It’s Bad For Lockheed — And America; Proxy Fight: Harold Simmons’ Bid Would Leave The Company Stripped, Its Research Efforts Flattened

In the newly released film "Pretty Woman," a beautiful prostitute is rescued Pygmalion-style by an unscrupulous corporate raider who, in turn, forswears the lucrative practice of acquiring companies simply for the purpose of selling off their assets. For the wheeler-dealer, the turning point comes when he declines to cannibalize the holdings of a defense contractor, instead joining forces with the firm’s existing management to produce needed materiel for the U.S. armed forces.

We should all hope that life imitates art with a similar transformation in Texas billionaire Harold C. Simmons. Simmons is a real-life corporate raider with serious designs on a real-life defense contractor, Lockheed Corp. He hopes soon to control the board of directors as the result of a bitter proxy fight.

Should Simmons succeed, he will, if past practice is any guide, shortly dismember the corporation, stripping so-called surplus funds from its pension plan, selling off its less-profitable parts and diverting cash from expensive activities like research and development.

Unfortunately, Lockheed is an inviting target for such a raid. It is said to have a $1-billion net surplus in its pension plan. The company has valuable real-estate holdings in California and subsidiaries that theoretically could be sold off to produce an immediate infusion of cash.

In addition, a great deal of Lockheed’s capital gets plowed back into relatively unprofitable research and development. For example, more than $100 million off bottom-line profits last year was invested in long-term and often highly classified R&D for U.S. government agencies performed by Lockheed organizations like the famous "Skunk Works," which produced the U-2 and SR-71 spy planes and the F-117 "stealth" fighter.

When Lockheed’s management last year wrote off about $500 million against some of its fixed-price military programs, it barely broke even for the year. That angered institutional investors, who hold more than 50% of its stock. The Simmons bid holds out the promise of improved returns on investment in the short term.

But the national interest will almost certainly be very badly served by a takeover of Lockheed by Simmons. Should he proceed to raid the pension fund, divest the company of unprofitable subsidiaries and otherwise reduce the corporate investment in long-term research and development, the consequences are predictable:

Corporate raids on "over-funded" pension plans typically result in the liquidation of assets held by such plans and their partial replacement with annuities or other instruments worth far less. In this manner, Simmons in the 1980s stripped more than $200 million from the pension funds of three companies he acquired (NL Industries, Baroid and Amalgamated Sugar).

On paper, the sum of Lockheed’s component parts would seem to be worth more than the whole. The breakup values of the its assets are almost certainly overstated. In the present climate, the defense sector seems certain to contract; a number of companies or subsidiaries are already on the block and demand is sluggish.

More important from the national perspective, experience has shown that frequently subsidiaries of defense contractors cannot survive, or perform as needed, if severed from the parent company. The synergy between corporate divisions, the transferability of intellectual and capital resources and the possibility that less-profitable entities can be "carried" by more profitable ones naturally disappear when such enterprises are obliged to stand alone.

Finally, Simmons’ corporate assault on Lockheed is likely to exacerbate a trend all too common in American business: the sacrifice of basic research and development so vital to long-term U.S. competitiveness. The National Science Foundation recently determined that corporate investment in such R&D has slipped below the level of inflation for the first time in 14 years. In part prompted by the threat of corporate takeovers, companies have instead been trying to demonstrate short-term profitability by diverting resources to applied or product-specific research and development — areas far less likely to produce fundamental technical breakthroughs, which determine national standing in terms of state of the art.

Nowhere is this trend likely to have more catastrophic results than in the area where America’s qualitative superiority has traditionally mattered most — its military capabilities. Were Lockheed’s demonstrated, prodigious capacity for innovation to be sacrificed to a corporate raider’s insatiable appetite for quick cash, it would be hard to overstate the lasting and adverse impact on the national security.

In short, a great deal is riding on the proxy fight for control of Lockheed’s board of directors. If it is too much to hope that Harold Simmons might follow Hollywood’s script and simply lose his ambition to acquire — and probably destroy — Lockheed, it is imperative that the company’s stockholders appreciate the damage his control would inflict on both their investment and the country’s larger interests.