Don't Let Mergers Crowd Out Defense-Conversion Efforts

THE recently proposed merger of Lockheed and Martin Marietta Corporations threatens to stall the remarkable and little-heralded process of post-cold-war defense conversion. If approved, it could force many companies engaged in the search for civilian uses for their highly skilled personnel, facilities, and know-how to turn instead to the risky game of courting rivals and building empires. In turn, the Pentagon will face fewer suppliers with even greater political clout.

Merger mania has belatedly bloomed in the defense industry, unleashing the same frenzy that hollowed out many American corporations in the 1980s. The rationale is that in an era of defense cutbacks, consolidation would permit contractors to save on overhead; with lower costs they could pass savings on to taxpayers and beat out competitors. This may be true in the short run, though tens of thousands of jobs will be lost and taxpayers will absorb shutdown costs.

But there is a darker side to the proposed merger. Fewer competitors and bigger size will mean greater leverage in dealing with the Pentagon and Congress. Political analysts worry about the considerable heft of a Lockheed Martin in the American ``gunbelt,'' the coastal and Southern states favored by defense spending. The mammoth survivor would have enormous power to convince Pentagon officials and military users of the indispensability of its products and its plans for new generations of military equipment. It would also have greater bargaining power in setting weaponry prices, especially in missile and satellite programs.

Although some leading military contractors consistently naysay conversion, prominent among them Martin Marietta's CEO Norman Augustine, our research shows that conversion efforts are surprisingly widespread and increasingly successful, even among the largest firms. Conversion has a long history.

Dupont worked assiduously after World War I to retain its employees and facilities, mostly committed to munitions, and successfully moved into the paints, plastic, and synthetics businesses. After World War II, aluminum makers like ALCOA found marvelous markets in housewares and appliances, while Boeing transformed itself into a first-rate, dual-use aircraft company, weathering the post-Vietnam cuts remarkably well.

Today, contractors from the smallest to the largest have mounted conversion initiatives. Some are already profitable. Although small and medium-sized companies - more nimble and perhaps more desperate - are more successful at conversion, large companies like Hughes/GM and TRW Inc. are making dramatic strides in applying aerospace expertise to automobiles, transit systems, and intelligent highways. Mergers between defense and commercial firms with complementarities, as in the Hughes/GM deal, auger better for successful diversification than those between heavily defense-dependent companies.

Martin Marietta and Lockheed both have substantial defense sales and new internal commitments to conversion. The merged company would make 40 percent of its sales in non-defense markets. But conversion efforts - in traffic control, civilian satellites, and computer information systems - are apt to be overwhelmed by consolidation activities.

Evidence that mergers hamper conversion is easy to find. Since Northrop's takeover of Grumman this year, Grumman insiders report that conversion has come to a standstill. All energies are being directed into ``digesting'' the merger. Morale is poor, and institutional resources are being squandered. Job loss will be greater than if there were no merger.

The Clinton administration, with congressional support, has already undercut the conversion impetus through backsliding on scheduled defense-spending cuts, unqualified enthusiasm for expensive, unnecessary high-tech weaponry, and halfhearted, underfunded attempts to encourage conversion. The new assistant secretary of defense for economic security, Josh Gotbaum, has initiated an evaluation of merger pros and cons for national security and economic competitiveness. His superiors would be smart to withhold their views of such mergers until the evidence is in.

Either the Justice Department or the Federal Trade Commission will decide whether the merger violates antitrust law. A merger that would create the largest defense contractor by far, with some $4 billion more than the next largest, would hurt the prospects of smaller firms and contribute to higher weapons costs in the long run. This is precisely what antitrust is designed to combat.

In this case, national security will be evoked as a countervailing consideration. But the merger makes no clear contribution to either national security or industrial base preservation. Both firms are solid, profitable, and well-positioned in military niche markets. The merger would make the nation more dependent on fewer private-sector sources of supply. The Justice and Trade Departments should say no. In doing so, they will strengthen competitiveness and restore the impetus for job-creating conversion. The Opinion/Essay Page welcomes manuscripts. Authors of articles we accept will be notified by telephone. Authors of articles not accepted will be notified by postcard. Send manuscripts to Opinions/Essays, One Norway Street, Boston, MA 02115, by fax to 617 -450-2317, or by Internet E-mail to OPED@RACHEL.CSPS.COM.