Unable to overcome the Pentagon's opposition to the creation of a defense industry superpower, Lockheed Martin Corp. abandoned yesterday its attempt to purchase Northrop Grumman Corp. for $11 billion.
The decision hands a victory to government antitrust regulators, who said they had never challenged such a large corporate merger in court, and capitulates to a sharp reversal on the part of Pentagon officials who had previously encouraged the defense industry's consolidation.
"Continuing the litigation at this point is simply not in the best interests of Lockheed Martin's customers, shareholders or employees," said the Bethesda company's chairman and chief executive officer, Vance D. Coffman.
Acknowledging in an interview that he was disappointed to give up the fight against the government's lawsuit seeking to block the deal, Coffman said he had to think about preserving Lockheed Martin's relationship with the Pentagon.
"Obviously you don't want to get in a longer-term situation with your biggest customer. That would be a concern for you for your long-term future," he said.
Defense Department officials could not be reached for comment after the announcement, which came about 6:30 p.m.
But the Justice Department's lead antitrust lawyer, Joel I. Klein, issued a statement welcoming the news.
"This means that the United States government and the American people will continue to receive the highest possible quality of military products at the lowest possible cost," Klein said.
He filed suit March 23 seeking to block the deal. Lockheed Martin vowed to fight but met regularly with Pentagon officials to look for ways to settle.
Yesterday, Northrop Grumman Chairman Kent Kresa said he had heard early this week that those discussions had fallen apart but that he didn't learn about Lockheed Martin's decision to terminate the deal until yesterday afternoon.
"I have mixed feelings, in the sense that I viewed this as a very exciting direction for Northrop Grumman to go in," Kresa said.
Executives at Lockheed Martin believed until the past few days that they might be able to settle.
"In the last month, our optimism had come up some and we were actually thinking we had a potential way to get the issues resolved," Coffman said. "But at the end of the day, it didn't pass muster."
Lockheed Martin had presented about a dozen "option paths" for modifying the merger to satisfy concerns that the deal would have lessened competition in the industry, Coffman said.
But Defense Department officials made it clear this week that they could not be satisfied and that a settlement was unlikely, he said.
With the trial in the lawsuit scheduled for Sept. 8 and the judge's decision not due until Christmas, Lockheed Martin's board of directors held a telephone meeting yesterday and voted to end the deal.
Under the terms of the original transaction, either company's board had the right to terminate the merger. Kresa said he had no role in the decision and was told of it with a phone call after the vote.
"We were committed to moving forward with the litigation. We felt we had a good chance to win. But Lockheed Martin had the right to do what they did, and we respect their decision," Kresa said.
Dwarfed by the merger-bulked trio of Lockheed Martin, Boeing Co. and Raytheon Corp., Northrop Grumman had charted a course for itself in the remade defense industry as the king of subcontractors - bigger than any other second-tier company and a major supplier to the three giants.
Kresa said the company - which built the B-2 stealth bomber and supplies parts to every Boeing jetliner - will continue in those roles while working as Lockheed Martin's partner in the competition to build the successor to the F-16 fighter jet.
Kresa said his course is clear, even though industry analysts have speculated recently that foreign companies looking to get a foothold in the U.S. defense industry might try to buy an unattached Northrop Grumman.
"We're not for sale," Kresa said, adding that the company's Electronic Sensors & Systems Division in Linthicum is a key to the future through its extensive work building radars and electronics gear for the military.
Lockheed Martin had argued that it needed Northrop Grumman to compete with Boeing and Raytheon.
"It would have made us a stronger company," Coffman said. "But we're a strong company now and we will be tomorrow, and the next day, even without Northrop Grumman. No question about that."
The Justice Department and the Pentagon agree that Lockheed Martin is strong enough to thrive.
The government had argued that the merger would create monopolies in too many defense markets because Lockheed Martin already dominates or competes strongly in areas such as military aircraft, stealth technology and electronics.
Industry experts had been split on the proposed merger, some lamenting the demise of Northrop Grumman as a unique, independent company and others applauding the strength the deal would have given the combined powerhouse.
But after Lockheed Martin lost in several court skirmishes - most notably its attempt to gain access to secret government documents related to the transaction - many experts felt the only viable options were to settle or drop out.
"There would have been a long, bruising court battle, they would have spent many millions more keeping the deal alive and would have damaged their credibility with their biggest customer," said Stuart McCutchan, editor of the newsletter Defense Mergers & Acquisitions.
"I guess you could say they decided to cut their losses."
! Pub Date: 7/17/98