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`This Is Going To Be The Biggest Kahuna Around'

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After sealing the megadeal to merge his company with Martin Marietta Corp., Chairman Daniel M. Tellep of Lockheed Corp. retreated to a quiet dinner with his wife at New York's Pierre Hotel. Martin Chairman Norman R. Augustine didn't even stick around when his lawyers popped champagne corks.

The two corporate chieftains may seem blase about their stunning Aug. 29 proposal to wed the nation's No.2 and 3 arms makers, but the rest of the defense industry reacted as if one of Martin's Titan IV rockets had just blasted into their boardrooms. "It scares the bejeezus out of us," says one defense company executive. "This is going to be the biggest kahuna around."

BLAST OFF. Indeed, with combined annual sales of $23 billion, the new defense behemoth will be 50% larger than its nearest competitor, McDonnell Douglas Corp. The threat of Lockheed Martin's muscle, industry executives say, likely will spur marriages among arms makers fighting for military orders that have shrunk steadily since 1987.

The Pentagon, with the tacit approval of the Justice Dept., has encouraged such consolidation--because it would rather rely on a few efficient producers than numerous weak ones. But now the activity is arousing antitrust fears among smaller companies and members of Congress, who may try to bust up the mergers on anticompetitive grounds. That's one more reason contractors may rush to complete deals. "Companies will be more eager to sell over the next year, before the well is poisoned and ahead of further cuts in defense spending after 1995," says Chuck Gabriel, a senior defense analyst with Washington Research Group.

At first glance, Wall Street agreed with Gabriel's assessment, bidding up defense stocks in the wake of the announcement. Speculation swirled around Loral Corp., a defense-electronics conglomerate that has been acquiring companies at a heady pace, and on McDonnell Douglas, maker of F-15 fighters, which has shunned much of the merger mania. "The pressure is on McDonnell to qtart finding new businesses," says Richard A. Bitzinger, an analyst with Defense Budget Project, a think tank.

And no one is counting out further purchases by Lockheed Martin. The new colossus will generate $4 billion to $5 billion in cash over five years, giving it the resources to add to its arsenal. The latest buzz: Lockheed Martin is already eyeing a merger with Northrop-Grumman, which launched the industry's "merger of equals" trend last spring. Such a deal could be worth $2.5 billion.

Beyond giant courtships, analysts expect a surge in linkups among arms-components makers and second-tier suppliers. "You will see a trickle-down effect," forecasts Richard Pettibone, an analyst at Forecast International.

Partnerships, for example, are likely among the handful of U.S. helicopter makers: Textron's Bell Helicopter division, United Technologies' Sikorsky unit, Boeing, McDonnell, and Hughes--too many chopper makers battling for dwindling Pentagon purchases. Likewise, cuts in military orders for ships and submarines will force shipbuilders to consolidate. A potential victim: Maine's Bath Iron Works, which builds a shrinking number of Navy destroyers.

A MONSTER. Defense experts predict that a similar merger wave will wash over Europe, as players there scramble to match Lockheed Martin's breadth and pricing power. Talks between Britain's General Electric Co. and British Aerospace PLC, which had met government resistance on antitrust concerns, may heat up again. If European arms makers don't follow suit, they could lose out to the U.S. on Asian and Middle Eastern orders, which have become critical to keeping Western production lines going in the post-cold-war era. Already, says Forecast's Pettibone, "you could almost go to Lockheed Martin and outfit your whole country."

The new defense monster still has a lot on its plate. Martin has barely digested its 1992 acquisition of General Electric Co.'s aerospace division and has just started on its December, 1993, purchase of General Dynamics Corp.'s space systems unit. But the gloomy outlook for arms spending ensures that even Lockheed Martin won't wait long before its next deal. In the weapons business now, it's eat or be eaten.Amy Borrus in Washington, with Suzanne Woolley in New York and Tim Smart in New Haven, Conn.

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