Lockheed-Titan: Lessons from a deal gone awry

When Lockheed Martin Corp. announced in September 2003 that it planned to buy Titan Corp. for $2.2 billion, the company talked about expanding its customer base and its capabilities.

Industry analysts said it showed how the big players hungered to get bigger.

"The message the big acquirers have sent is that they're going for size," analyst John Mahoney of investment bank Raymond James said at the time. "They want the big bites."

If the deal had closed in 2004 as was planned, it would have been a top contender for Washington Technology's deal of the year because there are so few of those big bites left.

But the transaction didn't close, and today it sends a different message.

The prospective merger fizzled in June 2004 because of unresolved investigations of San Diego-based Titan by the Securities and Exchange Commission and the Justice Department. Subsidiaries of and consultants for the San Diego contractor are accused of paying bribes to foreign officials to get business.

Titan also was tarred by the Abu Ghraib prison scandal in Iraq.

So what are the lessons for high-profile mergers and acquisitions?

Make sure you identify and clear up any issues your company has before possible violations of the Foreign Corrupt Practices Act arise, said Mark Jordan, a defense industry analyst at A.G. Edwards & Sons Inc. in St. Louis.

The act prohibits American companies and their direct foreign subsidiaries from offering, promising or paying anything of value to a foreign government official to get business.

"It's a sign of the times that issues of this type are treated more seriously now than a few years ago" because of high-profile corporate ethics problems, such Enron Corp., Jordan said. Titan's dilemma resulted from either "inadvertent sloppiness or bad behavior," he said.

Also, know that prospective suitors may have a change of heart sooner than you expect. Even before the bribery allegations, Lockheed Martin had found during the due diligence process that it would have to divest parts of the business, either its own or Titan's, because of conflict of interest issues, said David Garrity, managing director and portfolio strategies at Caris & Co. in New York.

Although the companies themselves never cited any potential conflicts of interest, Garrity contends this was a major reason Lockheed Martin scuttled the deal. The alleged corrupt practices violations "were a red herring that Lockheed Martin seized on in order to get out of the deal," Garrity said.

Titan likely will clear up its legal problems this year, according to a recent press report. Quoting unnamed people familiar with the situation, The Wall Street Journal reported Jan. 20 that Titan tentatively has resolved the investigations and will pay less than $30 million. The company set aside $28.5 million to cover any financial penalties from the federal probes.

Wil Williams, Titan's communications director, declined to comment on "that rumor" to Washington Technology, but he said that the company "is continuing to work with the government for a timely resolution."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.