NEW YORK, Aug. 30 -- In a surprise move, aerospace giants Lockheed Corp. and Martin Marietta Corp. announced Tuesday they plan to merge through a stock swap worth more than $10 billion. The new corporation, Lockheed Martin, will have $23 billion in annual revenues with operations in defense, space, energy, commercial, civil, government and international markets, and employ about 170,000 people. Unlike many merger deals, there has been little speculation on Wall Street the two companies would combine operations. However, with the end of the Cold War, major defense contractors have been forced to slim down to stay profitable at a time when government funding is being slowly reduced. 'Lockheed Martin will provide the opportunity to significantly reduce costs to the U.S. government and other customers, preserve critical elements of our nation's defense industrial base and strengthen our abilities to serve customers on a global basis,' said Daniel Tellep, Lockheed's chairman and chief executive officer. 'American taxpayers win, our shareholders win, and ultimately, U.S. workers win.' The move comes less than two months after another major aerospace contractor, Northrop Corp., bought the defense operations of Grumman Corp. for $2.17 billion after outbidding a $1.93 billion bid from Martin Marietta. It then became Northrop Grumman Corp. Both Martin Marietta and Lockheed made major acquisitions early last year -- Martin Marietta bought General Electric Co.'s defense electronics operations for $3.05 billion and Lockheed bought General Dynamics F-16 fighter aircraft business for $1.5 billion. Martin Marietta also bought General Dynamics' rocket launching business earlier this year for $208 million.
The deal calls for Lockheed shareholders to receive 1.63 shares of Lockheed Martin stock for each Lockheed share, while Martin Marietta shareholders will receive stock in the new corporation on a one-for-one basis. The new shares will have an annual dividend payout of $1.40 a share, equal to the current Lockheed dividend. The announcement was made early Tuesday morning in New York and the companies scheduled a news confernece for later in the day. 'This merger is the next logical step in the continued growth and prosperity of Lockheed and Martin Marietta and is consistent with our strong histories of delivering quality products to our customers and value to our shareholders and employees,' Tellep said. Tellep will hold the same positions -- chairman and CEO -- in Lockheed Martin. Martin Marietta Chairman and CEO Norman Augustine will be the new corporation's president and will become CEO when Tellep retires. Analysts have generally given both companies good marks in recent years for operating at above-average profit margins. Augustine is particularly well-regarded and had been rumored earlier this year as a possible candidate for the post of Secretary of Defense after Bobby Ray Inman withdrew and before William Perry was selected. Augustine said the merged company can generate between $4 billion and $5 billion in free cash flow over the next five years after taxes, interest and dividends. Martin Marietta, of Bethesda, Md., had 1993 sales of $9.4 billion and employs 93,000 workers. It has a contract backlog of $16.7 billion and was named last year to management and operate DOE's Sandia National Laboratories, in Albuquerque, New Mexico. The merger will mean job cuts. 'We will follow the same principles that guided us in those successful ongoing consolidations: a seamless transition that ensures mission success, the aggressive elimination of duplicate costs and the use of considerable synergies to diversify market opportunities outside the defense industry,' Augustine said. Martin Marietta cut about 9,000 jobs last year following the GE deal and planned to cut 2,000 more this year as part of a plan to reduce operating costs by $1.5 billion over the next five years. It also plans to cut some of the 2,400 employees from General Dynamics rocket- launching business. Lockheed had 1993 sales of $13.2 billion, a backlog of $28.9 billion and 77,500 employees, down about 3,000 from last year. It received a significant blow last week when the Pentagon disclosed it was considering delaying the start of the Air Force's $71 billion F-22 advanced tactical fighter program for up to four years. Lockheed is the prime contractor on the F-22 -- the last major aircraft program on the horizon -- and also has major businesses in missiles and satellites. At Lockheed's annual meeting in May, Tellep said prices paid for defense properties had been excessive and said it was unlikely the company would make any major acquisitions soon. 'Today's prices appear too high,' Tellep told about 500 shareholders. 'Moreover, we do not need an acquisition to survive. We are not ruling out the possibility of acquisitions but we are saying that any actions we take will have to be strategically and financially attractive.' Both companies have been trying to find ways to commercialize their defense technologies. Tellep told shareholders in May that Lockheed's board had authorized spending $150 million to develop a commercial remote sensor satellite system for aerial photography of the Earth with a technology that can provide clear resolution of as little as 3 feet. It has since formed a partnership with E-Systems Inc. with a target date of 1997 for starting to sell the images.