Essex Corp. a jewel for potential buyer

November 10, 2006|By Allison Connolly | Allison Connolly,Sun reporter

Essex Corp. may have had a rocky beginning, but it's little wonder why the nation's third-largest defense contractor now wants to buy it.

Seven hundred of its employees carry highly sought-after security clearances and work on significant contracts for the nation's largest intelligence agency. In five years, it went from a company with a promising optical processing technology and fewer than 50 people to one with more than 1,000 employees and expected earnings of at least $250 million this year.

Northrop Grumman's $580 million cash-and-debt offer, announced Wednesday after the market closed, put the relatively unknown company on the radar screen. It also fueled speculation that a consolidation among small and mid-size defense firms is ahead, as many predict defense spending will slow next year, especially with Democrats in control of Congress.

Essex Chief Executive Officer Leonard E. Moodispaw said yesterday that he hadn't been shopping the company when Northrop Grumman, a major employer in Maryland, came calling.

"We had a number of companies approach us when the share price dipped down," in the past few months, he said.

"We said we weren't for sale, but if they made an offer, we'd take it to shareholders. Northrop Grumman made an offer," Moodispaw said.

Los Angeles-based Northrop Grumman offered $24 per share - a 20 percent premium to Essex's closing price Wednesday. It also would assume Essex's debt.

Essex stock jumped almost 18 percent yesterday, gaining $3.57 to $23.55 a share.

"The valuation is really turning heads in the industry," said analyst Michael Lewis, with BB&T Capital Markets, which does or could do business with Essex. "Everyone's asking, why so high? What have they got?"

"I think they bought them because they served different customers who Northrop Grumman wasn't able to get to," said analyst Paul Nisbet, a principal at JSA Research in Newport, R.I., who covers Northrop Grumman. "It was a lot [of money] but it's a strategic purchase, not an economic one."

Larger companies, such as Titan, Anteon and United Defense Industries, have undergone consolidation in the past couple of years, said analyst Myles Walton of CIBC World Markets in Boston, and now the smaller companies are targets. He's not surprised that Northrop Grumman made a play for Essex, which has "unique" capabilities. "To get the company, they would have to pay up for it," said Walton, who does not own shares in Essex. "Its internal growth and customer relationships demand a premium for it."

Military analyst Loren Thompson of Arlington, Va.-based Lexington Institute said defense spending is likely at its peak.

The ink wasn't dry on the fiscal 2007 defense bill last month, approving nearly $533 billion in spending, when analysts started predicting a slowdown in military spending, especially if Democrats took control of Congress in the midterm elections, which they did this week.

Thompson said that with Defense Secretary Donald H. Rumsfeld stepping down, there's even more uncertainty about where the government will put its money but more than likely it will go toward services. "People in the intelligence business are going to fare better than those who bend metal," he said.

Thompson estimated that Northrop does more than $1 billion worth of intelligence work a year, but that might be a conservative estimate because the government won't acknowledge that much of the work exists.

If the sale goes through, Essex would become a business unit in Northrop's Reston, Va.-based Mission Systems sector, which employs 17,000 in 47 states and 19 countries and has eight divisions. Essex would be a business unit in the Intelligence Systems division.

Northrop Grumman employs 9,000 in Maryland, but only about 425 employees work for Mission Systems, about half in Columbia, a spokeswoman said. Essex would expand that footprint, most notably near National Security Agency headquarters at Fort Meade.

Moodispaw said he has secured "satisfactory" assurances that key people would stay on with the company if the sale goes through.

He has committed to stay on through the transition, which could take a couple of years, he said. The deal, which must be approved by shareholders of both companies, should be completed during first quarter of next year.

Essex prides itself on being nimble, a company that will "bend over backward" for the customer, Moodispaw said. He hopes that won't change.

"Northrop Grumman has committed to that," he said. "They told our key customers that they will not get in our way."

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