Lockheed/Loral combination would be tops in integration

Lockheed Martin Corp.'s plan to acquire the bulk of Loral Corp.'s defense business will catapult the combined company to the top of the federal integration market.

The companies earlier this month announced their "strategic combination," in which Lockheed Martin will buy Loral's defense electronics and systems integration business for $9.1 billion. The transaction, still subject to government approval, would create a $30 billion defense behemoth. The combined entity would have about $1.6 billion in federal information technology revenue—tops in the business, according to FCW estimates based on General Services Administration data.

International Data Corp.'s Government Market Services (IDC GMS) reported that a united Lockheed Martin/Loral would own an industry-leading 9.3 percent of the federal integration market, based on GSA data reported for the first half of fiscal 1995. Loral's portfolio of marquee integration deals, in particular, would fuel this IT expansion. Loral contracts include the Defense Department's $499.6 Defense Message System and the Internal Revenue Service's $1.3 billion Document Processing System.

Software Expertise

The new company would have expertise in fields ranging from battlefield simulation to document imaging. But it would have particular strength in large-scale software development in such fields as command and control, and air traffic automation. Many of those capabilities will come from the Loral side of the house, industry observers said.

Loral's 1994 acquisition of IBM Federal Systems and its 1995 purchase of Unisys Corp.'s defense unit made the company a top player in command and control systems. Loral's capabilities will enhance Lockheed Martin's business base, which includes the $166.5 million Army Global Command and Control System.

"The Loral acquisition improves Lockheed Martin's credentials in command and control," said an industry executive, who requested anonymity.

In air traffic control software, Loral will help reinvigorate Lockheed Martin's position in that market segment, industry observers said. Lockheed Martin once held the Federal Aviation Administration's key air traffic control modernization oversight contract. But that contract has since been broken into pieces and recompeted.

Loral, meanwhile, manages large segments of the FAA's air traffic control upgrade, including the $898 million Display System Replacement deal. And Loral is now one of three bidders for the FAA's Standard Terminal Automation Replacement System contract. The bulk of the company's air traffic control software expertise stems from its IBM Federal and Unisys defense acquisitions.

Loral will provide a "real value-add" to Lockheed Martin's air traffic business, according to an executive in the air traffic control market.

But Lockheed Martin, in turn, will contribute to Loral's software standing, according to some observers. Loral would benefit from Lockheed Martin's "corporatewide engineering process improvement initiative, which includes software," said Art Hersh, president and chief executive of the Software Productivity Consortium, Herndon, Va. He said Loral has historically taken a more decentralized approach to operations.

If the deal goes through, Lockheed Martin/Loral would face an enormous integration task. Loral's holdings include Loral Federal Systems, the former IBM Federal unit with major facilities in Owego, N.Y., and Manassas, Va. Loral also includes the Unisys defense business, which had never been integrated into Loral's other federal holdings.

Lockheed Martin, on the other hand, has just emerged from the merger of Lockheed Corp. and Martin Marietta Corp. announced 10 months ago. Lockheed Martin has been operating as five business sectors. Loral initially will operate as a sixth sector, pending a long-term consolidation plan.

"The complexity of integrating some of the businesses that Loral has into Lockheed Martin" will be a key challenge, according to Steve LeCompte, a vice president with IDC GMS. LeCompte said the combined company will have to decide whether to keep major Loral sites operating as independent profit centers or break them up and merge them into corresponding units within Lockheed Martin.

The integration of the two organizations is likely to result in redundancies and personnel cutbacks, according to LeCompte and other industry watchers. The combined company will also have to rationalize bidding opportunities. Lockheeed Martin and Loral, for example, have been independently pursuing the Air Force's Base Level Systems Modernization pact.

Lockheed Martin and Loral plan to pursue a "thorough review and analysis to determine how to best integrate these businesses," according to a statement from the companies. A source close to Lockheed Martin said that analysis is likely to take three months or more to complete.

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