Savvy in Science, but Not Marketplace

By MICHAEL A. HILTZIK

July 4, 1997 12 AM PT

TIMES STAFF WRITER

Shortly after closing the $2.17-billion purchase of Grumman Aviation in mid-1994, Northrop Chairman Kent Kresa proclaimed the dawn of an “exciting” new era for the combined companies--”a winning situation for everybody involved.”

For a while that seemed a reasonable boast. With about $8 billion in sales, the combined companies were roughly equal in size to Martin Marietta, then one of Northrop’s principal rivals.

But within months Martin merged with Lockheed, creating a $23-billion powerhouse. Los Angeles-based Northrop Grumman Corp. soon ended up immured in fourth place--behind Lockheed Martin Corp., Boeing Co. and Raytheon Co.--in an industry where, many observers, believe there are only three seats at the table.

Although Northrop did make several important acquisitions after Grumman, including the $3-billion purchase of Westinghouse Electric Corp.’s defense electronics group, it lost some bigger game. It was outbid by Raytheon this year for the missile and defense business of Texas Instruments and for the defense business of General Motors Corp.’s Hughes Electronics unit.

“They lost a number of times in the competition to acquire large properties and large [defense] programs,” said Paul H. Nisbet, president of JSA Research, an independent consulting firm in Newport, R.I.

Analysts say the problem was not necessarily that Northrop and Kresa have been insufficiently aggressive. Rather, the biggest acquisition targets made better economic and strategic fits with Northrop’s competitors. That allowed the rivals to justify higher bids on the expectation that they would be able to gain more from subsequent cost-cutting and consolidation.

Kresa “was cursed with the position he had of bidding against truly natural owners” of the targets, said Robert Paulson, former head of the aerospace practice at McKinsey & Co. and now chief executive of the investment firm Aerostar Capital.

The company that will now become part of the largest aerospace firm in the world--assuming the merger takes place as planned--is one of Southern California’s oldest companies, having been founded in 1939 by John “Jack” Northrop, a pioneering aircraft designer and investor.

Through its founder, in fact, the company had genealogical ties to two of the three surviving major U.S. aerospace companies. Jack Northrop began his career in 1927 as the designer of the first airplane manufactured by Loughead (later Lockheed) Aircraft; he subsequently founded an aircraft firm sold to United Aircraft & Transportation, which was later broken up into United Airlines Inc., United Technologies Corp. and Boeing; and he founded a third company in partnership with Douglas Aircraft, whose successor McDonnell Douglas Corp. is merging with Boeing.

Northrop Aircraft long held a reputation for innovative engineering but uneven marketing and production. Among its more remarkable achievements was the development of the distinctive Flying Wing bombers in the late 1940s, which were technological successes but failures in the military marketplace.

The company lost a $13.3-billion contract to build an advanced stealth missile in 1994 in part because the program was falling well behind schedule and spiraling well beyond original cost estimates. That cancellation jeopardized 1,700 jobs in Hawthorne, where the missiles were to be built.

Even its biggest score, the Air Force contract to develop the B-2 stealth bomber, proved to be something of an anticlimax. Northrop in 1981 began building what was envisioned as a fleet of 132 planes costing more than $1 billion each. But the program was repeatedly scaled back and finally capped by the Clinton administration at 21 planes and $44 billion.

Nowhere were the company’s virtues and flaws on display more vividly than in the saga of the F-20 Tigershark, a Northrop fighter plane that was the last major project to be undertaken by a U.S. defense contractor with its own money. Northrop spent $2.2 billion to develop what became one of the most admired military airplanes in the world.

But the company failed to sell it to the U.S. Defense Department, the key customer in any large-scale military program. With the plane approved for export sales by the Carter administration, Northrop hired legendary test pilot Chuck Yeager as its pitchman. But the company won only a four-plane order from the sultanate of Bahrain.

A promising sale to the South Korean air force collapsed when a Tigershark crashed, killing the pilot, during a 1984 demonstration for South Korean brass. The company halted the program in 1986, taking a $250-million charge against earnings.

In a final irony, the company was subsequently accused of having tried to bribe South Korean officials to buy the plane by funneling millions of dollars through a network of shady political fixers. Northrop claimed it was an innocent victim, duped by a ring of South Korean swindlers.

After five years of investigating, the U.S. government abandoned its inquiry in 1993 without bringing charges.

Northrop did register its share of successes, both in technology and in the acquisition marketplace, winning the bidding for the defense business of Westinghouse Electric for $3.6 billion last year in a deal that made it the third-largest supplier to the Defense Department.

And some aerospace analysts say time might prove Northrop right in having passed on other high-priced acquisitions in the industry.

“Maybe everybody’s overpaying,” Paulson said. “We won’t know for three to five years.”

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Cross-Country Combination

Lockheed Martin operates from a maze of offices scattered across the United States. Northrop Grumman has five divisions, also based across the country. A look at the companies, divisions and several examples of their products:

NORTHROP GRUMMAN

Divisions

* Commercial Aircraft, Dallas

* Data Systems and Services, Herndon, Va.

* Electronic Sensors and Systems, Baltimore

* Electronics and Systems Integration, Bethpage, N.Y.

* Military Aircraft Systems, El Segundo

Products

* B-2 stealth bomber

* MX missile

* E-2C Hawkeye early warning aircraft

* Various electronics systems used to upgrade older weapons