Defense companies play musical chairs in military electronics

LEXINGTON, Mass. - Executives at Raytheon Co. of Lexington, Mass., and Lockheed Martin Corp. of Bethesda, Md., moved to strengthen their positions in the increasingly competitive defense electronics market - Raytheon by buying Hughes Aircraft Co., Fullerton, Calif., and Lockheed Martin by spinning off its operations outside that market.

Mar 1st, 1997

By John Rhea

LEXINGTON, Mass. - Executives at Raytheon Co. of Lexington, Mass., and Lockheed Martin Corp. of Bethesda, Md., moved to strengthen their positions in the increasingly competitive defense electronics market - Raytheon by buying Hughes Aircraft Co., Fullerton, Calif., and Lockheed Martin by spinning off its operations outside that market.

The Raytheon/Hughes transaction is by far the larger of the two, representing a $9.5 billion payment to the General Motors Corp. Hughes Electronics Corp. in Los Angeles. The Lockheed Martin spinoff of several specialized businesses acquired last year from Loral Corp. (not including the former IBM defense electronics operations) was estimated at $650 million, or about equal to their combined annual revenue.

The net result of the moves is to position the two companies as the principal competitors to Boeing Co. of Seattle, which vaulted to the top of the defense industry in December with its $13 billion purchase of McDonnell Douglas Corp. in St. Louis.

By failing to outbid Raytheon for Hughes, officials of Northrop Grumman Corp. in Los Angeles face the danger of falling out of the ranks of the prime contractors on major weapon systems as the number of new systems dwindles.

Raytheon, with its earlier acquisitions of E-Systems and the defense electronics activities of Texas Instruments, both based in Dallas, may have to do some spinning off of its own to concentrate on its core business. In announcing the Hughes merger on Jan. 16 in New York, Dennis Picard, Raytheon chairman and chief executive, said the company would begin seeking buyers of its engineering, construction, and home appliances businesses.

General Motors executives had sought to get out of the high-tech business by auctioning off Hughes, which they bought in 1985, and will fold GM Hughes Electronics, the nominal parent company of Hughes Aircraft, back into General Motors. This is basically the non-defense side of Hughes, including commercial satellites, cellular telephone networks, and satellite TV antennas for the home market.

The resulting operation, to be named Raytheon Hughes Systems, will operate as a separate division and be headed by the current president of Hughes Aircraft, John Weaver, who will report to Picard.

On the basis of the merger, Raytheon officials estimate their 1996 sales would be $21 billion (an estimated $6.3 billion of that from Hughes), of which more than $13 billion were derived from defense electronics. The new division joins three others in that business sector of the company: Raytheon Electronics Systems, Raytheon E-Systems, and Raytheon TI Systems.

However, it is in the missile area where the merger may raise anti-trust concerns. Hughes is involved in Maverick, TOW, MEADS, Tomahawk, Stinger, RAM (Rolling Airframe Missile), AMRAAM, Sparrow, Evolved Sea Sparrow, Standard, and the new AIM-9X sidewinder. The Raytheon missile programs are Patriot, Hawk, AMRAAM, Sidewinder, Sparrow, and Standard.

Also, prior to the acquisition by Raytheon, Hughes bought the Marine Systems Group (MSG) of Alliant Techsystems of Hopkins, Minn., in December for $141 million. MSG makes torpedoes (Mk 46 and Mk 50) and undersea surveillance systems. MSG is being folded into the Hughes Naval and Marine Systems unit, which now goes to Raytheon.

One area where competition may be enhanced is in airborne radar. Hughes and Westinghouse Defense Electronics in Baltimore (now part of Northrop Grumman) had competed fiercely for each new generation of Air Force and Navy fighter aircraft and will now do so again under the respective banners of Raytheon and Northrop Grumman.

For Lockheed Martin, the selloff of the previously acquired Loral operations doesn`t entirely get the company out of the radar business. Lockheed Martin will still own 35 percent of the new company, to be called L3 Communications.

Lehman Brothers Holdings Inc. in New York will own half of L3, and the new firm`s management, including its president, Frank Lanza, who was chief operating officer of Loral and later became a Lockheed Martin executive vice president, will own the remaining 15 percent.

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