Federal Data to be bought by Northrop

Defense contractor continues strategy of diversification

Deal valued at $302 million

Md. firm supplies computer services to U.S. agencies

Information technology

September 07, 2000|By William Patalon III | William Patalon III,SUN STAFF

As part of its diversification into the information-technology sector, defense contractor Northrop Grumman Corp. agreed yesterday to buy Bethesda-based Federal Data Corp. in a deal valued at $302 million.

Federal Data, privately owned by the Carlyle Group, provides computer-networking and software services to government agencies, and employs 1,400 - mostly in the Washington area. Northrop, the No. 5 U.S. defense contractor, said Federal Data will become part of its Logicon information-technology unit once the deal closes in roughly 45 days.

Northrop's information-technology foray "has been a strategy for the company since 1994," said Larry Hamilton, the firm's director of corporate public affairs in the Washington region. "We'll still be building the E2C [aircraft] and the back half of the FA-18 [fighter jet]. But our strategy fits with the part of our corporate tagline that says: `Defense, aerospace, cyberspace.'"

Christopher H. Mecray, a research analyst who follows Northrop for Deutsche Banc Alex. Brown in New York, said the deal looks good. It is consistent with the overall corporate plan that Northrop's leaders have articulated and the price being paid isn't unreasonable for a company the analyst figures is growing at a 15 percent annual clip.

"Federal Data is a relatively strong fit, strategically," Mecray said.

The Federal Data acquisition will bolster the Maryland presence of Los Angeles-based Northrop. The company already owns the former Westinghouse Corp. defense-electronics business - with operations in Linthicum, Annapolis and Sykesville - which it now calls its Electronic Sensors and Systems sector, and has other key outposts in Belcamp and Hagerstown. Total statewide employment is about 7,600, Northrop spokesman Jack Martin said.

To purchase Federal Data, Northrop will pay $127 million in cash and $18 million in transaction costs, and will assume $157 million in debt, which it will have to retire. In return, Northrop is getting a company that had 1999 revenue of $589 million, and that has experienced tremendous growth. Over a recent three-year stretch - due chiefly to acquisitions engineered by Carlyle Group, an investment house that's extremely well-connected in defense-industry circles - Federal Data saw its job rolls swell from 200 to 1,400, and its annual sales grow from $200 million to more than $580 million, said Kerri Mae Winters, director of marketing communications for Federal Data.

With the deal's closing, Northrop will be able to heighten its relationship with some current clients, and add some new ones, too, the companies said. Key Federal Data customers include the Veterans Administration, the Internal Revenue Service, the National Aeronautics and Space Administration, the National Institutes of Health, the State Department and the Department of Defense.

The acquisition will have no impact on Northrop's earnings this year, but should add to profit in 2001, the company said. Mecray, the Deutsche Banc analyst, agreed with that assessment.

Northrop shares closed in trading on the New York Stock Exchange yesterday at $79.9375, down 12.5 cents.

For Federal Data to keep its high-tech focus, Northrop intends to fold its new acquisition into its Herndon, Va.-based Logicon subsidiary, which had 1999 sales of about $1.5 billion - approximately 17 percent of Northrop's $9 billion in overall sales.

No layoffs are planned at Federal Data; in fact, Logicon has 400 to 500 openings right now, both Northrop and Federal Data said.

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