The deal will create a company with more than dollars 22.5bn in annual sales, almost double those of McDonnell Douglas, the Pentagon's next biggest supplier.
The merger, five months in the making, is expected to trigger another round of consolidation among America's remaining defence contractors, and share prices rose sharply across the sector yesterday. Interest centred on Loral, another company with an ambitious acquisition record, Raytheon, Rockwell and E-Systems, an electronics group that has shunned mergers.
Martin, apparently worried about just such an eventuality, put a poison pill in place, making it prohibitively expensive for a third company to try to break up the deal.
Lockheed Martin, as the merged company will be known, will dominate three key defence sectors - space and missiles, aeronautics and electronics. It will employ 173,000 and have an order backlog of dollars 43bn. About 40 per cent of its business will be non-US Defense Department work, and it will rank as America's 14th-largest industrial group.
The two companies have been among the most aggressive in responding to the sharp decline in US defence spending, acquiring big pieces of former rivals that have decided to leave the weaponry business.
Lockheed, seeking 'critical mass' in an industry that has shrunk almost 70 per cent since the height of the Cold War, last year bought General Dynamics' fighter division, while Martin has purchased the aerospace businesses of General Electric and General Dynamics.
In March, Martin triggered the industry's largest bidding war, offering dollars 2bn for Grumman, only to lose out to a higher offer by Northrop of California.
Although Lockheed is a larger company in terms of sales, shareholders in Martin, the more profitable partner, will end up controlling a majority of the new group's stock. Lockheed's shares, which will be exchanged for 1.63 shares in Lockheed Martin, soared dollars 103 4 to dollars 763 4 yesterday, while Martin's finished up 50 cents at dollars 483 4 .
Norman Augustine, 59, chief executive of Martin, who will succeed Daniel Tellep as Lockheed's chief executive upon his retirement, said: 'These are Darwinian times in our industry. Failure to change is failure to survive.'
Despite the loss of more than a million jobs since the US military 'build-down' began in 1986, the industry still has overcapacity equal to almost two-thirds of the market, analysts say.
As a result, the Pentagon has encouraged consolidation and monopolies regulators have turned a blind eye to otherwise anti-competitive mergers.
Mr Tellep cited tough international competition - 'companies often subsidised by foreign governments, and consolidating across international boundaries' - as one reason for the merger. 'This new company will be able to compete with anyone, anywhere in the world.'
Both men warned of job losses at the new company, whose weapons businesses have already shed tens of thousands in recent years.
Significant savings will come from eliminating duplication in research and development, analysts said. But they held out the hope that new jobs would be created as the group expanded into non-defence businesses.
The new company would almost certainly make additional acquisitions in the future, although these would involve niche products rather than whole contractors.
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