Lockheed Sticks To Its GunsEric Schine
Daniel M. Tellep, chief executive of Lockheed Corp., likes to recount the ups and downs of the aerospace company by pulling out his "mood" chart. Resembling a hospital fever graph, it zigs and zags from the lows of a hostile takeover battle in 1990 to the highs of watching Lockheed's Stealth fighters perform flawlessly over Iraq in 1991. "It's been an exhilarating few years," he says.
Now, as he charts a course for Lockheed in the post-cold war era, Tellep hopes the mood swings will level off. To help ensure a smoother ride for his company, Tellep has put an end to Lockheed's quixotic efforts to redefine itself. No longer betting heavily on nonmilitary businesses, such as aircraft maintenance, Tellep instead has reversed course in a bold attempt to become the nation's largest defense contractor. His bet: As more players bail out of the defense business, there should be enough business around to allow a couple of big contractors to prosper.
On Mar. 1, Tellep took a big step toward realizing his goal when the Calabasas (Calif.) company concluded a $1.5 billion deal to purchase General Dynamics Corp.'s fighter aircraft division. The acquisition of the GD unit, which makes the high-performance F-16 fighter, transformed Lockheed into the largest military-aircraft manufacturer and secured its third-place ranking in the defense business, after McDonnell Douglas Corp. and Martin Marietta Corp. It will also produce benefits for Lockheed's bottom line. Earnings should rise 10% this year, to $385 million, estimates analyst Lior Bregman of Oppenheimer & Co., on a 30% revenue increase, to $13 billion.
Tellep is winning new business by stressing Lockheed's strengths as a leading high-tech defense contractor. Capitalizing on the performance of its F-117A Stealth fighter in the Persian Gulf war, Lockheed has spent the last two years quietly amassing an impressive collection of Pentagon contract awards for high-tech weapons. On Apr. 11, the Navy unveiled an experimental Stealth warship designed by Lockheed. The ship's angular design helps it avoid radar detection. All together, the company is sitting on a hefty $30 billion in back orders for military hardware (chart). "We have never been stronger," says Tellep, 61, an engineer and 38-year veteran of Lockheed.
PAPER WEAPONS. While Lockheed's accomplishments have been impressive, Tellep's strategy faces some big hurdles. Lockheed still must integrate its GD acquisition. More worrisome, the Clinton Administration has yet to spell out its procurement priorities for the years ahead. And in an era of declining defense spending, many of the futuristic and costly weapons Lockheed is focused on may never get built. "Even one cancellation would deal Lockheed a heavy blow," says Loren Thompson, a defense analyst with Georgetown University's National Security Studies Program.
In many ways, Tellep never felt fully at ease in nonmilitary ventures. When he took over as Lockheed's CEO in 1989 after successfully managing the company's missile and space division for four years, the company was on the verge of a hostile takeover battle. Texas billionaire Harold Simmons began acquiring Lockheed stock in 1988 and made unsuccessful takeover attempts in 1990 and again in 1991. At the time, Simmons hoped to sell off some of Lockheed's assets, arguing they were worth more separately than as part of the company. It was during this period that Tellep embarked on a broad diversification. Many analysts speculate that one of Tellep's aims was to calm jittery shareholders who were worried about the decline in defense spending.
Initially, Tellep pushed deeper into related businesses, such as commercial- aircraft maintenance in 1990. The same year, he ventured further afield by going after nuclear-waste cleanup work for the Energy Dept. and contracts to dismantle nuclear warheads in the U.S. and the former Soviet Union. Unfortunately for Tellep, both of these businesses, and some other attempts at diversification, have been disappointments. Lockheed's aircraft-maintenance unit, for example, stumbled badly as the recession pummeled the airline industry. Its environmental-services unit hasn't fared much better. Cleaning up nuclear waste isn't perceived as one of Lockheed's strengths, so the subsidiary has yet to win major contracts.
