Lockheed to challenge U.S.
      Company vows to press forward with Northrop Grumman merger
     NEW YORK - March 23, 1998: 7:00 p.m. ET - Lockheed Martin Corp.
 and Northrop Grumman Corp. are vowing to press ahead with their $9
 billion merger despite government attempts to block it.
     In a joint statement, the companies said they have been working
 diligently to resolve antitrust concerns. They also criticized the
 U.S. Justice Department for making divestiture demands that could
 "undermine the economic viability of the transaction."
     "Overlapping program areas account for only a small amount of
 the combined companies' revenues, yet DOJ has been seeking divesti-
 tures of businesses accounting for over half of Northrop Grumman's
 sales," the companies said.
     The companies' response came after Justice filed suit in U.S.
 District Court Monday to challenge the proposed $9 billion marriage.
     "This merger isn't just about dollars and cents," U.S. Attorney
 General Janet Reno said in Washington Monday. "It's about winning
 wars and saving lives. We want to insure that any defense merger
 protects our soldiers' lives and our taxpayers' wallets."
     The lawsuit said the merger would affect "critical" defense
 functions and "would result in unprecedented vertical and horizontal
 concentration in the defense industry, which would substantially
 lessen, and in several cases eliminate, competition in major product
 markets critical to national defense."
     The move came after Justice gave the two defense firms until
 Monday to devise a plan to sell off some of their operations.
     Lockheed has offered to divest up to $1 billion in assets in an
 attempt to appease regulators. The companies say after the divesti-
 tures, the combined Lockheed Martin/Northrop Grumman would account
 for less than a quarter of the defense electronics purchased by the
 government, a figure they say is well below levels that should cause
 antitrust concerns.
     Joel Klein, head of the Justice Department's antitrust division,
 said Monday that Lockheed had no further plans on the table that
 would satisfy the U.S. government's concerns.
     Government defense officials are concerned that the combination
 of the two companies could reduce competition for defense contracts.
 That, officials worry, could mean higher costs and less innovation
 for U.S. weapons systems.
     U.S. officials are looking for about $4 billion in divestitures
 from Lockheed, mainly in their electronics and radar divisions.
 Lockheed and Northrop make early warning radar and missile counter-
 measures systems for the armed forces.
     The companies disagree that such divestitures are necessary and
 said they would not take any action that would compromise their eco-
 nomic viability.
     "We did offer what we believe is a structural remedy," a spokes-
 man for Lockheed said.
     Regardless of which way the litigation goes, Lockheed may find
 its dealings with the Pentagon a bit awkward after the proceedings,
 said Harvey Saferstein, antitrust attorney at Chadbourne & Parke.
                   Consolidating defense industry
     Lockheed (LMT) is the maker of the F-16 Fighter, the in-develop-
 ment F-22 Fighter and the C-130J Hercules cargo plane.
     The purchase of Northrop, the maker of the B-2 Stealth bomber,
 would fortify its position as the top defense firm in the country,
 with roughly $37 billion in annual sales and some 230,000 employees.
     The merger of the two is part of an overall trend toward consol-
 idation in the defense industry, including Boeing Co.'s recent $14
 billion purchase of McDonnell Douglas Corp.
     This trend has been a concern for defense officials, who fear
 that their already shrinking defense budgets will be faced with in-
 creased costs.
     "As this consolidation wave has moved forward the Defense De-
 partment has focused its attention on the problems that could arise
 from increased vertical integration," said U.S. Defense Secretary
 William Cohen.
     "No previous merger has raised so many interrelated problems,
 both horizontal and vertical, across so many markets."
     Vance Coffman, Lockheed Martin's chief executive officer and
 vice chairman, said the combination would actually make for a more
 competitive military aircraft market by enhancing competition be-
 tween Lockheed Martin and Boeing Corp.
                     More important for Northrop
     The two announced the proposed merger in July but have rolled
 back the expected completion date after acknowledging the govern-
 ment's strenuous objections.
     Analysts expect the court battle to last for months and antici-
 pate a middle ground being reached between the $1 billion and $4
 billion divestment proposals.
     Northrop Grumman may be the most tense during the proceedings.
 The company is laden with debt after a string of acquisitions, a
 situation that led it to seek out the Lockheed deal in the first
 place.
     Paul Nisbet, a defense industry analyst with JSA Research Inc.,
 said the deal is more important for Northrop. "Lockheed Martin adds
 more financial stability to Northrop Grumman and more flexibility
 in terms of increased research and development," explained Nisbet.
     Lockheed Martin also would like the deal to happen. Defense
 sales have been relatively flat during the past year. However, Nor-
 throp Grumman, which makes parts for many Boeing, has solid earnings
 in the commercial aircraft arena, currently a booming sector.
     That commercial aircraft business, along with defense communi-
 cations interests, would make Northrop worthwhile to Lockheed even
 if it had to sell off Northrop's radar electronics units, said
 Nisbet.
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