overseas companies due piece of the pie?

THE BALTIMORE SUN

Bethesda -- A global war has erupted within the defense industry.

The conflict, which centers on a corporate acquisition, involves five of the world's top defense contractors, including the makers of the MX missiles, and components of the B-2 stealth bombers and the "star wars" missile defense system. And it pits former Secretary of Defense Frank C. Carlucci against a close friend and formidable opponent, Norman R. Augustine, the chairman and chief executive of Martin Marietta Corp.

Despite such military might, this is a battle of words, being fought in a New York bankruptcy court and in the halls of Congress.

On the surface, the issue is the acquisition of Dallas-based LTV Corp.'s missile and aircraft businesses by Thomson-CSF, a company owned in part by the French government. But the stakes are much higher. At issue in the precedent-setting case: whether a foreign country should be allowed to hold an interest in an American defense contractor.

"We have the opportunity here to make a terrible mistake as a country," Mr. Augustine says.

LTV, a diversified company, has been fighting a six-year battle with bankruptcy. As part of a reorganization, LTV decided to sell off a unit that makes tactical missiles for the Army and an aircraft division that produces components for the B-2 bomber and Boeing jetliners.

Bethesda-based Martin Marietta saw the announcement as an opportunity to pick up a big chunk of new business at a bargain basement price. It teamed with Lockheed Corp. in a joint venture, and signed a $355 million agreement with LTV for the missile and aircraft divisions.

But then along came Thomson, a Paris-based defense electronics company that is 58 percent-owned by the French government, and The Carlyle Group, a investment group headquartered in Washington. In early April the Thomson/Carlyle team bid $400 million for the LTV operations.

After a brief bidding war, in which Martin-Lockheed raised its bid to $385 million and the Thomson-Carlyle bid went to $450 million, U.S. Bankruptcy Court Judge Burton Lifland approved the higher offer.

That decision is being reviewed by Committee for Foreign Investment in the United States, a group that includes representatives from the Treasury Department, Commerce Department and the Department of Defense. The committee has until mid-July to make its recommendation to President Bush, who is not bound by the committee's decision.

Judge Lifland's decision has also caught the eye of Congress. Democratic Rep. Les Aspin of Wisconsin, chairman of the House Armed Services Committee has written a letter to Mr. Bush opposing the sale, and has scheduled a hearing Thursday on the matter. Another cautionary letter to the president, from Democratic Sen. Dale Bumpers of Arkansas, has been signed by 40 other senators.

Meanwhile, the Martin-Lockheed proposal is being scrutinized by the Federal Trade Commission to determine its impact on competition within the missile industry.

Mr. Augustine's criticism is sharp. Noting that the United States has never nationalized its defense industry, he asks rhetorically: "Why should we allow it to be nationalized under the French government."

He adds, "The defense industry in this country is just as important to our military capability as is our Army, our Navy or our Air Force. I don't think we would sell our army to the French or to anybody."

Mr. Augustine says he has no objection to a foreign company's buying a U.S. company but that he is adamantly opposed to foreign government involvement.

"Having foreign governments participating in a free-enterprise market place is just like having a monopoly in the market place," he said. "They have so much more power. They have their own printing press to print money. They make the rules, interpret the rules, and enforce the rules."

Susan J. Tolchin, a professor George Washington University's School of Business and Public Management, agrees.

"No company, even one as rich as Martin Marietta, can compete with the government from an industrialized country," she told a Senate committee after advocating a statutory change that would bar the sale of a U.S. prime contractor of critical technology to a foreign company.

Mr. Augustine says Martin learned how tough it can be to compete with a government-subsidized operation when it entered the commercial satellite launching business in 1986 and went head-to-head with the French Ariane rocket.

"We found that we couldn't compete against them. They just had too much power, financial power," he said.

And in their presentation to the Senate Subcommittee on Defense Industry and Technology, Mr. Augustine and Daniel M. Tellep, chairman and chief executive of Lockheed, expressed concern about leakage of classified information.

