By DANIEL TAUB

Staff Reporter

Just two weeks ago, Northrop Grumman Corp. officials were handing out coffee mugs with their company's logo on them. When a hot drink is poured in one of the mugs, the insignia of Lockheed Martin Corp. appears in gold.

Those mugs, however, were made in more optimistic times.

Last week, Bethesda, Md.-based Lockheed's planned $11.6 billion purchase of Northrop was thrown into doubt as federal regulators came out against the merger.

The feds are believed to be especially concerned about the control that Lockheed would have in defense electronics.

Lockheed and Northrop officials scrambled last week to determine what divestitures would assuage the Justice Department and the Pentagon, while keeping Century City-based Northrop a worthwhile purchase for Lockheed and its stockholders.

The merger stumble led analysts last week to speculate on what Northrop would do if the deal were killed.

"They'd be back to being between a rock and a hard place, like they were before this (merger plan) came out," said Paul Nisbet, president of Newport, R.I.-based JSA Research Inc., an aerospace investment research firm.

Nisbet said Northrop, at its present size, is not large enough to seriously compete against the industry's Big Three (Boeing Co., Raytheon Co. and Lockheed Martin) for aircraft or defense electronics contracts.

"(Northrop) didn't really have a lot of opportunity to get into the top ranks," he said. "So I think they're right back in that box again. Just what they'd do about it this time is hard to say."

Nisbet and other analysts said that to remain competitive, Northrop would be forced to purchase or merge with one of the industry's second-tier contractors, such as Woodland Hills-based Litton Industries Inc., ITT Industries or General Dynamics Corp.

If the Northrop-Lockheed merger is not allowed, it could be good news for hundreds of Los Angeles workers at least for a time.

Northrop has 430 employees at its corporate offices 320 at the company's Century City headquarters and 120 at its El Segundo office. Most of those employees likely would be laid off if a Northrop-Lockheed merger went through.

A Northrop official who asked not to be identified said the company's Century City employees are expressing mixed reactions to the merger problems. Some are pleased that Northrop may remain independent, and others expect the merger to go through anyhow.

"It runs the gamut from relief to a feeling of being unsettled," the official said. "It's a different story for each individual."

Lockheed Martin spokesman Charles Manor said his bosses told the Department of Justice last week that the company would return within 30 days with a new proposal one that would please federal regulators and keep stockholders happy.

Wall Street was less optimistic that a viable solution would be found. Northrop's stock plunged on news of the federal opposition to the merger to close at $117.50 on March 9. The stock dipped even further in the days following, to close at $115.25 on March 12.

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