Many of the commercial technologies that have propelled the 21st century into an age of information, communication, and travel are the result of significant changes in the American military-industrial complex. Much of the innovation that has led to cheap air travel, convenient internet access, and the identification of Earth-like planets is a result of the consolidation of defense contractors through periods of federal divestment in defense and military budgets. Innovation, indeed, is spurred by necessity. A result of the downturn of the Cold War, Lockheed Martin Corporation has proven an ability to innovate and produce despite significant changes to their industry. The merging of Martin Marietta Corporation and Lockheed Corporation in 1995 showed the broad reach of federal spending and how large-scale singular investment can define an industry. Their survival through a period of buyouts overthrows, and divestment is indicative of the utility of merging operational units to consolidate and retain market applicability.
Lockheed Corporation and Martin Marietta were two such defense contractors that grew significantly in the second half of the 20th century. Martin Marietta formed in 1961 through the merger of the Glenn L. Martin Company and the American-Marietta Corporation. A leading aviation company, Martin Mariette had a hand in developing the electronics and missile defense systems of the US government during the Cold War. Its Patriot and Titan programs led to the first intercontinental ballistic missiles that continue to influence contemporary warfare. Lockheed was also an important aviation production company dating back to 1912 when it began designing and producing some of the first airplanes. Prior to WWII, it was one of the largest manufacturers of submarine-hunting bombers, developing fleets for both Japan and the US. After WWII it grew to become an aerospace giant with the development of US fighter jets, spy planes, and satellite systems (“Our History,” 2014).
The 1995 merger of Lockheed and Martin Marietta came at a time when US military spending was experiencing a significant decline in the post-Cold War era. Following World War II (WWII) US spending as a percentage of Gross Domestic Product (GDP) reached its highest at 15% in 1952 during the Korean War as the US and Russian began a nearly half-century struggle (Walker, 2013). As the Soviet Bloc began to fall in the late 1980s US military spending focused on peacetime security. Spending dropped significantly in the early 1990s resulting in a restructuring of the many private defense contractors involved in the Cold War.
In response to the impending peacetime divestment of defense spending, the military-industrial complex began to consolidate. In the late 1980s, Harold Simmons famously attempted a corporate takeover of Lockheed. As Pentagon spending decreased so too did the stock value of many private defense contractors. This allowed Simmons to buy up a primary share of Lockheed stock, nearly 20% (Shelsby, 1995). His interest in Lockheed seemed focused on one of the corporation’s primary investors, the California Public Employee’s Retirement System. Chairman Daniel Tellep weathered the attempted buyout but moved to deal with the trend of consolidation during the largest shift in the American military-industrial complex in 50 years (Shelsby, 1995).
The pressures of the downturn in defense spending forced private defense contractors to sell off or merge with similarly-oriented contractors in order to maintain the market applicability of their operational units. Lockheed sought to merge with or acquisition another aerospace-centric corporation in order to focus the gains it had made in aerospace technology including satellite systems, information technology (IT) services, and global security systems. The Grumman Aircraft Engineering Corporation, a major military and civilian airplane manufacturer were seeking such a merger, but it had set its price too high for Lockheed (Shelsby, 1995). Martin Marietta was locked in the same situation, considering Grumman’s offer of $2.04 billion (“Our History,” 2014). Lockheed and Martin Marietta wanted the same thing, but neither corporation could afford it.
The need to consolidate was underlined at a meeting of defense contractor CEO’s in 1994 when then-Secretary of Defense Les Aspin broke the news that Pentagon spending would be significantly decreased. Amidst expensive merger considerations, Lockheed and Martin Marietta drew up alternative lists. Lockheed ended up at the top of Martin Marietta’s list, and vice versa. A merger between two of the top five US defense contractors made sense. Their market capitalization was the same, their sales figures were relatively similar, and the two corporations had years of mutual collaboration (Shelsby, 1995). Furthermore, Aspin had informed the defense contractor CEO’s that the Pentagon would remain focused on aerospace manufacture. There would only be room, however, for about two tactical aircraft manufacturers and two space-launch companies. A Lockheed-Martin Marietta merger made sense.
In 1994 Tellep and Martin Marietta CEO Norman Augustine began positioning for the merger. Among their shared fiscal attributes the two defense contractors also shared a similar corporate culture. This would become an important factor in the eight-month period of merger positioning in an industry that had seen 36 mergers since 1992 (Shelsby, 1995). Weathering attempted leveraged buyouts in the interim, the merger nearly fell flat when rumors of anti-trust sanctions threatened a sell-off of many of the corporations’ operational units. Despite these threats, the perceived value of the merger remained high. In March 1995 the merger went through.
The resulting Lockheed Martin Corporation forced consolidation of subsidiary defense companies, but the similarities between the two corporations allowed for a very successful organizational structure that remains effective today. Lockheed Martin became the 16th largest American industrial corporation at the time, and the merger was the largest in American military-industrial history (Shelsby, 1995). Martin Marietta brought their Titan and Atlas satellite-launching rockets, a night vision fighter jet system, and their managing shares of Sandia National Laboratories. Lockheed brought their F-16 and C-130 aircraft manufacturing, the development of the F-22 stealth fighter jet, and the development of the Theater High Altitude Area Defense missile system. All in all 70 companies would be consolidated into five different sectors: Aeronautics, Information Systems, and Global Solutions, Missiles and Fire Control, Mission Systems and Training, and Space Systems (“Our History,” 2014). The transition was relatively smooth, though, with little overlap between the two original corporations.
