Boeing Co. said yesterday that it will buy the satellite-building business of Hughes Electronics Corp. for $3.75 billion, creating a powerful new competitor for the already-struggling space business of Bethesda's Lockheed Martin Corp.
Boeing's move unites its own burgeoning military satellite business with the industry-leading commercial work of Hughes, a General Motors Corp. subsidiary, which has built 40 percent of the communications satellites now in use.
If federal regulators approve the deal, the new Boeing Satellite Systems unit will be part of a space division with almost $10 billion in annual revenue.
Lockheed Martin's space and missiles segment had $7.46 billion in sales in 1998 but languished last year as a result of launch delays and the loss of a spy-satellite contract to Boeing. Revenue declined to about $5 billion last year while earnings fell to one-fifth of the previous year's level, said Joseph Campbell, an analyst at Lehman Brothers Inc.
The Boeing deal hints of an even more challenging future for Lockheed Martin, he said. "Hughes, which was the [industry] leader, just got stronger. And Lockheed . . . just competitively got weaker," Campbell said.
One source close to Lockheed Martin's leadership said the company is likely to oppose the deal when it is considered by government regulators. A company spokesman issued a statement yesterday that hinted at that.
Terming the deal a "significant and far-reaching transaction that has numerous impacts on key segments of the U.S. industrial base," spokesman James Fetig said "Lockheed Martin intends to closely study and monitor the potential transaction as it progresses through the U.S. regulatory process and to respond to any U.S. agency inquiries that arise."
Space has long been a strength at Lockheed Martin, but that changed in the past year after delays in commercial launches and the failures of Titan and Athena rocket boosters.
Then, in September, Boeing won a $4.5 billion contract to build the next generation of spy satellites for the National Reconnaissance Office--work that Lockheed Martin had dominated for decades.
Now a marriage with Hughes would give Boeing the kind of balance in space work that it already enjoys in the aircraft business--a healthy menu of commercial work to offset its military contracts.
"I would say that Lockheed Martin can't be pleased," said Stuart McCutchan, who publishes the Defense Mergers & Acquisitions newsletter.
CAPTION: The Hughes deal would give Boeing a new balance in its space business: a healthy menu of commercial work to offset its military contracts.