LOCKHEED GIVEN DEADLINE TO ADDRESS ANTITRUST ISSUES.

Byline: Anne Marie Squeo Bloomberg News

The U.S. Justice Department gave Lockheed Martin Corp. until Wednesday to recommend a way to resolve concerns that the company's proposed $12 billion acquisition of Northrop Grumman Corp. would harm competition in numerous defense-related areas, people familiar with the negotiations said.

Justice Department antitrust chief Joel Klein told the Antelope Valley's two largest private employers last week in a letter that their April 8 target date to respond was too far off and pressed for a response before Wednesday.

Justice and Defense Department officials have expressed concern that the transaction would hurt competition in several areas including airborne early warning radars, missile countermeasures, airborne fire control and undersea warfare, the people said.

To meet the new deadline, Lockheed officials met throughout the weekend to craft a resolution that would resolve antitrust concerns but still make the transaction financially viable, the people said. The companies are considering selling between $1.5 billion and $2 billion in assets - between the two options suggested to them by the Defense Department, said a person familiar with the negotiations.

A spokesman for Bethesda, Md.-based Lockheed declined to comment on the new time frame or what the company might sell to win antitrust clearance. ``We'll have more to say about the process when appropriate,'' said Lockheed spokesman Charles Manor. A Justice Department spokesman couldn't be reached for comment.

In a March 6 slide presentation, the Defense Department gave Lockheed and Northrop three options: Sell some specific Northrop electronics units - worth about $400 million; sell all of Northrop's electronics businesses; or face an antitrust suit seeking to block the transaction.

Selling all electronics systems, worth between $3 billion and $4 billion, would be the largest divestiture ever required in an antitrust review. It likely would lead the companies to scrap the transaction, analysts said.

Both Justice and Defense department officials have said a final decision hasn't been reached on whether to seek a court order to block this transaction.

Lockheed's aircraft experience, coupled with Northrop's expertise in radar, would create a vertically and horizontally integrated company with the power to exclude third-party suppliers in favor of Lockheed parts, increase the barriers for a new firm to enter a market, and lessen innovation, among other things, the Defense Department told the companies.

Horizontal integration involves the combination of two companies that make competing products. Vertical integration refers to mergers that can close the chain of production by creating a company that is the main buyer and seller of, as in this case, electronics.

For example, in the area of airborne early warning radar, used to detect enemy aircraft and alert ground control about potential attacks, Lockheed Martin and Northrop are the only two manufacturers, the government said. The radars go on Air Force E-3 AWACS aircraft, Navy E-2C Hawkeyes and EA-6B Prowler jamming aircraft.

Lockheed also is paired with Northrop to produce the next generation of the sophisticated detection radars for the Hawkeye surveillance plane, the P-3 anti-submarine aircraft and the Air Force C-130 electronic combat aircraft.

The transaction also would make Lockheed the sole source of countermeasures against electro-optical and infrared-guided anti-aircraft missiles, as well as give it control of about 72 percent of the market for radio-frequency missile countermeasures, the Defense Department told the companies.

Northrop's Logicon unit, which reviews and evaluates defense suppliers, would also have to be divested. The government is concerned Lockheed's ownership of Logicon poses a major conflict of interest because Lockheed would own an organization charged with evaluating its top programs.

The officials said the Lockheed-Northrop review doesn't mark a significant change in the way the Pentagon and the Justice Department review defense-related combinations. In this case, Lockheed and Northrop are both prime contractors and providers of electronic subsystems. There isn't as much overlap with Boeing or Raytheon, the two other major defense contractors.