Lockheed Bets on Telecom

Lockheed Martin's purchase of Loral includes a $344 million investment in Loral Space, but the company also inherits troubled federal contracts

P> For about $10 billion, Lockheed Martin Corp. can dabble in the burgeoning commercial space and telecom markets while strengthening its profitable, core defense business.

But the company may also be purchasing multibillion dollar headaches in the form of two troubled federal computer contracts -- one at the Federal Aviation Administration and the other at the U.S. Army.

The nation's top defense-aerospace contractor, based in Bethesda, Md., announced Jan. 8 that it would pay $9.1 billion, or $38 per share, for the defense electronics and systems integration businesses of New York's Loral Corp. Lockheed Martin also would invest $344 million to gain a 20 percent interest in Loral Space, the new public company formed from the remaining Loral space and telecommunications businesses.

The news made investment analysts happy. Loral's stock shot up by $8.25 to $44.50. The effect on Lockheed Martin's stock was less dramatic, rising about $3 to $80.25.

Nevertheless, Peter Aseritis, an aerospace analyst at First Boston Corp. of New York, expects the acquisition to be highly profitable for Lockheed Martin. In fact, when the transaction is complete, combined sales of Lockheed Martin and Loral will reach $30 billion, with a backlog of $47 billion.

For the $23 billion Maryland company, its multimillion dollar investment in Loral Space represents a low-risk way to play in the commercial space and telecom markets, niches that the defense-aerospace giant has wanted to pursue for some time, he noted. Analysts such as Aseritis feared that Lockheed Martin executives, driven by a desire to diversify, would change the company's strategic focus on defense. This way, if the new markets don't prove to be money makers, Lockheed Martin will still have its main line of business, Aseritis explained.

With Lockheed Martin's investment and additional investments from Loral, Loral's space and telecom operations will have concentrated management focus bolstered by $700 million in cash--and no debt. Bernard Schwartz, the legendary CEO and chairman of Loral, said, "We intend to create a major space-based telecommunications enterprise, building on this foundation." He will serve as chairman and CEO of the new Loral Space.

For the last few years, Schwartz's $6.7 billion company has been building its space-based communications business. In March 1994, Loral announced a venture with international telecommunications companies to create Globalstar, a $2 billion satellite-based global mobile telephone system. The 48 low-earth-orbit satellites will provide voice, data, fax and position-locating services. Based on projected usage by 2002, four years after implementation in 1998, Loral estimates total Globalstar revenues at $1.6 billion.

The new Loral Space also will include Space Systems/Loral, the $1 billion commercial company building a global network of nine satellites for the International Telecommunications Satellite consortium known as INTELSAT. Space Systems also has contracts to build direct broadcasting satellites for a U.S. company, two telecom satellites for Japan and a series of geostationary operational environmental satellites for NASA and the Commerce Department's National Oceanic and Atmospheric Administration.

With the relatively small investment of $344 million in Loral Space, Lockheed Martin can leverage some of its successful forays into the commercial space and telecom markets. For example, the company holds a contract to build an advanced communications satellite, ChinaStar-1, for China Orient Telecomm Satellite Co. Ltd. of Beijing. It also participates in a joint venture with international partners to market its satellite launch vehicles, Atlas and Proton, to commercial customers.

Although investment analysts view the investment and the $9.1 billion acquisition of Loral's defense electronics and systems integration businesses as a positive for both companies, industry executives in the federal information technology market hold a different perspective. They said Lockheed Martin may be buying a multibillion dollar headache.

Loral Federal Systems Co. holds two government contracts that have run into trouble. The first is a nationwide air traffic control system modernization effort, which has escalated from $2.5 billion to close to $7 billion, and the second is a $494 million contract to automate administrative functions at Army installations, which has fallen behind schedule. Loral inherited both contracts from its $1.5 billion purchase of IBM Federal Systems Co. in January 1994.

Nevertheless, Wall Street analysts aren't concerned. Loral gets a parent with deep fiscal pockets -- more than $5 billion of free cash flow through 1999. And Lockheed Martin, through the acquisition, further entrenches its top position in the defense-aerospace market. The company earned $1.1 billion in 1994, up from $865 million the previous year, and its earnings per share for 1994 was $4.61, a $0.70 increase from 1993.

Lockheed Martin also inherits the entrepreneurial management spirit of Loral, Aseritis said. Since Schwartz became Loral's chairman in 1972, the company has had a compounded annual growth rate in sales of 25 percent. Income has grown at a compounded rate of about 34 percent annually to $288.4 million in 1995, and earnings per share have increased annually at about 27 percent to $3.38 last year. "Nobody else has done that," Aseritis said. "That's an awesome business performance." For that performance, Schwartz will earn about $68.4 million from the acquisition.

As a Lockheed Martin vice chairman, Schwartz will be part of the trio representing Lockheed Martin's Office of the Chairman. Daniel Tellep will remain chairman, and Norman Augustine becomes vice chairman and continues as CEO. Vance Coffman, executive vice president and COO, will oversee the company's aeronautics, energy and environment, and space and strategic missiles businesses. Schwartz' longtime partner Frank Lanza, Loral's president and COO, will serve as executive vice president and COO overseeing Lockheed Martin's electronics, information and technology services, and tactical systems operations.

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