pounds 5bn Lockheed deal creates defence goliath

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The Independent Online
The frenzy of consolidation that has gripped the United States defence industry since the close of the Cold War reached a new pitch yesterday as Lockheed Martin announced it was to buy Northrop Grumman for $8.3bn (pounds 5bn).

If it escapes the radar of the competition watchdogs in Washington, the deal will forge a global goliath with a workforce of almost a quarter of a million and annual sales in the region of $37bn.

It also puts the fragmented European defence industry under further pressure to consolidate. British Aerospace, which has pioneered the drive to consolidate Europe's warring manufacturers into little more than a single player, said the deal was a timely reminder of the need to move faster.

While experts saw considerable logic in the strategy of Lockheed Martin, there was also widespread shock. Northrop Grumman had stated repeatedly over recent months that it intended remaining independent.

By virtue of the few players that will be left, it will probably be the last of the mega-mergers in the US defence industry. Almost certainly, it was driven by proposed acquisition of McDonnell Douglas by Boeing. That deal, which is worth $14bn, received US government approval only this week but remains under scrutiny by the European Commission.

Both Lockheed Martin and Northrop Grumman are themselves recent products of the extraordinary consolidation rush. The former was created by the merger of Lockheed and Martin Marietta in 1995, while the latter is the fruit of the 1994 marriage of Northrop Corp and Grumman Corp.

There has been a joke in defence circles for some time that soon there would be just three defence rivals in the US: "McBoeing", "LockMartin" and "RayHughes". The latter is a composition of Raytheon, which is itself in the process of ingesting the Hughes Electronics division of General Motors.

"Lockheed Martin and Northrop Grumman have been leaders in consolidating the aerospace industry, and we are now taking the next logical step in combining together to shape the future," said Lockheed's chairman, Norman Augustine. The deal is set to be closed by the end of the year.

By comparison, the progress towards consolidation among Europe's defence and aerospace companies has been painfully slow. Despite the urgings of Sir Richard Evans, BAe's chief executive, national governments have been unable to agree terms towards the aim of using the Airbus consortium as the template for a wider defence rationalisation.

BAe has remained caught between its continued interest in bidding for GEC, which will next week outline its long-term strategy, and the bigger prize of cross-border mergers.

A BAe spokesman said yesterday: "This only serves to remind us in Europe that we really need to get on with things. We would all like to move faster, though US businesses have the advantage of all being in the same country with the same rules."

The Pentagon has been candid about encouraging the recent spate of mergers on the grounds that they would offer better pricing at a time when procurement programmes are on the decline. Both companies yesterday said they had had informal contacts with the Pentagon about the deal.

The likely reaction of competition officials is far less sure, however. This week, for instance, regulators definitively blocked a giant merger in the office supply sector between the Staples and Office Depot stores. Among analysts welcoming yesterday's deal was Jon Kutler of QuarterDeck Investment Partners. Pointing out that both Lockheed and Northrop had been consistently bidding for the same contracts recently, he said: "You would have thought if Lockheed wanted to do this deal it would have done it a few years ago and taken a competitor out of the marketplace. This is an obvious fit."

Lockheed, based in Maryland, is best known for producing the F-16 fighter jet, the C-130 lift plane and the F-117 stealth fighter. Northrop, which is in California, builds the B-2 Stealth bomber and the F-18 fighter jet as well as some parts of the Boeing 777, 757 and 767 jetliners. Lockheed Martin has had an especially good run recently, snaring, for example, the contract to build the next generation of space shuttles.

In May, it strengthened its ties with Northrop by joining forces with it to bid for the contract to build the Joint Strike Fighter for the US Air Force.