MERGERS NOW A SURVIVAL TACTIC : SHRINKING U.S. WEAPONS ORDERS ACCELERATE CONSOLIDATIONS.

Byline: James Sterngold The New York Times

Anyone trying to understand the pressures behind the frenzy of billion-dollar mergers that are reshaping weapons production in this country need have looked no further than the classified ads in the St. Louis Post-Dispatch last month.

Three days after the Pentagon eliminated McDonnell Douglas Corp. from the competition to build the nation's next generation of jet fighters, the giant Lockheed Martin Corp., one of the two surviving contestants, ran a large ad in McDonnell's hometown newspaper brazenly recruiting aerospace engineers for the project. ``The future is with us,'' the ad proclaimed.

McDonnell Douglas got the message. Boeing Co., the other remaining bidder for the fighter contract, announced Sunday that it planned to acquire McDonnell in a deal now valued at nearly $14 billion, marking the beginning of the endgame in the industry's rapid consolidation.

Largely at the Pentagon's urging, more than $40 billion in mergers has taken place in the weapons industries in the past four years and now the few remaining players are struggling to find partners.

Within months, if not weeks, analysts expect more deals involving the Hughes Electronics division of General Motors Corp., the military businesses of Texas Instruments, Raytheon Corp. and Northrop Grumman Corp.

Bids on Hughes Electronics were accepted Friday, investment bankers said, and on the Texas Instruments operations Monday. Analysts said that there were a range of possible developments, many of them involving acquisitions by Raytheon and Northrop Grumman, but that all the possibilities added up to greater concentration of power in the hands of fewer companies.

The pressure to compete with size has become overwhelming.

``The problem you face today is that if you lose out, suddenly you start losing your best people, and it's so hard to rebuild those capabilities,'' said Jon Kutler, the president of Quarterdeck Investment Partners, a weapons industry investment banking firm in Los Angeles. ``With every one of these deals the pressure grew, because everyone's competitive position changed. A year ago, when there were just rumors of a Boeing-McDonnell Douglas deal, it pushed a lot of this along because people knew they didn't want to be left behind.''

Cai Von Rumohr, an analyst with Cowen & Co., said he was expecting Hughes Electronics, the larger of the two companies still actively on the market, to fetch perhaps $8.5 billion. Hughes is a premier builder of missiles, radar systems and communications gear. The Texas Instruments military businesses, which also make missiles and radar systems, may bring $2 billion to $2.5 billion, analysts said.

But a critical factor will be the fact that McDonnell Douglas, perceived as a potentially desperate bidder just last week, is now out of the picture. That applies even greater pressure on the largest remaining companies, Raytheon and Northrop Grumman.

There is even talk now of a combination involving Raytheon, which produces the Patriot anti-missile systems, and Northrop Grumman, a major maker of aircraft fuselages as well as military electronics and itself the product of a huge merger.

``The real question is who is more desperate here,'' Von Rumohr said. ``Raytheon may be the more desperate, and Northrop Grumman has the problem of a lot of debt.'' Northrop Grumman paid $3 billion earlier this year for the military businesses of Westinghouse Electric, saddling it with a net debt load of about $3.4 billion, Von Rumohr said.

Raytheon shares rose -1/4, to 47-1/8, Monday while those of Northrop Grumman rose 1-1/8, to 80-1/2. Shares of Texas Instruments closed at 62-3/8, down 3-1/8, and General Motors' H shares, which represent the value of Hughes Electronics, rose -7/8, to 56.

The hard news for the acquiring companies, though, is that any deal they strike now may still not save them from being gobbled up by one of the other giants.

``Of the four remaining companies out there, any combination you can come up with still does not give them enough scale to compete with a Boeing or a Lockheed Martin,'' said Jim Schwendinger, the head of the aerospace group at the Deloitte & Touche Consulting Group. ``Even a year ago, I would never have said that, but when you look at the size of the remaining players, you realize how tough it is.''

The pressures built almost immediately with the end of the Cold War. With no more Soviet threat, Defense Department procurement budgets have plunged more than 50 percent since 1987, forcing the military contractors to shed excess capacity and to lay off tens of thousands of workers. That was the flip side to the ``peace dividend.''

The Pentagon also changed course. Facing enormous political pressure to pare waste and cut costs, military planners decided to push for a smaller number of more efficient bidders for weaponry, instead of maintaining a large stable of competitors. The Clinton administration decided to relax the antitrust rules on weapons-industry mergers. Bigger companies enjoyed more efficiencies of scale, and the stage was set for the wave of deals.

Of course, there is another factor driving these deals. The prices being paid are so enormous that some companies are seizing this as an opportunity to cash out and provide a windfall for shareholders.