Lockheed Martin Corp. abandoned its $2.2 billion deal to acquire Titan Corp. yesterday after the San Diego-based company failed to resolve a federal bribery investigation, ending a nearly year-long courtship plagued by controversy.
Bethesda-based Lockheed gave Titan until Friday to reach a plea agreement with the Justice Department, which is investigating whether Titan consultants bribed officials in Saudi Arabia and Benin, an African nation, to win contracts, including some for communications equipment. Titan asked Lockheed to extend the deadline when it became evident the investigation was continuing, but Lockheed refused.
"It's not a decision that we took lightly," said Thomas J. Jurkowsky, a Lockheed spokesman. "We did not want the uncertainty that surrounded the transaction to continue indefinitely. We concluded that terminating the agreement was in the best interest of Lockheed Martin and its stockholders."
Lockheed Martin, the nation's largest defense contractor, prized Titan for its growing information-technology business, which includes programs with intelligence agencies. About 8,700 of Titan's 11,000 employees have security clearances, an important selling point at a time when intelligence programs are among the fasting-growing defense sectors and applications for new clearances are backed up for months. About 2,500 Titan employees are based in the Washington area.
But Lockheed did not want to inherit legal responsibility for a violation of the Foreign Corrupt Practice Act, which prohibits U.S. companies or their agents from bribing foreign officials to win business, particularly because bribery has been an issue for the company before. In 1995, Lockheed Corp., a predecessor to Lockheed Martin, pleaded guilty to conspiring to bribe an Egyptian politician for help in securing a contract for three C-130H cargo jets.
The Securities and Exchange Commission staff has recommended civil charges against Titan. The company set aside $3 million to pay possible fines. Titan has also been dogged by a U.S. Army report that associated one of its former employees with abuse of Iraqi prisoners at the Abu Ghraib prison near Baghdad.
After announcing a deal to buy Titan in September, Lockheed Martin delayed closing twice, lowered the price by $200 million and set the deadline for Titan to resolve the bribery case.
The Justice Department and the SEC were aware of the deadline and worked to resolve the case in time, Jurkowsky said. "They did everything they could, they sought to make it happen, but ultimately an agreement" could not be reached in time, he said. Jurkowsky declined to say whether Lockheed blamed Titan for the breakdown.
"We worked very hard with the Department of Justice and SEC to reach a resolution and we are continuing to cooperate and work with them for that resolution," said Ralph "Wil" Williams, a Titan spokesman. A Justice Department spokesman declined to comment yesterday. An SEC spokesman did not return a call seeking comment.
With the acquisition canceled, Lockheed is likely to use the cash it would have paid Titan shareholders to raise dividends to its own shareholders and buy back stock, industry analysts said. Some also expect Lockheed, maker of the F-16 fighter and Atlas rocket, to find another company to acquire in Titan's place and continue its growth in information technology.
The Titan acquisition was seen as Lockheed's response to the purchase by its Falls Church-based rival, General Dynamics Corp., of a local technology company, Veridian Inc. Titan, with $1.8 billion in revenue, is among the largest publicly traded information technology companies available at a time when the sector is consolidating and large defense firms want to widen their info-tech capabilities.
"There was a reason [Lockheed] wanted to do this deal in the first place, and that reason is still there," said Jon B. Kutler, chairman and chief executive of Quarterdeck Investment Partners LLC.
"They are going to be more aggressive about filling that spot," said Robert D. Kipps, head of investment bank Houlihan Lokey Howard & Zukin's defense group.
For Titan, the end of the deal will usher in a transition back to a stand-alone company. Chief executive Gene W. Ray said in a statement that he was disappointed that the deal fell through. Ray has said the firm will not look for a new buyer.
Titan was not for sale when Lockheed pursued it, Ray said. "The offer of a merger came from Lockheed Martin, not Titan."
Titan is likely to stay independent for the next few years, but its reasons for accepting Lockheed's offer linger, industry analysts said. Titan has a relatively high debt load, more than $500 million, which makes it difficult for it to pursue acquisitions of its own, and Ray, 65, does not have an obvious successor, Kipps said.
"The issues that caused them to be interested in a sale are still going to be there a couple of years from now," Kipps said.