BP-Arco Deal Has Parallels to Northron-Lockheed.

Is Atlantic Richfield Co. about to become an orphan?

Last week's decision by the Federal Trade Commission to block BP Amoco's $27 billion acquisition of Arco raises the prospect that the long-awaited deal may not go through -- and with it, curious parallels with 1998's failed purchase of Los Angeles-based Northrop Grumman Corp. by Lockheed Martin Corp.

For all the obvious differences between the oil and aerospace industries, there are some revealing similarities between the scenario Arco now faces and the one Northrop went through two years ago.

Lockheed's bid for Northrop came on the heels of Boeing Co.'s acquisition of McDonnell Douglas and Raytheon Co.'s acquisition of the defense assets of Hughes Electronics Corp. and Texas Instruments Inc.

The Defense Department had at one time actively encouraged consolidation for the defense industry, but by the time Northrop reached the altar, antitrust concerns were unexpectedly cited.

"It was a game of musical chairs, and when the government blew the whistle, Northrop was the one left standing," said John Kutler, president of Quarterdeck Investment Partners, an investment research firm. "There's no question that deal would have gone through had it been struck a year earlier."

Likewise, BP Amoco and Arco announced their intention to partner soon after BP had already merged with Amoco, and when the Exxon-Mobil deal was already in the making.

"Their timing was pretty bad," said Fadel Gheit, an analyst with Fahnestock & Co. "The high crude oil prices are already drawing a lot of attention to the industry, and the deal came on the back of two big mergers. When BP came back for a second helping after Amoco the FTC decided that they were going to be extra hard on them this time."

To alleviate concerns that the merger would create a monopolistic situation with regard to Alaskan crude oil production, BP Amoco offered to divest 350,000 barrels of daily production in Alaska, an amount equivalent to Arco's total Alaskan operations. But that offer apparently did not satisfy the FTC.

This get-tough attitude is reminiscent of the Defense Department's stance in the case of the Lockheed-Northrop deal. Then, the department was looking for Lockheed to divest all of Northrop's defense electronics operations, which were precisely the reason Lockheed wanted to acquire Northrop in the first place.

Despite being left behind by Lockheed, which bailed out when the government had dug in, Northrop has successfully refocused as an independent company. Last year it reported net income of $467 million ($6.73 per share), more than double the $194 million ($2.83) in 1998.

"They had a difficult six months after the deal with Lockheed fell through," said Kutler. "They had to kick-start the engine again, after sitting around for a year expecting to be bought out. Since then, they have continued on the way they had started out on before Lockheed came along, and they have become a successful first-tier subcontractor, rather than a prime contractor. They are particularly strong in information technology and defense electronics."

Similarly, if the FTC is successful in blocking the BP deal in federal court, Arco stands a decent chance of continuing as an independent.

"Of course they will be able to survive as an ongoing concern, particularly in a $27-a-barrel environment," said Joel Fischer, an analyst with Burnham Securities in New York. "In fact, I wonder whether some senior executives may not be secretly hoping that the FTC will kill this deal. It looks now that they were panicking last year when prices were in the $12-to-$13 range and they approached BP 'with a buyout proposal."

Meanwhile, Arco's earnings tripled last year, largely due to high oil prices.

"They have done some cost trimming, by selling off Arco chemicals, which had required another big investment cycle, and with this level of oil prices, they look in pretty good shape," said John Parry, vice president with oil-industry research firm John S. Herald Inc. in Stamford, Conn.

"They will have to look at some other upstream strategies if the deal falls through, but I can see them doing more joint, ventures, with BP Amoco for example, in Asia," he added.

Of course, Fischer acknowledged that morale among Arco's senior management might be flagging, considering that those lucrative golden parachutes under the BP buyout may not materialize. A similar scenario took place at Northrop when its buyout fell through and management had nowhere to go but back to work.