Northrop Offers $2 Billion in Rival Bid for Grumman

The wave of consolidations sweeping America’s defense industry turned aggressive Thursday as Northrop Corp. launched a $2-billion offer to snatch Grumman Corp. away from Martin Marietta, which agreed earlier this week to buy the firm for $1.9 billion.

If Northrop succeeds, it will have substantially improved its chances of surviving as an independent company in what will be a brutal industry contraction over the next few years. The alternative raises the risk that Northrop, which is based in Century City, might ultimately be swallowed up by a predator.

The government has encouraged the defense industry to eliminate some of the excess production facilities that are driving up weapons costs and hurting the international standing of U.S. contractors. The Pentagon would prefer two or three healthy combat aircraft producers instead of seven companies barely surviving on ever-diminishing government budgets. Moreover, a stronger U.S. industry will be more globally dominant, theoretically lowering the Pentagon’s costs.

But the downsizing is accompanied by deep pain for employees who will lose their jobs and for communities that are likely to see large industrial plants close permanently. Industry analysts have estimated that 10,000 to 15,000 jobs could be eliminated in a merger of Grumman with another firm.

Grumman spokesman Robert Harwood declined to answer questions about the Northrop offer, but Martin Marietta issued a harshly worded rebuttal, asserting that it “is deeply disappointed that Northrop has chosen to launch a hostile attack that seeks to disrupt” a friendly merger.

Martin Marietta added that “the attack by Northrop degrades the entire character of the rational consolidation taking place within the United States national security industrial base.”

The tough talk reflects a dramatic change in what has been a gentlemanly business, where chief executives often fraternize with one another and talk about common goals. Although mergers have been taking place for several years, none has been hostile and now for the first time prime contractors are trying to eat other prime contractors in a battle for survival.

Northrop denied that it was making a hostile bid. But after failing in two previous efforts to acquire companies amid a rapid shrinkage of the defense business, Northrop signaled Thursday that it is ready for a tough fight to win Grumman, a longstanding manufacturer of Navy aircraft that has highly regarded electronics technology.

“We are committed to remaining a player in the defense industry, and this merger will make us an even larger and more important player,” Northrop Chief Executive Kent Kresa said. “This is a very positive development for Northrop and Grumman.”

The resulting company would have sales of about $8 billion, a bit short of the $8.5 billion to $10 billion defense sales of its biggest rivals--Lockheed and McDonnell Douglas. But it would have substantial technology in important areas such as aircraft surveillance, Stealth and electronic systems. Northrop has about 30,000 employees and Grumman has 18,000, concentrated near its headquarters on New York’s Long Island.

Kresa said it was too early to know how a Northrop-Grumman merger would affect the two firm’s employment or facilities, although he acknowledged, “There will be some things that make sense to put together, that’s what restructuring this industry is all about.”

Employees at Northrop’s Hawthorne facility said Thursday’s announcement caught many of them off-guard, although some expressed optimism that the deal might help Northrop grow.

“I’m not concerned,” said Terry McQueary, 47, who has worked as a planner for Northrop for 13 years. “It’s a good time for anybody to make investments now.”

Grumman, however, is already closing some of its facilities on Long Island and moving final production of its last aircraft program, the Navy E-2C radar plane, to a newer facility in Florida. Northrop, meanwhile, has announced that it will close its B-2 bomber plant in Pico Rivera in the next few years.

In an apparent appeal to Grumman employees, Northrop said it would change its name to Northrop Grumman Corp. if the acquisition deal goes through.

Under its acquisition plan, Northrop will offer Grumman shareholders $60 per share starting Monday, $5 a share more than the Martin Marietta bid announced Monday. Northrop said it has arranged financing commitments from Chase Manhattan Bank and Chemical Bank for $2.8 billion, providing a huge cushion if the company has to match higher offers by Martin Marietta or other potential bidders.

Martin Marietta also has financing that allows higher offers, but its bank agreements would top out at about $70 per share, while Northrop could go all the way to $80--although such a high price is seen as unlikely, said BT Securities analyst Wolfgang Demisch.

Northrop had been discussing a possible merger with Grumman for about a year, but the company reached a deal with Martin Marietta without allowing Northrop to submit any counteroffer, Kresa said in a terse letter to Grumman Chairman Renso Caporali.

“We and our representatives have been negotiating with Grumman in good faith since early December, responding to Grumman’s clear statements that it was not for sale,” Kresa wrote. “Now it appears . . . that we were not playing on a level playing field.”

Kresa also asserted that some aspects of the deal struck by Martin Marietta are “improper and illegal,” referring to an agreement under which Grumman must pay Martin Marietta $50 million if its offer is exceeded.

Kresa declined to say whether the company was prepared for a court fight over the issue and did not have any explanation of why Grumman did not want to allow Northrop to submit a bid. The two firms have collaborated on various projects, including a losing bid for the now-defunct Navy A-12 attack jet.

Kresa said that based on its $2-billion offer, the deal would not hurt Northrop’s earnings, and that potential cost savings resulting from the merger could add to future profitability. He indicated it was likely he would seek an agreement from the Pentagon to share those savings, which normally go to the Treasury.

The additional debt could be quickly reduced, he said. Initially, Northrop’s debt would jump to 63% of its total capital, but would drop below 50% by the end of 1995.

Aerospace analysts said a Northrop-Grumman merger would create a formidable competitor in the defense industry, although an obvious weakness is that all the large aircraft programs at both firms are due to expire before 2001.

“The combination of Northrop and Grumman is potentially a powerhouse technologically and financially,” Demisch said. “But it needs the glue of some extra contracts.”

But Northrop’s appetite to grow may not be satisfied by Grumman.

“There are other consolidations that need to take place and we will want to continue to play in this,” Kresa said.

Until Thursday, defense deals were largely for divisions or subsidiaries of other companies. Lockheed, for example, bought General Dynamics’ Ft. Worth fighter aircraft unit and Hughes Aircraft bought General Dynamics’ missile business. But now the defense downsizing will mean that whole companies will be swallowed up.

Kresa said the Grumman acquisition would significantly enhance Northrop’s strategy of focusing on three critical areas: combat aircraft, electronics systems and commercial aircraft structures. The Grumman presence, Kresa said, would give Northrop a broad and integrated product line.

Northrop would also stand to gain strength in Congress, an area in which it has long held a weak hand.

“This is a big plus for Northrop in terms of its political clout,” said Booz Allen Hamilton consultant John Harbison.

Harbison said that the U.S. aerospace industry’s consolidation is improving its competitive position so much that European nations are now clearly worried about the potential strength that U.S. firms will bring to the market.

“They see their industry losing their competitive edge and losing their critical mass,” Harbison said. “We have really pulled away from Europe. And to the extent we improve our world position, it helps the U.S. government because it lowers their costs.”

At the end of their work shift in Hawthorne on Thursday afternoon, employees were handed a one-page announcement explaining Northrop’s bid. Employees said it was too early to gauge what effect the potential acquisition of Grumman might have on their jobs, although many tried to view it in the best possible light.

“I think maybe it’ll be good for us,” McQueary said. “You have to see it as a business opportunity for us that could save jobs rather than cost jobs.”

Times staff writer Scott Sandell contributed to this story from Hawthorne.

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