It's a good idea, but can they pull it off?
Experts and investors alike seemed warily optimistic yesterday about Lockheed Martin Corp.'s plan to create a new telecommunications giant by purchasing Comsat Corp. for about billion.
Lockheed Martin stock fell $4.875 yesterday, finishing at $95.125. Comsat closed at $34.375, up a mere 25 cents. Wall Street's unenthusiastic reaction to Sunday's announcement seemed to reflect investor skepticism about the complex deal.
Lockheed Martin first must win approval from the Federal Communications Commission and then get legislation passed by Congress to complete the transaction.
"I think it's going to be a tough one," said analyst Paul Nisbet of JSA Research Inc., who gave the deal a 60 percent to 70 percent chance of survival.
Others were more optimistic but still warned of a long and difficult process for the two Bethesda-based companies.
"I think it will go through," said Joseph A. Gomes of Wm Smith & Co. in Albany, N.Y. "There doesn't appear to be a lot of overlap between the two companies."
Lockheed Martin, one of the world's leading defense contractors, has long built and launched satellites but did not market communications services. Comsat, it hopes, will help boost it to the top of that field, as well.
The complexity of the proposed merger lies in the unique nature of Comsat. Founded by an act of Congress in 1962, Comsat is the designated United States representative to the two international satellite organizations, Intelsat and Inmarsat, and has exclusive rights to provide their services to U.S. companies.
Because of that exclusive access to a valuable commodity, Comsat's charter says no company can own more than 10 percent of its stock. But the FCC can allow an entity to buy up to 49 percent of the stock if regulators find the deal to be "in the public interest," said Scott Blake Harris, former chief of the international bureau of the FCC who now practices law at Harris, Wiltshire & Grannis in Washington.
That prospect seems good in this case, Harris said, because Lockheed Martin is likely to show that "this acquisition is going to help competition in the satellite services market."
Once that step is cleared, Lockheed Martin must get Congress to pass legislation lifting the ownership cap so that it can acquire the remaining 51 percent of Comsat.
"There aren't many mergers that require an act of Congress to go through. If it's not unique, it's very close," Harris said. He believes the companies can clear that obstacle, too, but that they will have to make some compromises.
Comsat's heavily regulated status carries certain privileges and
immunities -- such as protections against lawsuits -- that Congress will want lifted to make the company more competitive, Harris said.
What's more, Comsat will probably lose its exclusive rights to sell access to Intelsat and Inmarsat in this country, allowing other companies to deal directly with the networks.
"One can argue that, that would diminish the revenue stream that Comsat has," Harris said. But Comsat owns 18 percent of Intelsat and 22 percent of Inmarsat -- the biggest share held by any member of either consortium -- and so would continue to profit from any new business.
"My guess would be that the driving factor for Lockheed Martin here is not the ability to resell Intelsat services," Harris said. "If it was merely that, I suspect we would not be seeing a transaction here."
Bills calling for much of what Harris described are already percolating in Congress. The House passed a version May 6, and the Senate is still debating its own.
John V. Sponyoe, chief executive of Lockheed Martin's Global Telecommunications subsidiary, said the companies are already
beginning to work with Congress.
"We've done a lot of homework," Sponyoe said. "We very much want to be the market leader in terms of our achievements and not through any special privileges."
Analyst Gomes said the legislative phase might prove to be "more problematic" than the FCC approval phase, in part because of the possibility that Congress will be absorbed in determining the fate of the Clinton presidency. "People's attention has been distracted, to say the least," Gomes said.
The result may be a transaction that takes a year or more to complete, experts said.
"It will probably happen by the end of 1999," said Steven A. Solazzo of TD Securities Inc. in New York.
Analysts said that if the deal goes through, the two companies will be better equipped to do battle in an increasingly competitive industry.
Lockheed Martin was the only major satellite builder that hadn't moved into communications services. Hughes Electronics and Loral Space and Communications had already taken that step, and their services were posing an increasing threat to Comsat.
Pub Date: 9/22/98