After a federal judge hit Lockheed Martin Corp. and Northrop Grumman Corp. with an unexpected setback this month, many observers began counting the days until the companies gave up their expensive fight for the right to merge.
Those skeptics might be counting for some time.
Misguided, noble or both, the two aerospace contractors appear determined to stick with their court battle against antitrust regulators until the end of the year, though many doubt they will win.
"We believe it's the right thing to do, not only for the companies but for the country," said Kent Kresa, Northrop Grumman's president, chief executive and chairman.
Kresa said last week that selling to Bethesda-based Lockheed Martin for $11 billion was a responsibility to shareholders and the best way for the defense industry to finish consolidating in the wake of the end of the Cold War.
His company is spending $3 million a month to fight a federal antitrust lawsuit that charges the deal would dangerously reduce competition in key defense markets. Lockheed Martin refuses to disclose its expenses, but outsiders speculate they must at least equal the other company's.
The expenditures come as Lockheed Martin is implementing a companywide efficiency plan to reduce expenses. Northrop Grumman is working under a similar streamlining policy and, in the past year, has consolidated several small offices in the Baltimore area that report to its Electronic Sensors & Systems Division in Linthicum.
Stuart McCutchan, who follows the situation for his Defense Mergers & Acquisitions newsletter, said the law of diminishing returns is working against the companies. Not only are costs mounting, he said, but even a victory might require Lockheed Martin to sell off important parts of Northrop Grumman.
"I'd say there's a 75 percent probability the deal won't happen," said Paul Nisbet, an industry analyst for JSA Research Inc.
The companies and their 30 lawyers see the odds differently. They believe that Judge Emmet Sullivan will make an all-or-nothing ruling in the Sept. 8 trial and will not try to carve off parts of Northrop Grumman.
In that case, the potential benefits of the merger are seen as being so great that they justify the expense of hanging on until Sullivan reaches his verdict, which he promised to do by Christmas.
A ruling that the judge issued June 3 does not help the companies. He refused to make the Justice Department turn over thousands of documents that the Pentagon used in deciding to oppose the merger. The companies say the documents would show that some defense officials support their transaction, undermining the government's case that the deal threatens national security.
Now corporate lawyers will have to work harder to make the same point. They are taking testimony from 30 to 50 officials from the Pentagon and from rival companies such as Boeing and Raytheon.
If a program manager, for example, seems to contradict one of the government's claims, the companies can petition the judge to give them the documents pertaining to that topic.
That will take longer than the companies had hoped and puts witnesses in the awkward position of testifying against either their government bosses or the companies they work with on particular programs.
The government's complaint identified nine market areas where it said competition would suffer if the merger went through, from military aircraft to radar jammers. It can win the case by proving just one of those claims.
Lawyers for the companies have told the judge that they can eliminate some of the market concerns by agreeing to sell off certain product areas. For instance, the companies are willing to part with a portion of Northrop Grumman that oversees the work Lockheed Martin is doing on the Navy's AEGIS battle communications system.
That parts of Northrop Grumman will be sold -- large ones or small -- appears to be the one inevitable aspect of the transaction. Some supporters use the prospect to explain why Lockheed Martin should be allowed to close the deal.
By entering into the Lockheed Martin deal, the argument goes, Northrop Grumman has put itself irretrievably on the trading block. If the federal government refuses to let Lockheed Martin buy the bulk of it, European defense contractors would be ready to pounce.
General Electric Co. of Britain and Daimler-Benz AG of Germany are among several that have expressed interest in such a deal.
Critics of Lockheed Martin's bid for the company say a foreign attempt to buy Northrop Grumman would pose even more problems. The radar work Northrop Grumman does in Linthicum is so sensitive, said analyst McCutchan, "that I can't imagine [the Pentagon] in a million years letting a foreign company have insight into it."
One key executive has seemingly weakened this aspect of the companies' defense: Kent Kresa, the Northrop Grumman chief executive officer. Last week, Kresa said that if the Lockheed Martin deal falls through, his company will be "in great shape" to carry on independently.
Many experts agree that Northrop Grumman could thrive as the top subcontractor for bigger defense companies. But many also believe the Los Angeles-based company suffers as long as the merger remains in limbo.
Most who have studied the case agree that the companies might knock some of the government's points out of the ballpark, such as the claim that Northrop Grumman could stand as a third prime contractor on military aircraft alongside Boeing and Lockheed Martin. Northrop Grumman has not won such a contract in almost two decades.
But even if the companies win those arguments, there is one unpleasant prospect that they might be powerless to escape: the secretary of defense testifying that the merger would weaken the nation's military.
The thought of trying to persuade the judge to ignore the defense secretary motivates the companies to keep open the possibility of reaching a settlement with the government. The judge has encouraged both sides to consider negotiating, but no meetings are set.
Pub Date: 6/14/98