The frenzy of defense industry mergers can be traced to 1993, when then-Deputy Defense Secretary William Perry invited executives to dinner. At an event now referred to as "the last supper," Perry urged them to combine into a few, larger companies because Pentagon budget cuts would endanger at least half the combat jet firms, missile makers, satellite builders and other contractors represented at the dinner that night.

Perry's warnings helped set off one of the fastest transformations of any modern U.S. industry, as about a dozen leading American military contractors folded into only four. And soon it's likely only three will remain, with Lockheed Martin Corp.'s announcement yesterday that it plans to buy Northrop Grumman Corp. for $11.6 billion.

Bethesda-based Lockheed Martin has long been the pacesetter in the acquisitions boom, having assembled itself from 17 separate defense firms or divisions of companies. Now, with this last purchase of a company that itself grew out of numerous other combinations, outgoing chief executive Norman R. Augustine establishes himself as the most audacious dealmaker in aerospace history.

"Norm was probably looking to go out with a bang, and this is his bang," said Stuart McCutchan, a longtime defense industry analyst who has observed the business for nine years as editor of a trade publication called Defense Mergers & Acquisitions. He is scheduled to retire in August.

There's a clear strategy behind the acquisition trend. The military procurement budget has plunged 67 percent since its height in 1985, forcing defense contractors to lay off workers and close plants at a pace perhaps unmatched in modern U.S. corporate history. Both the Pentagon and industry executives believe that larger companies will be more efficient at stretching that limited budget and carrying out the big-ticket projects that characterize defense spending in the late 1990s.

By the end of his second term, it may emerge that President Clinton's most enduring legacy in national security will be his role in creating a handful of extraordinarily powerful defense contractors.

By far the two most potent players are now Lockheed Martin and the Boeing Co. Even without the deal announced yesterday, one or the other of these two firms will act as prime contractor on about 60 percent -- or $360 billion -- of the $600 billion to be spent on Pentagon procurement over the next 20 years, military documents show. These two have won almost every large aerospace contract let by the Pentagon and the National Aeronautics and Space Administration in the past two years.

Boeing, the world's leading maker of commercial aircraft, sat out the merger jitterbug until last year, when it bought Rockwell International Corp.'s defense and space business and agreed to buy arch-competitor McDonnell Douglas Corp. The Federal Trade Commission approved the latter $15 billion deal only this week, allowing creation of a firm with 200,000 employees and $48 billion in annual sales.

By contrast, Martin Marietta Corp. and Lockheed Corp. were two of the earliest acquirers. Under Augustine's leadership, Martin Marietta started making deals in 1992, agreeing to buy the defense and space business of General Electric Co. Along the way, it also bought General Dynamics Corp.'s rocket division.

Then in 1995 Martin Marietta merged with Lockheed, which itself had bulked up by acquiring General Dynamics' jet fighter division. Last year the combined firm bought the defense business of Loral Corp., a collection of military contracting firms assembled over the years by Wall Street dealmaker Bernard Schwartz.

Lockheed Martin's Loral acquisition established it as the world's largest defense electronics firm -- one of the few growing areas of military contracting. While only 1 percent of U.S. defense contracts were devoted to electronics during World War I, and 10 percent in World War II, the number grew to 35 percent during the Vietnam War and now stands at 45 percent.

But the new Lockheed deal also brings criticism.

Northrop Grumman is an electronics powerhouse because of its recent purchase of Westinghouse's defense electronics division outside Baltimore. So the new Lockheed Martin will be even more vulnerable to the criticism that it is too "vertically integrated," meaning that it is too dominant both in building entire jets and missiles, and in designing the electronics and radar that go into them. "I don't think this is healthy," said McCutchan, who fears the new Lockheed may drive under smaller electronics subcontractors, and also make competitor Boeing nervous about using Lockheed components on its aircraft. "While this deal may be good for shareholders, I doubt it is for the defense supplier base." AND THEN THERE WERE THREE

Lockheed Martin's plan to acquire Northrop Grumman would leave the aerospace industry with three major defense contractors, with number three Raytheon far behind Boeing and Lockheed. Combined Boeing and McDonnell Douglas revenue

About $48 billion Combined Lockheed Martin and Northrop Grumman revenue

About $35 billion Combined Raytheon and Hughes Aircraft revenue

About $21 billion LOCKHEED MARTIN 1997: Announces plan to buy Northrop Grumman

Northrop Grumman acquisitions:

1996: Westinghouse defense

1994: Northrop buys Grumman

1992: Northrop buys LTV Aircraft 1996: Buys Loral's defense unit

Loral acquisitions:

1995: Unisys defense

1994: IBM Federal Systems

1992: LTV missiles

1991: Ford aerospace

1988: Goodyear aerospace 1995: Lockheed merges with Martin Marietta

Martin Marietta acquisitions:

1994: General Dynamics rockets

1993: General Electric aerospace

Lockheed acquisitions:

1993: General Dynamics military jets

1987: Sanders Associates BOEING

1996: Announces plan to buy McDonnell Douglas

1996: Buys Rockwell defense and space RAYTHEON

1997: Buys Texas Instruments defense

1996: Agrees to buy Hughes Aircraft

Hughes Aircraft acquisitions:

1995: Magnavox defense

1994: CAE Link

1992: General Dynamics missiles

1995: Buys E-Systems CAPTION: Northrop Grumman's B-2 Stealth bomber