Northrop Grumman, TRW to merge

$7.8 billion deal exceeds first offer by $2 billion, creates No. 2 defense firm

OK by U.S., Europe required

Little impact is expected in the Baltimore area

July 02, 2002|By Robert Little | Robert Little,SUN STAFF

Northrop Grumman Corp.'s hostile bid to acquire TRW Inc. ended with a handshake yesterday, as the two companies announced a $7.8 billion merger agreement that will create the world's second-largest defense company.

The deal caps a swift ascent to the top ranks of the industry for Northrop Grumman, adding a major stake in the government satellite business to its portfolio of shipbuilding, aircraft and military electronics manufacturing.

Northrop Grumman plans to quickly shed TRW's automotive parts division, close its corporate headquarters in Cleveland and absorb its remaining defense manufacturing businesses. The company that emerges will be a 123,000-employee giant with $26 billion in projected annual sales, second only to Lockheed Martin Corp. among the world's defense contractors.

The cost of the deal raised some eyebrows - it was nearly $2 billion more than initially offered - but the purchase price increased only 10 percent when the upward surge in Northrop Grumman's stock price this year is factored in.

"There is no doubt in my mind that the combination of our two companies is in the best interests of our shareholders, our employees and the government," said Kent Kresa, Northrop Grumman's chief executive officer. "The future is just much ... brighter for us now."

The deal is subject to shareholder votes and to regulatory approval in the United States and Europe, but company officials predict few complications and hope to complete the merger by the end of the year.

The merger should have little effect locally, except that much of TRW's defense-related business will likely be placed under the control of Northrop Grumman's Electronic Systems division in Linthicum.

Since 1998, when a proposed merger with Lockheed Martin crumbled because of government opposition, Northrop Grumman has virtually rebuilt itself with major acquisitions such as Litton Industries and Newport News Shipbuilding. A company that once complained of second-tier status at the Pentagon is one of the top contractors for shipbuilding, missile defense, unmanned vehicles and military electronics.

"They've done a really incredible job of putting this company together," said Paul Nisbet, an analyst for JSA Research in Newport, R.I. "This is a company that was pretty much left for dead a few years ago."

TRW's corporate roots date to 1901, its name derived from the earlier Thompson Ramo Wooldridge, a conglomeration of companies that formed the modern corporation. Best known for business that Northrop Grumman plans to sell - manufacturing air bags, seat belts, brake systems and other automotive parts - the company also makes communications and surveillance satellites, aircraft avionics and space-based electronics systems.

The $60-per-share deal announced yesterday shows that Northrop Grumman officials found what TRW executives long have told them was needed to close the deal: more money. An initial offer of $47 per share, or roughly $5.9 billion, was quickly rejected by TRW in February, as was a revised offer of $53 a share. The final purchase price was 27 percent higher than the initial offer.

Kresa said the price was reached after Northrop Grumman officials were invited to review TRW's internal financial records, including contracts and classified programs. That overture was made to halt a hostile takeover bid that Northrop Grumman was waging directly with TRW shareholders.

"I can say after a very, very detailed evaluation that, indeed, that value is there," Kresa said.

Executives from both companies said their auditors paid particular attention to the other's accounting records, to make certain that no irregularities emerged of the sort uncovered at WorldCom Inc. and Enron Corp. TRW said it sent 40 investigators to scour Northrop Grumman's books, even though the defense giant is heavily audited by the federal government.

"Given the environment, we wanted to be certain," said TRW Chairman Philip A. Odeen. "I think everyone was very comfortable there were no issues there of any kind."

Shares of Northrop Grumman fell $6.81 yesterday, or 5.45 percent, to close at $118.19 on the New York Stock Exchange. Shares of TRW fell 40 cents to close at $56.58.

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