The proposed megamarriage of defense industry giants Lockheed Corp. and Martin Marietta Corp. will create the nation's largest defense contractor pension fund.
In fact, the fund is bigger than the merger deal.
The new company, Lockheed Martin, would have total combined employee benefit assets (defined benefit plus defined contribution) of $16.8 billion. If the two had been merged in 1993, Lockheed Martin would have ranked as the 33rd largest employee benefit fund in the United States. The merger, by contrast, has a valuation of more than $10 billion.
Defense industry sources believe the combination of the two pension operations could proceed without major hitches because both plans are well funded and conservatively managed. Plus, the whole deal is being called a "marriage of equals," so investment industry observers expect decision making on the pension side will be done jointly.
That's in sharp contrast to Northrop Corp's. hostile acquisition of Grumman Corp. earlier this year, in which Northrop began almost immediately to impose its investment management policies on the former Grumman pension plan.
Also, pension staffs at both Lockheed and Martin Marietta are said to be lean, and major staff reductions are not anticipated.
Pension executives at neither company would return repeated telephone calls seeking information regarding prospects for their respective pension operations.
But, outside sources expect the two plans to be merged and at least a portion of Martin Marietta's $1.2 billion internally managed assets to be distributed to external asset managers.
According to the 1994 Pensions & Investments' survey of employee benefit funds, Martin Marietta manages internally about $276.1 million of domestic equities, $226.2 million in domestic fixed-income assets and another $724.3 million in cash.
A source in the Lockheed treasury department said Lockheed Martin probably will conduct an asset allocation and liability review of the combined plans after the merger has been completed, probably sometime in 1995.
He said there is a "good chance" a portion of Martin Marietta's internally managed assets would be distributed to outside money managers, depending on the results of the asset allocation review, "although that is far from certain at this point."
He said the combined employee base of 170,000 at Lockheed Martin might have to be reduced in coming months, which could affect liabilities of the plan if an early retirement program is offered.
"That (reductions in employees) will have to be determined later; no one is certain about exact numbers yet. That all depends on the needs of the new company and how healthy our business is going to be going forward."
Another industry source familiar with both companies said that because Martin Marietta and Lockheed are treating the link-up as a "marriage of equals," a significant portion of the internally managed assets at Martin Marietta could continue to be managed internally. "Especially for a plan that is going to be this large, it may make sense to retain some internal management capabilities," he said.
Martin Marietta's $3.8 billion in defined benefit plan assets were 45.8% invested in equities, 23.4% in fixed income and 30.8% in cash, according to the 1994 P&I survey. Lockheed's 1993 annual report said the firm's nearly $8.1 billion plan assets were 48% in equities and 52% in fixed income.
According to the P&I survey, Martin Marietta and Lockheed share only a single money manager: Capital Guardian Trust Co., Los Angeles, and both use Bankers Trust Co., New York, as master trustee.
A spokesman at Capital Guardian said his firm has not been notified yet on how the pension assets will be handled. "It doesn't appear that anyone knows what is going to happen right now," he said. A spokesman for Bankers Trust declined to comment, citing client confidentiality.
The combined defined benefit assets of Lockheed Martin are approximately $12 billion.
Participants in both companies' defined contribution plans already have shown a tidy profit - at least on paper - as a result of the proposed merger.
Approximately 26% of the 63 million shares of outstanding Lockheed stock, or 16.4 million shares, are held in the company's defined contribution plans. Following the merger announcement, Lockheed shares jumped to $78.75 as of Aug. 31 from about $66 the day before the announcement, for a paper gain of $209 million.
The Martin Marietta profit-sharing plan holds 5% of the 125.9 million outstanding shares of Martin stock, or about 6.3 million shares. Martin Marietta stock closed at 507/8 Aug. 31, up from $48.25 the day before the announcement, for a paper gain of more than $16.5 million.
Total assets of the Martin Marietta profit-sharing plan, according to the 1994 P&I survey, were $1.3 billion. The Lockheed defined contribution plan had total assets of $3.5 billion as of July 1, 1993.
Under terms of the merger agreement, Lockheed shareholders will receive 1.63 shares of Lockheed Martin stock for each Lockheed share. Martin Marietta shareholders will receive stock in the new corporation on a one-for-one basis.
According to their 1993 annual reports to shareholders, the pension plans of both companies are overfunded. Martin Marietta recorded assets in excess of accumulated benefit obligations of $606 million, while Lockheed had excess assets of approximately $1.5 billion.
According to one defense industry source, Martin Marietta has a pension staff of about five persons while the Lockheed staff is said to be about that or only slightly more.
A Lockheed spokesman said it is "too early to say" whether there will be cuts in the combined Lockheed Martin pension staff operations. But, without confirming numbers, he did say the Lockheed staff already is "lean" and that Lockheed "has been known for its very lean corporate staffing needs."
One consultant said the merging of the Lockheed and Martin Marietta plans could be managed more efficiently than what happened when Northrop took over rival Grumman.
Northrop moved Grumman's $2.8 billion internally managed pension assets to J.P. Morgan Investment Management Inc. for safekeeping pending distribution to external managers. At the same time Northrop terminated the entire Grumman pension staff (P&I, July 25).
"Grumman is certainly an example of what can happen," said one consultant who wished to remain unidentified. "That's one of the factors you must consider when there is duplication or if there is a difference of philosophy. It is usually hard to make a case for two pension staffs. But if most of the assets are already externally managed, there may not be a lot of redundancy, although there may be some.
"You are going to end up with a large pool of assets now and some serious asset reallocations are possible."
In addition, he said, if there is an early retirement program, there "could be significant impact on the combined plan. It changes the liability structure because you bring a lot of stuff up front, and makes current liabilities higher and shortens the duration of the plan."
Another consultant said the "friendly nature" of the merger and the already lean staffing of the two pension operations could lead to a smooth merging of plans "You probably won't see fundamental changes. But just as with Northrop and Grumman, they will have to look at their manager structure and keep the best of those. All this will be done over time."
A consulting actuary said the merger of the two defense giants offers Lockheed Martin an opportunity to start a new pension operation "almost from scratch. ... What they will want to do is sit down together and develop what they think is the ideal situation and then determine where they are now and what they have to do to get to the ideal," he said.