The new organizational structure, facilitated by the lack of overlap, allowed Lockheed Martin to retain a relatively decentralized management model. The five operational units would oversee the 70 companies under the new corporation’s direction, allowing executive management and human resource management to be more focused on different aspects of technical-service provision. Recruitment, compensation incentivizing, and performance tracking could pander to the major differences across the five operational units. Four of the five new units were located at the new corporate headquarters in the proximity of Lockheed Martin’s primary customer, the Pentagon, and the corporate leadership was equally split between Lockheed and Martin Marietta executives.
The continued success of Lockheed Martin is a testament to why this new organizational structure came together. Lockheed Martin became the only major contractor that could supply the US military with nearly every service it required, and the consolidation of the two corporations’ like-minded technical services pushed Lockheed Martin into commercial success in IT and Security markets. Shortly after the merger, Lockheed Martin quickly grew its reach into defense electronics and systems integration with the acquisition of Loral Corporation for $9.1 billion (Hartung, 2011). Currently, Lockheed Martin has contracts with about 24 government agencies, and as of 2011 received about 7% of the Pentagon’s spending budget (Hartung, 2011). It is the largest provider of IT services, systems integration, and training to the US government, and its major commercial unit, Information Systems and Global Solutions netted $8.3 billion in 2013 (Hartung, 2011). These two positive results, significant commercial and government-garnered gains, oriented Lockheed Martin as a staple of the US military industry during an upswing in defense spending at the turn of the 21st century.
While the Lockheed Martin merger is a good model for understanding why certain mergers work and others don’t, it is confined to the pressures exerted on it by federal funding. In 1993, prior to the merger, defense contractor CEO’s lobbied hard to get the Department of Defense to subsidize the costs of defense industry mergers and acquisitions. In 1991 a defense contractor merger was estimated to cost about $300 million, and by 1993 the cost was $14.2 billion (Korb, 1996). A decrease in defense spending would obviously affect the many contractors that had a hand in the Cold War. Korb (1996), however, argues that such a cry is largely exaggerated. While spending decreased, the capacity for services by defense contractors remained high. Defense expenditures are also largely confidential, fractioned into larger budgets that don’t focus specifically on defense.
September 11, 2001, terrorist attacks had a significant effect on US defense and military spending. As a percentage of GDP, spending was at its lowest in decades in 2000 at 2.7% and experienced a significant increase to around 5.5% between 2001 and 2010 (Walker, 2013). The Obama administration has set budget propositions to decrease this amount of spending to 2.4% of GDP by 2023, which would be the lowest since WWII (Walker, 2013). The implication for defense contractors like Lockheed Martin will likely be the same in the near future as it was in 1995: consolidate operational units and focus on technical service provision.
Consolidation and a focused service-provision plan is a contemporary point of contention. If defense spending does decrease in such significant ways over the next decade there will be another trend towards consolidation of major defense contractors. This is likely as defense budgets remain marred in political maneuvers, and the demand for services from defense contractors remains higher than ever. Lockheed Martin currently runs the FBI’s Integrated Automatic Finger Print Identification System, is the largest systems facilitator for the US consensus and is in charge of upgrading the entire National Security Agency’s IT systems and security (Hartung, 2013). LM’s ability to maintain these technical services is a testament to their organizational structure following the 1995 merger, but its continued success will rely on how effective its five operational units are in the next wave of mergers and acquisitions.
The merging of Lockheed and Martin Marietta proved to be a success with significant gains in the two corporation’s original interests, but the application of this merger to future consolidation within the private sector is questionable. Lockheed Martin was rumored to get about $1 billion from the government to facilitate its merger (Korb, 1996). This necessitates a look at how well the two corporations came together. There was little operational overlap between business units, and impending buyouts prompted a merger. Large governmental subsidies, though, may have made the merger easier than if the two corporations came together in the private sector. Federal subsidy aside, the largest merger in American defense industry history was smooth. Eased by a shared corporate culture and similar market capitalization, Lockheed and Martin Marietta came together with great business savvy. The organizational structure that was implemented allowed for a relatively decentralized management style and this has allowed for the success of Lockheed Martin’s five operational units. Maintaining this corporate culture, decentralized management style, and effective technical service provision will make it a popular target in the near future when another wave of “merger mania” sweeps through the American military-industrial complex.
Hartung, W. D. (2011, January 12). Is Lockheed Martin shadowing you? Mother Jones. Retrieved from http://www.motherjones.com/politics/2011/01/lockheed-martin-shadowing-you
Korb, L. J. (1996). Merger mania: Should the Pentagon pay for defense industry restructuring? The Brookings Review, 14(3), 22-25.
Our History. (2014). Lockheed Martin. Retrieved from http://www.lockheedmartin.com/us/100years.html
Shelsby, T. (1995, March 12). How the deal was done: The Lockheed-Martin Marietta merger. The Baltimore Sun, pp. 1-8.
Walker, D. (2013, June 30). Trends in U.S. military spending. Council on Foreign Relations. Retrieved from http://www.cfr.org/defense-budget/trends-us-military-spending/p28855