Lockheed Martin's decision to call off its proposed $8.3 billion acquisition of Northrop Grumman Corp. in the face of government opposition could signal the end of mega-mergers in the defense industry.
Lockheed Martin Corp. announced its decision late Thursday, citing the companies' failure to overcome government opposition to the move because of concerns that it would crimp competition.The news came just hours after the Pentagon said it was unable to work out an agreement with Lockheed to modify the deal and that it would press on with a lawsuit it filed in March to block the merger - the largest ever challenged by the federal government.
"Continuing the litigation at this point is simply not in the best interests of Lockheed Martin's customers, shareholders or employees," Vance Coffman, Lockheed Martin chairman and chief executive, said in a statement. He said it was "regrettable" that the merger did not go through, but that the companies would continue to cooperate.
The government welcomed the decision, and one analyst predicted the move would spur smaller companies to branch out in order to better compete with giants such as Lockheed and Boeing.
The Pentagon and Justice Department had argued that the combination of the two aerospace giants would reduce competition in key defense areas such as electronics and missile warning systems. The case had been scheduled to go to trial Sept. 8.
"We welcome this decision to abandon the transaction," said Joel I. Klein, assistant attorney general for antitrust. "This means that the United States government and the American people will continue to receive the highest possible quality of military products and services in the defense of this nation, at the lowest possible cost to the American taxpayer."
In a statement, Kent Kresa, Northrop Grumman president and chief executive, said: "While we believed the merger was in the best interests of our constituencies, Northrop Grumman can and will continue as a strong, independent competitor in the aerospace marketplace."
The decision by Lockheed Martin to abandon the deal brings to a halt the rapid consolidation that has taken place in the defense industry since the end of the Cold War led to a drop in military spending. Since 1993, 40 defense companies were merged into four.
The Lockheed-Northrop deal, announced a year ago, would have combined what had been five independent companies just three years ago. It also would have solidified Lockheed Martin's position as the nation's largest defense contractor. The combined company would have accounted for 25 percent of the Pentagon budget.
According to the Pentagon, Lockheed was the largest military contractor in fiscal 1997. Lockheed Martin had $11.6 billion in contracts. Boeing was second, at $9.6 billion; Northrop Grumman, third at $3.5 billion; General Dynamics, fourth, at $3 billion; Raytheon, fifth, at $2.9 billion.
With the scuttling of the Lockheed-Northrop union, the era of megamergers in the defense and aerospace industry is over in North America, said Jerry Weltsch, an analyst for the California market consulting firm Frost & Sullivan.
Now smaller companies such as Raytheon Aerospace and TRW will try to diversify, acquiring smaller companies so they can compete with giants Lockheed Martin and Boeing. "These second- and third-tier companies will start looking at their options," Weltsch said.