Yesterday, defense contractor Lockheed Martin (NYSE:LMT) announced that it is lowering its cash offer to acquire fellow defense contractor Titan (NYSE:TTN) by 9%, from $22 a share to $20 a share. That puts the total value of the deal at $2.2 billion now, if you factor in Lockheed's agreement to assume Titan's $540 million in debt.

Moreover, the deal will not go through until Titan either enters a plea agreement with the Department of Justice (DOJ) over possible violations of the Foreign Corrupt Practices Act and then complies with whatever punishment is meted out to it, or obtains written confirmation that the DOJ considers the case closed and is imposing no fines. Lockheed, in its turn, will agree that the DOJ investigation does not constitute a "material adverse effect" that could justify Lockheed breaking off the deal. (The press release does not mention what effect the Securities and Exchange Commission (SEC) investigation, which is also ongoing, might have on the merger.)

This is what we call "playing hardball." We already know that Titan does not anticipate huge fines being levied upon it by either the DOJ or the SEC. The company has, after all, only set aside $3 million in anticipation of such fines. Yet Lockheed is decreasing its offer by not $3 million, but $150 million. Amazing.

The strange thing is that Titan's board has agreed to these demands, which have been formalized in an amended merger agreement. But it remains to be seen whether Titan's shareholders still think the deal is worth doing. A vote on the question is scheduled for June 7 -- but it should come as no surprise that the parties have made contingency plans in the event of further delays. The new merger agreement permits either party to back out if the merger is not completed by June 25 (for example, if it takes longer than expected to settle matters with the Feds). If necessary, the merger can be postponed to as far out as Sept. 24.

Whether or not the merger proceeds (I think it will, both because Lockheed has a lot to gain and because Titan is every day looking like a more and more motivated seller), there is a lesson to be learned from this story: When you see a buyout offer from Company X to acquire Company Y at $10 a share, and see the price of Company Y's shares rise to $9.50, have you ever wondered why the price did not rise to $10? This is why. A deal ain't done till it's done.

Tom Gardner hunts down small, undervalued companies like there's no tomorrow in Motley Fool Hidden Gems . Take a free 30-day trial to learn more.

Fool contributor Rich Smith owns no shares in any company mentioned in this article.