Staying still is not an option for Northrop After Lockheed debacle, it needs other partners


July 26, 1998|By J. Leffall

THIS MONTH Lockheed Martin Corp. called off its merger deal with Northrop Grumman in the face of opposition from the Defense Department and government antitrust officials, which felt the combination would seriously limit competition.

While Lockheed is an undisputed giant, the collapse of the deal raised questions about the future of the much smaller Northrop, whose Electronic Sensors & Systems Division is in Linthicum. What is the next move for Northrop? Will it pursue other acquisitions or mergers? What should it do to stay competitive?

Roger R. Threlfall

Aerospace analyst, J. P. Morgan Securities, New York

They have two courses of action they can seek for themselves. They can go back on the market and attempt to sell themselves again or they can attempt to make smaller acquisitions as they've been doing. But staying still, especially after what happened with Lockheed, is not a good move for them.

Information and electrical systems are some areas Northrop is looking to strengthen itself in. The combined company Lockheed and Northrop would have created not only had critical mass, but a broad spectrum of products and services. It would have had dominant impact and been ranked either No. 1 or 2 in every important marketplace. It's a task to come back from a deal that would have created something really big.

In satellite and air traffic control technology, Northrop is extremely weak. The problem now is that they are a more narrowly focused company than they otherwise would have been. But they've done a pretty good job at damage control. They've been visiting investors telling them of other pending consolidation moves.

Right now they are saying size matters but that the merger fallout is not the end of the matter. Northrop now is willing to look at other strategic alternatives. Right now there is evidence that they are moving in the direction of mergers and acquisitions, but nothing is official or definite. Yet this is the direction they need to go in.

Howard A. Rubel

Industry analyst, Goldman Sachs, New York

I think what they need to do is go back and put their heads together both within their company and with investors and bounce back as they've done in the past.

There is a window of opportunity in some of the things they are presently looking into, and Lockheed was a slight disappointment but not a major setback

The company, along with its stock, will definitely recover, I think, pretty soon. It's all a matter of realignment of strategies and strengthening some of the areas they were weak in, which is what would have happened with Lockheed, but that's over for now.

Their next move should be to fortify the areas that would have been fortified in the lost deal, and they have a good track record.

Basically, if they make other alliances, whether through acquisitions or selling to the highest bidder, they will definitely be making moves to kind of steer around this setback.

Paul H. Nisbet

Analyst, JSA Research Inc., Newport, R.I.

Well, I think what they will do is what I think they should do, and that's getting back on the acquisition merger path, picking up or making alliances with higher growth companies in facets of the industry that they typically haven't done too well in.

Information technology-wise, they bought Logicon. They expect that to double in size and that's a high-margin area. Logicon's technology is being combined with the data systems they had when Northrop hooked up with Grumman.

Defense electronics is another area that they've already made strides in and need to gain a bigger foothold there.

As far as stock is concerned, the earnings reported for Lockheed were good so that's why the numbers went up for them. In the case of Northrop's stock, I think the market just overreacted to the downed merger.

I foresee that Northrop's stock will be up to $133 by the end of next year and I think that's going to be the result of a good strategic plan.

Right now the general expectation is that Northrop will grow with the acquisitions they've made and maybe more if they cook up another deal with a company less big and threatening than Lockheed Martin.

There will be something along the lines of consolidation and alliances for this company. I expect them to stay active.

Byron K. Callan

Industry analyst, Merrill Lynch Global Securities, New York

They are still floating pretty nicely and this is not a huge problem they are facing. The first thing to do would be to restabilize. They've been sort of in limbo for a year or so.

But it's all a matter of revamping the game plan. If you think further around the field, they won't face as much vertical integration as the larger Lockheed will.

Northrop has some good flexibility with things in Europe and the United States that it could tap into.

Information technology is going to be big for them, I think. But it's all a matter of sitting down and counting the chips, so to speak.

There hadn't been a lot of strategic planning with them in the past, just basic execution; they need to step it up a notch and brush off the dust and refresh themselves.

For Northrop, it's going to be a combination of acquisitions and joint projects that they will need to pursue. This is the way the world is going and I think they want to be a part of that consolidation trend.

Pub Date: 7/26/98

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