Northrop Grumman Corp. stock plunged yesterday as investors worried about the company's fate now that Lockheed Martin Corp. has abandoned its $11 billion merger attempt.
During a telephone conference, analysts hammered Northrop Grumman Chairman Kent Kresa with questions about whether he would break up the company to revive the 40 percent premium investors had expected if the merger had taken place.
Northrop Grumman shares fell $6.75 yesterday to $90.625, a day after dropping $5.1875 on word that talks aimed at settling the government's antitrust suit against the merger had collapsed.
Kresa declined to rule out any action that would benefit shareholders but insisted that the company is not for sale and said specifically that he has no intention of breaking off the Electronic Sensors & Systems Division in Linthicum.
Other industry experts counseled calm and predicted that the company will remain intact and thrive as an independent entity.
"My recommendation to our clients is buy the hell out of thestock," said Paul Nisbet of JSA Research. "I think there are a lot of unhappy analysts who have seen their investment-banking fee bonus go out the window and some institutional investors who are not happy with Kent Kresa because he hasn't agreed to break up the company and sell it any which way to get instant gratification."
Nisbet said he expects the stock to reach $130 -- the effective price Lockheed Martin was offering to pay -- by next year through Northrop Grumman's improving performance.
Peace of mind
Money aside, there was one immediate payoff for Northrop Grumman: peace of mind.
"The uncertainty is over," said James G. Roche, corporate vice president and general manager of the local division, which builds radars and other military electronics.
"It's sure better to show up at a meeting or show up at the Pentagon knowing who you are. We're Northrop Grumman."
Roche sent a letter to the division's more than 7,000 area employees yesterday, explaining the news and offering reassurances.
"What was terrible was the limbo situation," Roche said. "We didn't know exactly what was going to happen."
Managers didn't know whether they would be split up under the new company or whether the division itself would be divided, Roche said. International customers who might have been interested in buying a particular technology were sometimes hesitant because they didn't know whether Lockheed Martin would continue to develop it, he said.
"Now we can say if you buy an air traffic control radar system from us, we'll be there for you," Roche said.
Kresa made similar points during the morning teleconference with financial analysts and conceded that inefficiencies may have crept into the company during the year of limbo. "We will now aggressively do the right things that we should as a viable company," Kresa said.
Some analysts think the company will have help from the Pentagon. Richard Aboulafia, an industry expert with the Teal Group consulting firm, said the government's refusal to permit the merger because it wants Northrop Grumman to remain a defense industry competitor implies a special relationship.
"They are essentially treating Northrop Grumman's high-tech assets as almost a public commodity," Aboulafia said.
"This is the start of a serious period of interventionist behavior," he said, in which the Pentagon will have to ensure the company gets enough work to survive alongside Lockheed Martin, Boeing Co. and Raytheon Corp, the companies that dominate the industry.
But Loren Thompson, who follows the industry for the nonprofit Lexington Institute, said the military has shown no signs of backing its wishes with actions.
Northrop Grumman's B-2 stealth bomber production line has been terminated with 21 planes built, an order for surveillance planes has been cut back to 13 from 19, and the Navy is buying about half of the 1,000 Super Hornet fighter planes it once envisioned, he said.
Northrop Grumman is Boeing's main partner on the Super Hornet.
"Northrop Grumman emerges from this situation as the victim of a government double standard," Thompson said.
Also, he said, the fact that antitrust investigators waited until the last minute to reveal their opposition to the merger "allowed a massive change in the [company's] shareholder population."
With more short-term investors on hand in anticipation of a big merger payoff, Northrop Grumman managers now face pressure deliver some kind of consolation prize.
The surest way to provide that, said Adam M. Pener, a senior associate at the Washington investment consulting company RWR Inc., would be to sell off all or part of the company.
Pub Date: 7/18/98