Possible Lockheed/Marietta Merger Indicative of US Defense Shake-Up

PUSHED by the pressure of Pentagon budget cuts, United States defense firms continue to shrink and consolidate as they struggle through one of the most drastic industrial transformations in modern American business history.

The proposed merger between Lockheed Corporation and Martin Marietta Corporation would be but the latest in a string of megadeals stretching back to August 1992, when the LTV Corporation sold its missile division to Loral Corporation and its aircraft arm to a consortium led by Northrup Corporation. More change probably lies ahead, as the remaining players in the defense game position themselves for a leaner future.

Because it takes some years for weapons contracts to work their way through the procurement pipeline, budget cuts already enacted mean that the defense market will continue to decline through at least 1997. By then, the Pentagon will be spending only one-half to one-third as much on new hardware as it did in the 1980s boom years, according to Pentagon projections.

In those sections of the country that depend on defense as their economic engine, the human cost of this drawdown will be intense.

``Some of this is inevitable, given the significant reduction in what we are spending on the military. We don't have the money,'' says Rep. Christopher Shays (R) of Connecticut, whose district contains a significant concentration of military firms. ``I have concerns and problems with it, but I don't see the alternative.''

Currently, employment in the US defense industry is shrinking at a rate of about two jobs per minute, according to one estimate.

The Aerospace Industries Association says that, over the last five years, its members alone have slashed 471,000 employees. Defense officials routinely say that at least 1 million jobs have already been lost in the military sector, with another 1.5 million at risk in the near future.

Mergers make sense in the face of this kind of pressure. They can eliminate overcapacity and duplicate jobs, leaving a stronger single firm in place.

Thus, Northrup bought Grumman Corporation in May for more than $2 billion. General Dynamics Corporation has held a virtual fire sale of its best divisions - among other things, selling its fighter-aircraft business to Lockheed last year for $1.5 billion. Martin Marietta bought General Electric Company's aerospace business for $3 billion in April 1993.

The proposed Lockheed Martin Corporation would combine two defense firms that most analysts judge to be among the best-run in the industry. According to the chairmen of both Marietta and Lockheed, the catalyst for the merger was the government itself.

At a press conference held on Tuesday to announce the merger, Norman Augustine, chairman of Marietta, recalled a dinner two years ago at the Pentagon with then-Secretary of Defense Les Aspin, his deputy, William Perry, and Undersecretary John Deutch. ``They told us there were already too many of us,'' Mr. Augustine said.

In the business of tactical aircraft, there were five US competitors. ``They told us, at most, they could afford two of us,'' he said. In the space-launch business, there were three competitors, but the Pentagon could only afford two. In spacecraft manufacturing, there were five companies, but the Pentagon again only saw room for two.

In merging, the two companies maintain that there will be substantial savings. ``The arithmetic is pretty simple: Three full factories are better than six half-full factories,'' Augustine stated.

Over the past several years, the Pentagon has put its money where its mouth is by paying part of the restructuring costs of some large mergers. But there were indications that the Lockheed Martin marriage would not receive an automatic blessing from Pentagon officials. The two companies would together be the largest US defense contractor by far and one of the largest industrial firms in the nation, with about $23 billion in government and civilian revenues.

``There appear to be very serious antitrust questions'' raised by the proposed merger, Mr. Deutch, now deputy defense secretary, said Tuesday.

The chairman of a Senate panel that reviews antitrust policy urged the Justice Department to look closely at the legal issues involved in approving a new Lockheed Martin firm. ``This proposed megamerger would create the world's largest space and defense company and could be harmful to taxpayers, small business, and consumers,'' Sen. Howard Metzenbaum (D) of Ohio wrote Anne Bingaman, the assistant attorney general for antitrust.

Senator Metzenbaum is chairman of the Senate Judiciary Committee's subcommittee on antitrust, monopolies, and business rights.

The Lockheed and Martin Marietta chairmen say they have no estimate of the number of jobs they will eliminate if the merger is approved.

Layoffs will be likely, however. Marietta has 350 employees at its Bethesda, Md., headquarters, and Lockheed has 250 at its Calabasas, Calif., site. The new headquarters will be located in Bethesda, the chairmen said.