Justice inquiry threatens Lockheed-Titan merger

The proposed $2.2-billion merger of defense IT giants Lockheed Martin Corp. and Titan Corp. has been thrown into jeopardy, with the deal now pending the outcome of a Justice Department inquiry into bribery allegations.

A condition in an amended merger agreement that the companies issued today specifies that in order for the deal to proceed, the Justice Department must exonerate Titan from allegations that its international consultants and subsidiaries made improper payments to foreign government officials in exchange for contracts.

The revised merger terms stipulate that Titan must obtain written confirmation from the Justice Department either that the government has resolved its investigation and will not pursue claims against the company, or that Titan has entered into a plea agreement and has completed the sentencing process.

The company's allegedly improper payments were made for contracts in Africa, the Middle East and Asia.

Bethesda, Md.-based Lockheed Martin announced its acquisition of Titan of San Diego last September, but the allegations, which surfaced in February, have delayed the deal. Both companies have conducted internal reviews of the matter and said today that they were "substantially complete."

The Securities and Exchange Commission and the Justice Department are conducting separate investigations to determine whether the payments and Titan's disclosure of them are illegal.

Titan's shareholders were originally scheduled to vote on the deal in mid-March, but the company postponed the meeting to April 12 to give their internal investigators, as well as Lockheed Martin and the government, more time to complete their reviews.

The new agreement pushes Titan's shareholder meeting to June 7. It also stipulates that if the deal is not completed by June 25, either party may terminate the agreement if certain conditions are met. The merger date may also be extended to Sept. 24, according to the new agreement.

Under the new terms, Lockheed Martin also has knocked down the previously proposed buyout price it's offering to Titan stockholders to $20 per share in cash from the original $22 per share in cash, an equivalent amount of Lockheed Martin stock or a combination of both. This reduces the deal's value to $2.2 billion from $2.4 billion. Lockheed Martin reduced the amount of its offer on account of the bribery allegations, a company official said.

The new merger agreement follows news yesterday that Titan shareholders who purchased stock between July 24, 2003, and March 22 filed a class action suit alleging that company executives misstated financial results and omitted information about the foreign consulting fees.

In an effort to get its shareholders approve merger, the shareholders said, Titan failed to disclose that its foreign consultants had engaged in "questionable and potentially illegal activities," made improper payments to foreign government officials and improperly accounted for the funds used in the payments.

Titan, which sells information technology and homeland security products and services mainly to the federal government, reported record revenue of nearly $1.8 billion in 2003, the year in which some of the alleged kickbacks occurred.