SATELLITE STRING. A few nonmilitary ventures still hold promise. Lockheed's best shot at diversification ironically involves an old cold-war opponent. Teaming up with Krunichev Enterprise, the Russian rocket company that once launched Soviet spy satellites, Lockheed hopes to build 66 communications satellites for a global wireless-phone system that Motorola Inc. plans to have in operation by 1997. Tellep hopes such satellites can grow into a $1 billion-a-year business by the end of the decade. But for now, Lockheed's nonmilitary ventures aren't helping much. Indeed, Oppenheimer's Bregman says such businesses depressed earnings by some $40 million last year.
Unable to foresee any benefits from nonmilitary projects for quite a while, Tellep began reconsidering his diversification plan in 1992. Sure, Pentagon spending was dropping fast, but an industrywide shakeout was gathering steam. Tellep believed that would clear the field for a couple of big, well-focused survivors. For the short term, he figured that regional conflicts would continue to generate demand for weapons. Longer term, Tellep felt that Lockheed's high-tech background would give it a clear competitive advantage. The Pentagon continues to spend heavily on research and development. And most defense analysts believe the Pentagon will place greater emphasis on high-technology systems.
GLOBAL ARMING. Lockheed's reputation as a technology leader is already helping it ride out the industry turmoil. With sales for such cold-war products as spy satellites and missiles for Trident submarines winding down, Lockheed put its teams of engineers and scientists to work on a modified Star Wars system to zap incoming missiles high above the atmosphere. Last year, Lockheed won a $700 million contract to help develop the controversial system. And with the risk of arms proliferation growing daily in hot spots across the globe, Lockheed is banking on exporting its antimissile system to scores of worried nations.
The GD acquisition could also help Lockheed thrive in today's rough defense environment. Already, the deal has bolstered Lockheed's cash flow. The GD unit has more than 700 firm orders for F-16 fighters at $22 million apiece. That represents nearly a 10-year backlog, two-thirds of which are foreign sales to countries such as Taiwan and Turkey that continue to spend heavily on defense. "It was a brilliant move," says Bernard L. Schwartz, chief executive of Loral Corp., one of Lockheed's leading competitors.
The acquisition also gives Lockheed a solid lead in future fighter development. With the GD purchase, the company now has a two-thirds stake in the F-22. Lockheed, GD, and Boeing have already sunk more than $1 billion of their own money in the program designed to create the next generation of tactical-fighter aircraft. The F-22 is supposed to be faster and more maneuverable than any existing fighter and will incorporate some Stealth technology.
Still, GD's aircraft unit doesn't come without a few problems. The most pressing for Tellep is how to go about merging GD's Fort Worth plant with Lockheed's sprawling aircraft business in Marietta, Ga. The total payroll of Lockheed's new aircraft division has almost tripled, to 30,000. The combined operations also have dozens of duplicate facilities, such as flight simulators, wind tunnels, and high-powered computer design facilities. Tellep vows to streamline the division, but many analysts don't believe Lockheed has the kind of belt-tightening culture needed. "They don't have the wild-eyed passion you need to cut costs," says Robert Paulson, a defense-industry consultant with McKinsey & Co. "These are the scientists and gentlemen of the aerospace industry."
The biggest worry is how many of Lockheed's defense projects will survive the budget-cutting process in Washington. After much fanfare, for example, the F-22 now faces a doubtful future. Expected orders for the $51 million-a-copy plane have been cut by nearly half now that the Navy is reconsidering whether to buy the plane. And additional Air Force funding for the $10 billion development stage has been delayed. "There will be an F-22 in production," assures Tellep. "But the issue of how many remains obscure."
Still, Lockheed's chief figures that the defense business will remain a profitable industry to those who survive the current shakeout. Besides, Tellep, a cold-war veteran, knows that the world is rarely a peaceful place for long. That's why he's making sure Lockheed stays primed for battle.
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