The Norman Conquest

DEFENSE WONKS CALL IT "The last supper." Secretary of Defense Bill Perry, then No. 2 at the Pentagon, gathered together the nation's biggest arms contractors one night. Like a commander addressing a flak-wary bomber squadron, he gave it to them straight: about half would shortly be gone from the Pentagon's payroll, victims of post-cold-war budget cuts. Norman Augustine's company seemed as likely a candidate for oblivion as any. Martin Marietta was a smallish firm best known for building the Challenger's ill-fated fuel boosters. Augustine's friend Bill Anders, head of powerful General Dynamics, put it bluntly. The industry would soon consist of "one gorilla, two chimpanzees and six marmosets." And Augustine, he gibed, was clearly a marmoset.

That was three years ago. Recently Anders got a package in the mail: a giant stuffed gorilla, signed "Norm." Anders could only laugh. Today Norm Augustine is no monkey; he's the King Kong of the defense industry. His $30 billion Lockheed Martin, so named after its merger last year with Lockheed, is the world's biggest defense conglomerate--and getting bigger all the time (it now owns most of General Dynamics). In fact, it may be too big, some experts warn.

Clearly, the cold-war "military industrial complex" is no more. The defense industry has shrunk in recent years to the point where it consists almost solely of Lockheed Martin and a handful of rivals. Some 700,000 jobs have been shed as the survivors split a procurement budget that last year, at $44 billion, amounted to just a third of what it was 10 years ago. It's also a leaner and far more efficient industry--a dramatic transformation that owes much to Augustine personally. By most accounts he has set the pace of defense consolidation. Even as Perry spoke in 1993, the gangly, Princeton-educated engineer was rushing to buy up competitors at near-fire-sale prices. Since 1990, Lockheed and Martin Marietta together gobbled up 17 companies and pieces of companies, including some of the biggest in the defense business: Loral, GE and RCA Aerospace and LTV Missiles.

No one disputes that this wasteful, overfed industry had to change. (Remember those $999 pliers and $2 billion stealths?) But now Washington faces an opposite problem: the possibility that too many players have dropped out, leaving the field to what Augustine jokingly calls his "coup de gorilla." Defense analysts seriously worry that America's technological superiority is being sacrificed to economic rationality. "We have lost the innovative edge," says Wolfgang Demisch of BT Securities. Some key weapons systems--among them heavy tanks, nuclear carriers and submarines--are now produced by basically one monopoly supplier. Lockheed Martin still faces formidable competition for most aerospace contracts. But even Augustine says that before too long Lockheed may be jousting for the skies with only Boeing, whether in fighters, rockets or spacecraft.

Those worries are shared at the Pentagon, even as it points out there is still excess capacity. "Excessive vertical integration," says Paul Kaminski, under secretary of defense for procurement, could erode the benefits of competition for producing everything from large-scale weapons systems to a whole array of little things, such as the processors and sensors used in flight controls. Some of the latter, for instance, were originally developed by IBM Federal Systems--bought by Loral in 1994, which was in turn swallowed by Lockheed Martin earlier this year. Federal Trade Commission chief Robert Pitofsky recently told NEWSWEEK: "Additional acquisitions are likely to raise antitrust problems."

Augustine, widely respected for his brilliance and integrity, dismisses such talk. Innovation, he says, isn't helped by "a bunch of small, desperate companies, poorly funded, that are not going to invest in R&D for long term." And Lockheed, he adds, will buy from the best subcontractors--even if they're not part of his conglomerate.

Whatever the controversy, Augustine & Company is flourishing. Lockheed's stock price has nearly doubled since early 1995, and this year it won a slew of big contracts, including the new space shuttle. It is one of two finalists (the other is Boeing) to develop the armed services' joint strike fighter, a contract worth potentially hundreds of billions. It is No. 1 contractor to the Pentagon, NASA and the Energy Department. A planned announcement this week could be the capper--or stopper. Lockheed Martin is favored to win a key contract to develop America's next-generation satellite launchers. But the Pentagon may just decide it's gotten too huge. Augustine has built a great company. It's just that lack of competition could be a problem no matter how friendly the gorilla may be.

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