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Latest defense merger is just what the Pentagon ordered

July 4, 1997

WASHINGTON (AP) _ At the end of World War II, the Pentagon had 26 aircraft builders to choose from. If the government approves the merger of Lockheed Martin and Northrop Grumman, it will have two.

The proposed $7.9 billion merger announced Thursday is the latest in a post-Cold War consolidation of the defense industry that has occurred with the encouragement _ indeed with the financial support _ of the Pentagon.

Whether the taxpayers will benefit, as merger advocates argue, remains to be seen.

What is certain is that when the Pentagon goes into the marketplace seeking proposals for new aircraft and aerospace systems, it will find a much smaller pool of potential bidders than in decades past.

The great old names of aviation history _ Grumman, Northrop, North American, Republic, Douglas and others _ are history now. The survivors are Lockheed Martin and Boeing Co.

``You’ve got too many companies chasing too few defense dollars,″ said Kenneth Allard, a professor at the National Defense University. ``Inevitably the consolidation occurs. With equal inevitability the best survive and band together.″

To be sure, defense industry mergers have been occurring steadily in the decades since World War II as weapons systems grew more complex and major contracts were fewer and further between.

From 1977 through 1994, the Pentagon let more contract dollars on a noncompetitive basis than a competitive basis in each of seven weapons categories tracked in a recent General Accounting Office report. From 1986 to 1994, 80 percent of the total Pentagon contract dollars were let under the ``only one source″ category.

But analysts agree that what has happened since the end of the Cold War is of a historic magnitude and will change the nature of defense contracting well into the next century.

``This action carries on the monumental changes that have been taking place in our industry,″ said Norman R. Augustine, chairman and chief executive of Lockheed Martin.

Much of the latest flurry of mergers dates to a pivotal meeting arranged in 1993 by then-Deputy Defense Secretary William Perry. At that session, Perry told defense executives that declining defense spending would drive some of them out of business unless they joined forces with competitors.

By the mid-1990s, Perry was secretary of defense, Pentagon weapons spending had plummeted to the lowest level since before the Korean War, and the number of industry mergers was soaring. In 1992 the total value of defense mergers was about $2.5 billion. Four years later the annual defense merger total was $24 billion, according to Defense Mergers & Acquisitions, a magazine based in McLean, Va. Last year, defense mergers reached $24 billion.

At first, the mergers were justified by the sharp reductions in defense spending. That trend is now expected to reverse over the next several years, but no one is expecting a new crop of defense contractors.

``We’re past that stage,″ Augustine said Thursday. The new imperative behind defense industry mergers, he said, is to make U.S. firms more competitive in the global marketplace.

The problem is not just the amount of money the Pentagon spends but the number of weapons systems. For the next three decades, the Pentagon will buy, at most, three new fighter planes. During a similar time span from the 1950s through the 1970s, the military bought dozens of aircraft types.

Boeing has one of those three new planes, the Navy FA-18 E and F. Lockheed Martin is building the Air Force F-22. The third and most sought-after prize, the Joint Strike Fighter, is up for grabs.

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