Far from throwing in the towel after the US Government counted out its merger with Northrop Grumman, Lockheed Martin is back in the acquisition ring with a very different prize in its sights.

The agreement to acquire US satellite communications service provider Comsat, hard on the heels of forming its Global Telecommunications Services subsidiary, signals that Lockheed Martin is now looking in a different direction for growth after its acquisition of Northrop Grumman was blocked by the US Government.

Lockheed Martin president Peter Teets says that, "post-Northrop Grumman", the company has two legs to its strategy for going forward: improving margins in its core businesses and expanding into high-growth markets.

The Comsat acquisition is an example of the latter, while the "Lockheed Martin 21" (LM-21) initiative under way to re-engineer the company's technical and business processes, and reduce costs, is at the heart of the former.

"Northrop Grumman was not a 'debacle' or a 'loss'," says Teets. "We wanted Northrop Grumman to give us bulk in electronics and aeronautics. But the Department of Defense would not approve the deal, although we tried hard to solve their concerns. We were obviously anxious to consummate the Northrop Grumman deal, but we are a very strong company without it," he says. "Northrop Grumman is a strong company, and I believe they will survive. We will continue to partner with them."

Denied the opportunity to boost its electronics and aeronautics sectors, Lockheed Martin now believes that its core defence business will grow only slowly, and that the best strategy is to improve margins by reducing costs.

It is a theme echoed by the other US defence giants, Boeing and Raytheon, which seem similarly to be focusing inwards on restructuring after the recent spate of acquisitions that reshaped the industry.

"We are real close to the bottom of the defence spending cycle in the USA," Teets believes. "But we are not looking for significant growth. An increase in spending is warranted, but the balanced budget is very important now in the USA," he says, adding that the balanced budget is likely to limit the scale of increases in defence spending.

Instead, Lockheed Martin has launched the company-wide LM-21 initiative to improve its margins. "We think $2.5-3 billion a year in savings is achievable, "Teets says.

Since the beginning of the year, Lockheed Martin has been working to identify "best practices" and migrate those across the company. "In any process, one Lockheed Martin company will be world class, but there will be considerable variation across the corporation. This is fertile ground for improvement," he says.

The second leg of the company's "post-Northrop Grumman" strategy is to expand into high-growth markets. This is essential in meeting the company's goal of achieving double-digit growth. "We want to be in a reasonable growth mode," Teets says. With the defence business stable, growth can only come from new markets.

Space is an obvious market, given Lockheed Martin's strong positions in the satellite manufacturing and launching industries. But with the company already in the top three in both sectors, the opportunities for rapid growth there are limited, so Lockheed Martin has turned to the service provider segment.

Its first move was to form Global Telecommunications Services as a wholly-owned subsidiary that could later be spun off as a public company. The new unit brings together Lockheed Martin's various ventures, including that with former Soviet intelligence organisation Intersputnik, to launch and operate commercial satellites, with the aim of providing global communications network services to corporations and governments.

Lockheed Martin has aggressive growth plans for the new business. The market it is serving, valued today at $50 billion, is expected to grow to $120 billion by 2002 with exploding demand for broadband and Internet services. "Our goal is to achieve $1 billion in sales by 2000; now, we are under $100 million," says Teets.

The Comsat deal, valued at $2.7 billion, would appear likely to boost Global Telecommunications Services well on its way towards its goal of $2-3 billion in sales within five years. Lockheed Martin is also expected to pursue the acquisition of public and private communications service providers in Asia, the CIS and South America.

The move means a significant shift for Lockheed Martin, which traditionally has been a manufacturer. "We will be a service provider," says Teets.

The shift is taking place elsewhere, notably in the company's information sector. This includes Integrated Business Solutions, a company which provides outsourced information technology services. "This is a market with a lot of growth," says Teets.

Overall, Lockheed Martin sees the IT and commercial space sectors growing to 60% of its business as its turnover increases to $40 billion by 2003, up from $28 billion.

And what of the defence business? Teets says any gaps left by the failure of the Northrop Grumman merger will be filled by partners. Talks on alliances and ventures were put on hold during the merger period. "We're off hold and will make headway with partnerships now," he says.

Source: Flight International