Lockheed Martin Corporation will settle Federal Trade Commission charges that its $9.1 billion acquisition of Loral Corporation would violate antitrust laws. The FTC charged that the proposed deal would violate antitrust laws by reducing competition in the markets for the research, development, manufacture, and sale of air traffic control systems, commercial low earth orbit (LEO) satellites, commercial geosynchronous earth orbit (GEO) satellites, military tactical fighter aircraft, and unmanned aerial vehicles.
Lockheed Martin and Loral are two of the largest U.S. defense and space contractors. In January, 1996, Lockheed Martin proposed to buy Loral. As part of the transaction, Loral’s space and telecommunications businesses would be transferred to a new entity, Loral Space & Communications Ltd. with Lockheed Martin purchasing a 20 percent convertible preferred equity interest in Loral Space. The proposal additionally provides that Bernard Schwartz, CEO and Chairman of the Board of Loral Space, would be appointed Vice Chairman of the Board of Lockheed Martin. Finally, the proposal contains an agreement that Lockheed Martin provide certain technical services to Loral at cost.
The terms of the settlement provide for Lockheed Martin to divest its systems engineering and technical services (SETA) contract with the Federal Aviation Administration; prohibit Lockheed Martin from providing certain technical services or information to Space Systems/Loral, a subsidiary of Loral Space & Communications Ltd.; restrict participation and compensation of persons who serve as directors or officers of both Lockheed Martin or Loral Space; limit Lockheed Martin’s ownership of Loral Space; and require “firewalls” to limit information flow about competitors’ tactical fighter aircraft and unmanned aerial vehicles.
“The Department of Defense and other agencies of the government are entitled, like any other consumer, to the benefits that competitive markets provide,” said William J. Baer, Director of the FTC’s Bureau of Competition. “This order ensures that the Lockheed Martin/Loral merger will not cause higher prices or lower quality for the defense and space industries or result in higher costs to DoD or American taxpayers.”
As a result of the proposed acquisition, Lockheed Martin, currently the FAA's SETA contractor, would gain ownership of Loral, the largest supplier of air traffic control systems to the FAA. The SETA contractor is responsible for developing technical and other procurement specifications, assessing bids and other proposals submitted by companies competing for FAA contracts, and evaluating the cost and performance of the contractors.
According to the FTC complaint detailing the charges, Lockheed Martin’s position as SETA contractor would allow it access to competitively sensitive, non-public information about contractors competing with Lockheed Martin/Loral for air traffic control systems business. The complaint alleges that access to that information could result in increased prices and reduced innovation. In addition, Lockheed Martin would be in a position to disadvantage competitors or raise competitors’ costs by setting unfair proposal specifications or submitting unfair evaluations.
The proposed agreement to settle the FTC charges, announced today for public comment, would require that Lockheed Martin divest its SETA contract and any associated assets, within six months, to a Commission-approved acquirer. In addition, it would require Lockheed Martin to provide technical assistance to the acquirer in order to assure uninterrupted SETA services to the FAA.
Lockheed Martin and Loral are also leading competitors in the markets for commercial LEO and GEO satellites. Under the terms of the merger agreement, Lockheed Martin proposed to acquire a 20 percent convertible, preferred stock interest in Loral Space and to provide technical assistance, including R&D support, at cost, upon Loral Space’s request. Bernard Schwartz, Chairman of the Board of Directors and Chief Executive Officer of Loral Space, would be appointed to the position of Vice Chairman of the Board of Lockheed Martin, under the agreement.
According to the FTC complaint, the technical services agreement could allow Lockheed Martin to gain access to proprietary information about Loral Space’s competitive activities and bidding strategies, thereby increasing the likelihood of collusion between the companies. The agreement also would likely reduce Loral Space’s incentives to invest in R&D, since R&D would be included in the technical package provided at cost by Lockheed Martin. In addition, Mr. Schwartz’s positions with each company would give him access to competitively sensitive information, including bid strategies, pricing and R&D plans, which could adversely impact satellite competition between the two companies. Moreover, compensation based on the profitability of Lockheed Martin’s space business could diminish Schwartz’s incentive to compete aggressively with Loral Space products and services against Lockheed Martin. Thus, these arrangements would violate antitrust laws, according to the complaint.
The proposed settlement would prohibit Lockheed Martin’s space business from providing personnel, information or facilities to Space Systems/Loral, pursuant to the technical services agreement. It would also prohibit Lockheed Martin from acquiring an interest greater than 20 percent in Loral Space. In addition, it would prohibit any person serving as a board member or officer of both companies simultaneously, including Mr. Schwartz, from participating in Lockheed Martin’s space business, obtaining non-public information relating to Lockheed Martin’s space business or providing non-public information about Space Systems/Loral to Lockheed Martin. In addition, the order would prohibit compensation for individuals serving as a board member or officer of both companies to be based on the profitability or performance of Lockheed Martin’s space business.
Loral is currently the sole supplier of a number of critical components for tactical fighter aircraft procured by the Department of Defense. Lockheed Martin is a leading manufacturer of tactical fighter aircraft. Integration of these critical components into the aircraft requires the transfer of non-public, competitively sensitive information between the aircraft manufacturers and the component supplier. According to the complaint, the merger of Loral and Lockheed Martin would allow Lockheed Martin/Loral to gain access to competitively sensitive information about its fighter aircraft competitors. To preserve competition and protect innovation and research, the proposed agreement to settle the charges would erect a “firewall” that would prohibit the Lockheed Martin division that manufactures and supplies critical aircraft components from making any competing aircraft manufacturers’ proprietary information available to Lockheed Martin’s aircraft division. Similar “firewall” provisions have been used in previous Commission orders and the Department of Defense has stated that the proposed order resolves all of the competitive concerns it identified as a result of the merger.
Currently, Loral is the sole supplier of integrated communications systems for unmanned aerial vehicles and Lockheed Martin manufactures and markets such vehicles. Because other manufacturers of the aerial vehicles provide proprietary information to the integrated communication system supplier, the complaint alleges that the merger would allow Lockheed Martin’s unmanned aerial vehicle division to gain access to competitively sensitive non-public information about competitors which could affect prices and reduce innovation and quality. The agreement to settle the charges would require a “firewall” to prevent confidential or proprietary information from being transferred from the division that develops the integrated communications systems to the unmanned aerial vehicle division.
Commission staff consulted closely with the Department of Defense during the course of this investigation and in identifying appropriate relief for the competitive concerns that were identified.
The Commission vote to announce the proposed consent agreement for public comment was 5-0. It will be published in the Federal Register shortly and will be subject to public comment for 60 days, after which the Commission will decide whether to make it final. Comments should be addressed to the FTC, Office of the Secretary, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580.
NOTE: A consent agreement is for settlement purposes only and does not constitute an admission of a law violation. When the Commission issues a consent order on a final basis, it carries the force of law with respect to future actions. Each violation of such an order may result in a civil penalty of $10,000.
Copies of the complaint, consent and an analysis to aid public comment are available from the FTC’s Public Reference Branch, Room 130, 6th Street and Pennsylvania Avenue, N.W., Washington, D.C. 20580; 202-326-2222; TTY for the hearing impaired 202- 326-2502. To find out the latest news as it is announced, call the FTC NewsPhone recording at 202-326-2710. FTC news releases and other materials also are available on the Internet at the FTC’s World Wide Web site at: http://www.ftc.gov