Graham Warwick/WASHINGTON DC

TWODAYS AFTER the US Government approved Boeing's merger with McDonnell Douglas (MDC), Lockheed Martin and Northrop Grumman announced that they, too, are to merge. The "new" Lockheed Martin will have annual sales of $37 billion, less than Boeing/MDC's $48 billion, but it will remain the world's largest defence contractor, with sales to the US military alone of some $15 billion a year.

The stock-for-stock deal values Northrop Grumman at $11.6 billion. Lockheed Martin chairman Norman Augustine does not expect the merger to encounter anti-trust problems, believing that there is little overlap between the companies. Nor does he expect a European challenge, as Lockheed Martin has no plans to become a commercial-aircraft manufacturer.

Augustine says that the merger of the two "strong and healthy" companies will reduce costs and strengthen technology leadership, and is necessary for Lockheed Martin to be competitive globally. Serious discussions on a merger began in June, he says.

The companies already co-operate on several projects, and Northrop Grumman joined Lockheed Martin's Joint Strike Fighter team in June.

Both companies have led the charge in consolidating the US aerospace industry. Lockheed and Martin Marietta merged in 1995, and acquired the bulk of Loral in 1996. Northrop merged with Grumman in 1994 and purchased Westinghouse's defence and electronics business in 1996. Its $750 million take-over of Logicon is expected to be complete in August.

Just as Martin Marietta's failure to acquire Grumman led to its merger with Lockheed, Northrop Grumman's unsuccessful bids for Texas Instruments'(TI) defence business and Hughes may have encouraged the company to consider a merger.

Chairman Kent Kresa says that Northrop Grumman "-did not actively seek this transaction", but was persuaded by Augustine's "vision of the future" and the shareholder value represented by Lockheed Martin's offer.

The offer represents a premium on Northrop Grumman's expected 1997 sales of around $9 billion, but is in line with other recent industry transactions, Lockheed Martin says, notably Raytheon's agreements to pay $3 billion for TI and $9.5 billion for Hughes - both substantially above their annual sales.

Northrop Grumman has been transforming itself into a defence-electronics contractor and will boost Lockheed Martin's share of this growing sector. About half of Northrop Grumman's $9 billion sales is in electronics, says Vance Coffman, who will take over on 1 August as Lockheed Martin chairman. A further $3.5 billion is in aerostructures, including substantial subcontract work on Boeing airliners, and $1 billion in information and systems integration.

The merger will boost Lockheed Martin's space, missiles, electronics and information businesses to more than $20 billion annually, ahead of the combined Boeing/ MDC's defence and space revenues. The company's aeronautics sales will be boosted beyond $10 billion, with significant commercial-aerostructures business, but will still be only about half that of Boeing/MDC.

The transaction is expected to be completed by the end of 1997. Kresa will become vice-chairman of Lockheed Martin.

Source: Flight International