LOCKHEED MARTIN chief executive Norman Augustine has warned that rising prices and anti-trust barriers may begin to act as a drag on future consolidation in the US defence industry.

"Consolidation of the defence industry is not yet over in the USA or in Europe," says Augustine, but adds that there are good opportunities, which are not being pursued because of rising acquisition prices.

Prices are creeping back up above the level of the 1980s, when the defence build-up instigated by President Ronald Regan sent the value of US defence companies soaring. Companies are being sold at more than 100% of their sales revenues, while at the depth of the recession in the early 1990s the ratio had fallen to 25-50%.

Augustine believes that there is still room for another couple of major mergers among the leading US groups, however. He also stands by earlier predictions of a visible upturn in US defence procurement budgets by 1997/8.

Lockheed Martin will now concentrate on consolidating after its own unprecedented merger and acquisition activity, he says. That will include the disposal of more than $1 billion worth of non-core businesses. The group has already announced the sale of its sizeable materials unit, which produces aggregates.

The merger of Lockheed and Martin Marietta, which was announced at the time of the 1994 Farnborough air show and completed in March 1995, is close to securing the promised annual cost savings of $1.8 billion, says Augustine. The group is also more than half-way through its plan to integrate the Loral units acquired earlier this year. That should add another $800 million in savings.

The savings are largely being passed on to customers, says Augustine. That translates roughly into a 10% price-saving across the $27 billion group.

The cash coming into the group will initially be used to bring down debt levels, but Augustine says that Lockheed Martin may look to make investments in smaller defence companies, or possibly make acquisitions or alliances with larger corporations, which can take the group into new business areas.

Source: Flight International