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Thursday, September 16, 1999

"There is no finish line"
-- Nike corporate motto

FCC Gives Nod to Lockheed Martin and Comsat

By Richard McCaffery (TMF Gibson)

Lockheed Martin's (NYSE: LMT) bid to buy satellite operator Comsat (NYSE: CQ) passed a major hurdle yesterday when the Federal Communications Commission approved Lockheed's move to purchase up to 49% of Comsat stock.

FCC approval was the first step in a two-step regulatory race Lockheed Martin has been running in its yearlong attempt to grab the Bethesda, Maryland-based Comsat in a deal worth $2.7 billion. The company still must receive Justice Department approval in order to complete its tender offer by September 18.

Combining Comsat's fleet of communications satellites with Lockheed Martin's deep pockets and manufacturing expertise would create a powerful competitor in the international satellite industry, which is becoming increasingly deregulated and competitive. Under the agreement, Comsat would be folded into Lockheed Martin Global Telecommunications, a newly formed, wholly owned subsidiary of the defense contracting giant.

Ultimately, Lockheed Martin plans to spinoff the Global Telecommunications division as a publicly traded entity, which could provide an interesting opportunity for investors considering the pressing need consumers and businesses have for high-speed broadband communications. While the satellite industry is inherently risky because of the technology and enormous capital expense involved, investors shouldn't confuse the type of voice, video, and data services Comsat has reliably offered for more than two decades with Iridium's (Nasdaq: IRIQE) efforts to create an entirely new business. Iridium filed for Chapter 11 over the summer.

Major issues remain unresolved, however. For example, the Justice Department has asked Lockheed to divest its 15% stake in Comsat competitor Loral (NYSE: LOR), yet Lockheed has not found a satisfactory way to do this. It's unclear if the Justice Department will press the matter in court or let it slide.

A related action investors should cheer is the FCC's move yesterday to give companies direct access to Intelsat, the state-owned space organization that operates the world's largest fleet of communications satellites. (You're probably using one every time you call that crazy brother who lives overseas.)

For years, companies that wanted access to Intelsat's spacecraft had to go through Comsat, the designated Intelsat signatory, and pay a fat commission. No longer. Now companies can contact Intelsat directly and the commission has been sliced to just 6%. Yesterday's move should help level the field for up-and-coming players. It's all about competition.

News to Go

Hotel and gaming operator Starwood Hotels (NYSE: HOT) is selling $500 million worth of hotels it considers non-strategic in the next three quarters. Proceeds will be used to repurchase about $300 million in stock.

Drugmaker American Home Products (NYSE: AHP) is in talks with plaintiffs' lawyers to settle the dispute over its diet pill drugs Pondimin and Redux, The Wall Street Journal reported. The drugs were later linked to heart disease.

Database software maker Informix (Nasdaq: IFMX) is buying privately held Cloudscape, which makes database software for remote workforces, in a stock purchase worth about $83 million.

Consumer products company Procter & Gamble (NYSE: PG) is changing the way it pays advertising companies for the first time in 50 years, Reuters reported. Now, ad agencies will be paid a percentage of sales rather than a commission based on spending.

Contract research pharmaceutical company Quintiles (Nasdaq: QTRN) said financial results for its third quarter ended September 30 will come in below expectations because of canceled drug development efforts.

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