Lockheed Martin announces plan to acquire defense firm Loral Corp.

Expect few changes in Loral's PACS unit for now

Loral Medical Imaging Systems (LMIS) has found itself swept alongby the wave of consolidation crashing across the defense industry.On Jan. 8, aerospace and defense giant Lockheed Martin took thefirst step toward acquiring the PACS vendor's parent, Loral Corp.,in a transaction worth over $10 billion.

The deal is the latest in a series of mergers and acquisitionsthat have reshaped the defense industry in the last several years.Lockheed Martin itself was formed by the merger of Lockheed andMartin Marietta, a deal completed just last year.

A few medical imaging firms have been caught up in the consolidation,as many defense contractors have moved into healthcare in hopesof diversifying from the shrinking arms industry. Defense firmE-Systems, for example, entered the medical imaging market bypurchasing PACS companies AVP and Image Data and folding theminto E-Systems Medical Electronics. Defense consolidation caughtup with E-Systems last year when it agreed to be acquired by Raytheon(SCAN 4/12/95).

There have been few outward changes in E-Med's operations sincethen, and the Lockheed Martin/Loral deal could have a similarlack of impact on LMIS. LMIS has established itself as one ofthe major players in the nascent PACS industry, largely on thestrength of filmless hospital contracts with government agencieslike the Department of Defense and the Department of VeteransAffairs. Its revenues pale in comparison with those of Loral'score businesses, however.

In the short run, this could work in favor of Hoffman Estates,IL-based LMIS, which Loral purchased from Siemens in 1994 (SCAN9/14/94). The group's low profile will probably enable it to preserveits independence, according to a market analyst who requestedanonymity.

"The amount of revenue generated from the medical imagingside of the business is insignificant in relation to the totalsize of the corporation or the merging entities," the analystsaid. "Lockheed Martin can very easily leave Loral MedicalImaging autonomous and reconsider later on whether it strategicallyfits their long-term business."

Lockheed Martin's primary interest in Loral is to acquire andabsorb its defense electronics and systems integration businesses,estimated at a value of $9.1 billion. Lockheed Martin also plansto create a new company, called Loral Space & Communications,and then buy an equity position in the new company. Carlton Caldwell,a spokesman for Lockheed Martin Information Systems in Orlando,FL, expects that Loral Medical Imaging Systems will be placedin a holding pattern until a decision is reached on how to integratethe company properly.

The official line from the company, according to Caldwell,is that LMIS, along with Loral's other business units, will beorganized into one of six business sectors within Lockheed Martin.When the transaction is complete, perhaps as early as the endof February, these businesses will be evaluated and a long-termconsolidation plan will be developed, he said.

Sources at both Lockheed Martin and Loral expect the evaluationprocess to take as long as a year or more. In the meantime, itwill be business as usual at LMIS, according to Loral's Washington,DC, spokesman Joseph Tedino.

Speculation among some staff at Lockheed Martin is that thecompany's Information and Technology Services sector is the mostlogical fit for Loral's medical imaging business. Tedino warnsthat discussion about how the various components of the two companiesmight be merged is premature.

The Lockheed Martin group has been marketing a multimedia medicalworkstation for more than a year. The workstation can be customizedto fit specific needs, from telemedicine to teleradiology, andcan be configured to include video cameras, VCRs and image scanners.

Loral Medical Imaging Systems recently began exploring telemedicineas part of its PACS development effort. At the Radiological Societyof North America meeting last November, Loral interfaced its VantagePACS line with a telemedicine workstation devised by researchersat Penn State's Milton S. Hershey Medical Center in Hershey, PA,as part of the Radiology Department of the Future exhibit.

Loral is best known for its Medical Diagnostic Imaging Support(MDIS) system, which has been installed under contract with theDepartment of Defense at U.S. military bases. Last November, Loralwon three contracts worth a total of $7.8 million from the Departmentof Veterans Affairs to install Vantage PACS at VA medical centersin Florida, Michigan and Texas.

In all likelihood, LMIS will be left to go its own way untila consolidation plan is framed for the merger of Lockheed Martinand Loral. The long-term picture may be very different, however,according to the industry analyst. Defense companies move slowly,and many of them have no experience running medical businesses.In the end, they may eventually decide to spin off their healthcareoperations.

"I see the divestiture of all these medical businesseson the defense side in the future," the analyst said.