Defense Firms Enter Key Alignments to Bid for Smaller Military Contracts

Article excerpt

The pending $10 billion buyout of Loral Corp. by Bethesda's Lockheed Martin Corp., itself the 9-month-old product of a $10 billion merger, will spur billions of dollars in new aerospace and defense mergers, industry analysts predict.

Top executives involved in the latest acquisition share that view.

"It's like a force of gravity. . . . There are plenty more deals to come," said Bernard Schwartz, Loral Corp. chairman.

"These are Darwinian times in aerospace," said Norman Augustine, Lockheed Martin chief executive officer, adding that the entire industry, from plane makers to parts makers and from bomb builders to microchip makers, faces further change.

Lockheed Martin's plan to buy the bulk of Loral for more than $10 billion, announced Jan. 8, followed by just a week the purchase by Northrop Grumman Corp. of Westinghouse Electric Corp.'s defense electronics business.

That deal, valued at $3.6 billion, gives Northrop, a company that specializes in fighters and bombers, control over a company that makes the specialized electronic equipment that goes into the fuselages - and one that also has a strong role in the civilian side of air traffic control.

"There is a perceived need to broaden your markets at a time when you're in a shrinking defense environment," said aerospace securities analyst Paul Nisbet of Newport, R.I.-based JSA Research. "The specialists who are without a broad market are hurting very badly."

Similarly, the Loral acquisition gives specialized electronics and civilian strength to Lockheed Martin, which builds fighters, bombers, spacecraft and military weapon systems.

As "platform builders" like Lockheed or Northrop look to diversify, they're focusing on high tech and electronics. That's what prompted Loral to buy IBM's federal system unit, an air traffic control equipment maker, two years ago.

Analysts are also watching General Motors Corp. for signs it may sell its Hughes electronics unit. Hughes, which the carmaker acquired in 1985, makes electronic guidance and control systems for missiles and for air traffic control and navigation, giving it both a defense and a civil side.

But because the subsidiary is so heavily involved in GM's core automotive business, its parent is seen as unlikely to sell the unit, according to Mr. Nisbet.

Allied Signal Inc. and Raytheon Co. also are seen as unlikely to spin off their defense-electronics businesses, he said.

Allied Signal is selling some civilian businesses - its anti-lock brake and plastics divisions - but earlier this month bought Precision Products, a Northrop Grumman unit that makes inertial guidance and navigation systems for military and space use. …