Northrop moves to buy TRW

Former would rise to No. 1 in defense, but target may balk

Bidding war on horizon?

February 23, 2002|By Robert Little | Robert Little,SUN STAFF

Northrop Grumman Corp. made an unsolicited and seemingly unwelcome bid to buy TRW Inc. yesterday, the latest step in a long quest to merge its way to the top of the American defense industry.

If the takeover succeeds - an uncertainty that will likely play out in boardrooms over the next days and weeks - Northrop Grumman would emerge as a $26 billion-a-year defense behemoth whose size could eclipse Lockheed Martin Corp., the nation's top defense contractor.

Northrop Grumman does not want all of TRW, a manufacturer of commercial and defense products based in Cleveland.

It would quickly sell the company's $10 billion business making steering and brake systems, seat belts, air bags and other auto parts, then absorb the $6 billion in space and aeronautics components manufacturing that remains.

The resulting company would employ well over 100,000 people nationwide, with a product line that included aircraft carriers, stealth bombers, air-combat systems and military and space electronics.

"I think they're hitting all the hot buttons in the industry now - defense electronics, surveillance, missile defense - all the things that stand to gain in the Bush defense budgets," said Paul Nisbet, a defense analyst for JSA Research Inc. in Newport, R.I.

"They really seem to know what they're doing."

The bid came in a letter to TRW's board of directors. The board issued a statement pledging to "address the Northrop proposal in order to determine the appropriate course," but a spokesman would not say when the board will meet or when a decision might be made.

The statement also suggested, however, that TRW is inclined to resist the takeover bid. It comes just three days after TRW's chief executive, David M. Cote, resigned to take over Honeywell International

"TRW finds it regrettable that Northrop Grumman has chosen to make this proposal immediately following the unexpected departure of its former chief executive officer ... and the aberrationally low stock price that resulted," the statement said.

Northrop Grumman is offering $47 worth of stock for each share of TRW and would absorb about $4.9 billion in debt, bringing the total cost of the takeover to roughly $10.9 billion.

Shares of TRW surged 26 percent, or $10.50, to close at $50.30 - a 52-week high - on the New York Stock Exchange. Shares in Northrop Grumman fell nearly 7 percent to $109.95. Several Northrop Grumman competitors, such as General Dynamics Corp., also saw their stock prices fall amid speculation that a bidding war for TRW will ensue.

"It's almost like Northrop Grumman's making this play when TRW seems vulnerable," said Kevin P. Tynan, an equity analyst at Argus Research. "They're basically trying to steal it at this point."

Just three years ago Northrop Grumman ranked sixth among the nation's defense contractors and its executives were complaining of second-class treatment from the Pentagon.

Since then, the company has purchased Litton Industries and Newport News Shipbuilding to become the nation's top shipbuilder and third largest defense contractor, behind Lockheed Martin and Boeing Co. TRW was ranked eighth last year.

Acquisitions - including hostile ones - are nothing new to Northrop Grumman. It bought Newport News after the shipbuilder had already negotiated a deal with General Dynamics Corp. Its Electronic Systems division in Linthicum - the company's largest - was once owned by Westinghouse Electric Corp.

Northrop Grumman's very name is the result of a corporate duel in the mid 1990s, when Northrop Corp. suddenly wrested Grumman Corp. away from a takeover by Martin Marietta Corp.

A Northrop Grumman spokesman said the TRW deal would have little direct effect on the company's Baltimore-area division, except that many of the newly acquired space businesses would likely be placed under its control.

Among the businesses that Northrop Grumman wants to keep, the largest operations are in Reston, Va., and Redondo Beach, Calif.

Wire services contributed to this article.

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