"Technology is not transferred by members of any board of directors -- it is transferred from engineer to engineer, detail by detail, over months and years," he said.

"That's the sore loser argument," charges David Rubenstein, a senior partner and co-founder of Carlyle which would run the aircraft unit of LTV under its arrangement with Thomson.

As he sees it, Martin is lobbying hard to kill the deal so that it can come back later and pick up the two LTV divisions at a much lower price, "maybe for as little as $250 million because they wouldn't have any competition."

Thomson, no stranger in this country, first established a presence here in 1918.

It has electronic manufacturing plants at 25 locations in the country employing about 10,000 workers making General Electric and RCA television and camcorders.

Its U.S. defense operations have teamed with a number of U.S. companies -- including Martin Marietta. It has worked with GTE on the development of battlefield communication equipment, with LTV on the development of a surface-to-air missile, and is teamed with Martin Marietta on the development of a new multiple launch rocket system.

In recent testimony to a Senate committee, James D. Bell, chairman and president of Thomson's Arlington, Va.-based U.S. subsidiary, painted a rosy and prosperous outlook for LTV's missile division under its control.

"The company is American," Mr. Bell says of the LTV missile division, "will remain American and will be subject to all of the laws and regulations . . . to safeguard our defense -- including, I should emphasize, those U.S. laws regulating exports of sensitive technology and weapons."

Meanwhile, he talks of big capital investments in the operation to make it a "center for the development and production of missiles." It would safeguard the jobs of nearly 14,000 workers.

Under the Thomson plan, Hughes Aircraft division of General Motors Corp. would be a partner in running the LTV missile division and hold a 15 percent interest. Mr. Bell says that the LTV missile division will obtain from Thomson and Hughes additional technological and expertise. "The transfer of this technology will flow from Thomson to LTV, not from the U.S. abroad."

And Richard Keating, a spokesman for Thomson's U.S. subsidiary, says the parent has never received money from the French government and its business activities are supported solely from its profits.

There are some people who think that Martin made a fatal miscalculation when it rejected a suggestion by Mr. Carlucci that Carlyle join the Martin team, a move it made shortly before Thomson submitted its bid, because Thomson was putting pressure on Carlyle to bring more money to the table.

Mr. Augustine says he has no regrets about rejecting the offer from Mr. Carlucci, a man he calls a close and personal friend that he holds in high regard. At that time, Mr. Augustine explains, Martin and Lockheed already had reached an agreement with LTV.

"Frankly we viewed it almost as an ethical issue and we did think it was right, so we said no," he said.

Mr. Rubenstein says he feels almost certain that if Martin had boosted its bid another $15 million the bankruptcy judge would have selected its offer over Thomson's. Even without an increase, he was still somewhat surprised by the court's decision. "I went into court that day," he recalls, "with a press saying that we were sorry that we lost. I didn't have one talking about us winning."

Despite having raised its bid several times, Mr. Augustine says there was no way that the Martin-Lockheed team could get into a bidding war with the French government and its deep pockets.

Mr. Augustine feels strongly that government approval of Thomson's purchase of the LTV units would be a "precedent-setting" move that could open the doors to even more foreign ownership of U.S. defense contractors. With the Pentagon budget shrinking, he says more and more defense companies will be coming on the market at low prices.

Last week, for example, General Dynamics said it will cut back operations by selling some of its defense-related businesses. For sale are such businesses as General Dynamics missile and military electronics operations.

"If this is approved and it may be," Mr. Augustine says, "There will be a great deal of pressure on us [defense contractors] to to go out and find a wealthy foreign partner so we can have a government buy into us. People will go to Korea, Japan, Taiwan, France or Germany seeking partners.

"You could get on a slippery slope where pretty soon you would sell off your defense industry. Is that acceptable to our government? That is not the decision I would make."

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