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Aerospace Giants Consolidate, Eyeing Lean But Lively Future

AFTER being flattened on the Tarmac in the post-cold-war era, America's aerospace/defense industry is pulling itself together.

Deflated by Pentagon budget-cutting, companies are consolidating to cut costs, but also to position themselves in new business lines for a potentially prosperous future. In their quest to adapt and reinvent themselves, America's airplane, electronics, and military manufacturers are seeking marriages of convenience as well as matches made in heaven.

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The Jan. 8 announcement that aerospace giant Lockheed Martin Corp. will acquire space/electronics specialist Loral Corp. underlines the US-led, worldwide trend that began around 1990.

"What is happening is a natural consequence of America's peace dividend - the shrinking and compacting of defense industries," says John Kutler, president of Quarterdeck Investment Partners, an investment-banking firm focused on defense. "In the face of Soviet threat, companies overbuilt a huge infrastructure that today's business climate can no longer justify."

Though the defense industry is still downsizing, analysts say the healthy purchase price for Loral - a whopping $9 billion - also reflects a growing confidence by investors that the worst declines of the past few years may be over.

"All of a sudden, investors are looking at an industry that is beginning to get a bit of its luster back," says Joel Kotkin, senior analyst for the Center for the New West in Denver. "With much of the worst behind, and with leaner meaner companies forming, [investors] are feeling confident that there might even be some growth ahead."

The Lockheed-Loral deal comes on the heels of others, such as Northrop/Grumman's $3.6 billion purchase of Westinghouse's defense division a week before.

Last year Lockheed merged with Martin Marietta, becoming the US government's largest defense-and-space contractor, and Northrop acquired Grumman, putting it in third place after McDonnell. Now there is also industrywide speculation that giants Boeing Company and McDonnell Douglas Corp. will either merge or trade some divisions.

"Basically you've got too many companies and not enough customers," says Bill Whitlow, a defense-industry analyst with Pacific Crest Securities, Seattle. Consolidations cut expenses "by combining offices, facilities, personnel - and eliminating competition."

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The Lockheed-Loral giant will have more than $30 billion in annual revenues. Because Lockheed Martin, based in Bethesda, Md., is the country's largest rocketmaker and a major builder of satellites, observers say its owners were attracted to New York-based Loral's strengths in radar lines, telecommunications, air-traffic-control lines and systems-integration businesses. "Lockheed looked around and said, 'What are the growth areas of the future?'" says Mr. Kutler. "They decided the answer was upgrades in electronics, which is just what Loral does."

Because larger firms make it progressively harder for smaller ones to compete, analysts say the trend will continue. "Companies are reading the handwriting on the wall and following the rule that if you are not No. 1 or 2 in the business, then get out," says Michael Beltramo, a Santa Monica, Calif., defense analyst. "The attitude becomes, 'If you can't lick 'em, join 'em.' "

Job losses usually follow mergers in the effort to avoid overlapping production - a fact that has already hit home in southern California, with its many defense contractors.

And although the US government stands to benefit from more efficient businesses in the form of lower prices, analysts warn that a time is fast approaching when consolidation could greatly reduce competition.

"There is the concern of an erosion of bargaining [power] by government contractors," Mr. Beltramo says. Thus, with the increase in mergers, antitrust action by the federal government grows more likely. Despite talk of a Boeing-McDonnell merger for instance, many feel the two companies may simply trade divisions, remaining separate firms.

"It's unlikely that Boeing and McDonnell will merge because they would then control virtually all of the US commercial airplane business and 70 percent of that worldwide," says Mr. Whitlow. Instead, they might combine helicopter divisions or McDonnell Douglas might sell some of its space systems to Boeing.

Europeans are uneasy about the Lockheed Martin/Loral merger. Even before the merger with Loral, Lockheed Martin was larger than the sum of German, French, and British aviation industries combined. Europeans worry that an even larger Lockheed could crowd Europeans out of shrinking world markets.

Nations in Europe have been cutting defense budgets since the cold war's end, but they have yet to take on significant restructuring of aviation and defense industries. Germany's Dasa and France's Aerospatiale developed the consortium Eurocopter to rival McDonnell in the helicopter market. Dassault Aviation and British Aerospace may do the same for jet fighters. France's conservative government has proposed deep cuts in military budgets this year, and French President Jacques Chirac signaled a major overhaul might be announced in March.

*Staff writer Gail Russell Chaddock contributed to this story from Paris.

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