Clinton goals clash in Martin merger


The proposed merger between Martin Marietta and Lockheed, creating the world's largest military contractor, will force the Clinton administration to resolve a clash between defense downsizing and antitrust laws, both high government priorities that three successive presidents have been unable to sort out.

Brewing ever since military budgets stopped growing in the late years of the Reagan administration, the conflict today pits two high-priority Clinton administration initiatives in a head-on clash.

On one side, President Clinton's Defense Department has been pressing the nation's private defense companies into mergers and acquisitions to save those industries and their technologies even while radically slashing military budgets.

On the other, the Justice Department and Federal Trade Commission have been driving to breathe life into antitrust enforcement that Republican presidents de-emphasized for 12 years.

Now the sheer size of the deal that would merge the nation's No. 2 and No. 3 defense contractors will press the Clinton administration into hard decisions about whether it is willing to sacrifice antitrust goals -- requiring a merger to have limited impact on competition in an industry -- to help military suppliers through the mergers and acquisitions needed to save key defense industries, say principals in the deal, Wall Street analysts and antitrust lawyers.

"I think we forced the answer. I think we'll make policy with this case," Norman R. Augustine, chairman of Martin Marietta, said yesterday in an interview with editors and reporters from The Sun.

If the administration permits such an immense merger, other defense contractors will be encouraged to move into bigger combinations to compete with the new behemoth, Mr. Augustine and Wall Street analysts said.

Government approval of the merger would send "a signal that, if it saves money for the Department of Defense, you can go through with it," Mr. Augustine said yesterday.

"This deal throws it wide open, and if it survives the review process, the opening will exist for practically every other company in the industry to seek partners or acquisitions," said Anthony Ginsberg, of Fourteen Research, an investment analysis house.

Mr. Augustine, a former deputy Army secretary who was on Mr. Clinton's short list of Secretary of Defense candidates earlier this year, has been a leading campaigner for a decision on the issue, which he believes could affect the country's defense industries for decades.

"The leadership of the Department of Defense has made it quite clear that it expects our industry to consolidate, a view with which I happen to agree. On the other hand, our existing antitrust laws seem to work to exactly the opposite purpose," he said in a speech to the American Bar Association in August of last year.

At stake is the ability of defense contractors to work out orderly mergers and acquisitions that would preserve as much high-technology and industrial capacity as the new shrunken defense budgets can support, analysts and industry leaders say.

Without some relief from usual antitrust rules, there is little hope of achieving the orderly capacity reductions that Defense officials have been pressing on military and space contractors, they say.

Instead, post-Cold War defense budgets would undermine companies, leaving entire sectors of the business too weak to keep critical staffs together and whole technologies at risk of being lost.

"Even big players like Martin Marietta and Lockheed are being forced to jettison some business lines even while they merge into ever-bigger companies. There are so many fewer dollars now that the only possibility is either much bigger players or severely weaker players," said Robert Deller, a vice-president of INPUT, a Washington-based market-research company.

The Clinton administration assigned a task force to study the conflict of priorities late last year, bringing together staff members from the Pentagon, Justice and the FTC.

That task force filed its report last spring, clarifying some of the procedures to be followed in handling defense-industry mergers, but no analyst suggests that it resolved the central conflict of priorities.


"I'd say there's a lot of uncertainty today," among companies that are considering mergers pursuant to the Pentagon's urgings, Mr. Augustine said yesterday.

Under Anne K. Bingaman, the assistant attorney general charged with reinvigorating antitrust enforcement, the Justice Department has frequently opposed giving special consideration to mergers or acquisitions by defense contractors.

Since defense budgets began to flatten in the late 1980s, the Justice Department has successfully gone to court to block four mergers in the industry, all of them much smaller than the Lockheed-Martin deal.

Survival of fittest?

Mr. Augustine used one of those cases -- the proposed acquisition of a big part of Olin Corp.'s military business by Alliant Techsystems, both makers of ammunition for 120-millimeter tank cannons -- to make his point in a speech before the American Bar Association last year.

"The military decided that the reduced size of the market for 120-millimeter tank ammunition would support only one supplier," Mr. Augustine said. "On the other hand, antitrust regulators focused narrowly on competition concerns, and the court agreed, killing the merger."

"To a business-oriented observer, however, it appeared that the transaction was in truth the victim of a largely indifferent Department of Defense," which held back from intervening to help win approval for the merger, he said.

Mr. Augustine said the case poses this question: "Should we require that the two remaining players in a market continue competing until only one weakened survivor remains, and the assets of the loser, including its human and intellectual capital, are scattered? Or might there be some other way that better advances the goals of both national security and antitrust?"

The regulators will have the final legal call on whether to fight the merger and they have a broad range of steps they could take short of suing to block it.

One middle-ground step could be to ask the merged Lockheed Martin Corp. to sell off, rather than fold into its own system, any components that the regulators found to be adversely affecting competition.

Mr. Augustine said yesterday the company would fight demands for any "significant" divestiture, but he stopped short of saying what would be significant.

Another would be construction of a "Chinese wall" between a Lockheed component and a Martin competitor, Mr. Augustine suggested yesterday.

Beginning with Tuesday's announcement, Mr. Augustine has argued that Lockheed and Martin have few areas of competition and that in each of those areas, there are half a dozen or more companies in the field outside the new merged giant, so that price and other competition would not be unduly affected.

Most Wall Street analysts have generally agreed with that view, though they have cautioned that both companies have extensive top-secret business in intelligence-gathering equipment, an area about which little is publicly known and it is hard to judge the competitive climate from outside.

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