Northrop Grumman mired in stealth Westinghouse deal enriches the mix of defense business

January 04, 1996|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Northrop Grumman Corp., which signed up to become Maryland's biggest manufacturing employer yesterday as it agreed to buy Westinghouse Electric Corp.'s defense electronics business, is a high flier with a crippled engine, defense industry analysts say.

The driving force behind Northrop Grumman's sales, estimated at $6.8 billion for 1995, has been the B-2 stealth bomber, darling first of the Carter administration and lately of congressional Republicans from Southern California, where it is made.

But much of official Washington doesn't like the plane, and the program's uncertain future has spurred a spree of deals to get the old Northrop Corp. into businesses with better prospects.

"The Westinghouse acquisition is the second part," said PaineWebber Inc. defense analyst John A. Modzelewski. "The first piece was the [1994] acquisition of Grumman."

As did the purchase of Grumman, the Westinghouse deal brings defense electronics businesses to the table of Northrop, traditionally an aircraft manufacturer -- and one that has increasingly fallen victim to budget cuts and to competitors that have edged it out to get the slimmer defense-contracting pickings of the post-Cold War era.

"We've had such a shake out among main [aircraft] contractors, they couldn't stay in," said Paul H. Nisbet, an analyst at JSA Research Inc. in Newport, R.I. "Other than the B-2, they haven't been a main contractor for a military plane since the F-5," which he said has been out of production for about a decade.

Northrop Grumman's aircraft unit builds B-2s for the Air Force, builds much of the F/A-18 Hornet fighter-attack plane for the Navy and Marines as a subcontractor to McDonnell Douglas, and makes fuselages for civilian Boeing 747s.

Northrop Grumman's defense electronics businesses are highlighted by radar packages that turn planes such as the Navy's E-2 Hawkeye and the Air Force's E-8 Joint STARS plane into mainstays of modern warfare that can track multiple targets across tumultuous battlefields. But the electronics businesses -- both Northrop Grumman and Westinghouse -- earn less money than the plane business -- for now.

But the electronics business seems likely to stand up better than the market for military planes, analysts say. And Northrop Grumman's position in electronics is stronger, especially after the Westinghouse deal.

"It makes them a real power in defense electronics," Mr. Nisbet said.

The bond rating house Moody's Investors Service seemed to agree. While both Moody's and Standard & Poor's Corp. placed Northrop Grumman debt under review for a possible cut in their credit ratings, Moody's said the deal addresses Northrop Grumman's need to "achieve a better balance" between a shrinking aircraft business and a smaller electronics business with "good earnings prospects and solid operating profit margins."

The B-2 is a technological wonder and a political failure, a victim of changing military missions and new fiscal realities. It is set apart from other military planes by its ability to deflect the beams of enemy radar, giving it the "stealth" capability that should let it go where other planes can't, though critics say it hasn't lived up to all of its promise in tests.

Now the Air Force wants only 20 B-2s, at a cost of about $45 billion, not the 132 once planned. The Clinton administration and congressional Democrats have generally backed the Air Force, but the president has wavered in recent weeks, telling the Los Angeles Times last month that "there's going to be more B-2s built."

"The Air Force hasn't changed its position. Twenty is enough," Air Force spokeswoman Kathleen Cook said. "That is what we said originally and that is what we want."

But the program's current status is muddled because of the broader budget debate.

President Clinton signed a defense appropriations bill that included $493 million for B-2 parts in anticipation of expanding the 20-plane fleet. But last week he vetoed a defense-authorization bill containing compromise language that would have repealed requirements in previous laws that all B-2 money be spent on the first 20 planes, while demanding that the $493 million appropriated this year be spent on the first 30.

A senior administration official said the president will send Congress a bill soon to delete funding for Republican-backed projects that the White House did not include in its defense budget, in part to free up more money for the peacekeeping operation in Bosnia. But the official said the administration has not yet decided whether to ask Congress to kill the extra B-2 funding, which is one of the items Congress added.

Even some GOP budget leaders in Congress have criticized expanding the B-2 program beyond 20 planes, eight of which have been delivered to the Air Force.

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