Rumors of Litton Takeover Send Stock Surging

One week after Lockheed Martin agreed to buy Northrop Grumman to create the world’s biggest defense firm, industry speculation that General Dynamics might buy Litton Industries sent stock in the Woodland Hills defense firm up 4.4% on Friday.

The possibility of a General Dynamics-Litton deal was first floated by an unnamed analyst in a short article in the July 21 edition of BusinessWeek magazine, which hit the streets late Thursday. On Friday, Litton stock reached as high as $54 a share in the first 15 minutes of trading but quickly settled back into the $52.50 range. The stock closed at $53, up $2.25 on the New York Stock Exchange.

Litton Industries spokeswoman Kathleen Wailes had no comment about the BusinessWeek report.

“The one thing I would say is every time there is a deal in the defense industry, as there was last week, rumors like this surface,” she said.

Norine Lyons, a spokeswoman for Falls Church, Va.-based General Dynamics, also declined to comment about the report.

But analysts say Litton is a ripe candidate for a merger with either General Dynamics or Honeywell Inc. of Minneapolis.

“Litton is certainly a potential acquisition candidate,” said Peter Jacobs, an aerospace analyst with Ragen MacKenzie in Seattle. Excluding engine manufacturers General Electric Co. and Pratt & Whitney, “Litton is the only top 10 defense contractor that has not participated in the major defense acquisitions, mergers or spinoffs in the multibillion-dollar range.”

Either General Dynamics or Honeywell would make a good fit because all three companies are in the second tier of defense firms and have synergies to exploit in the shipbuilding arena, said Jacobs, who suggested Litton could fetch a share price in the $70 range.

A deal with Litton “would seem to make very good sense, considering the climate of the market today and the potential synergies,” said Ken Herbert, research director for Frost & Sullivan in Mountain View, Calif.

Litton’s stock has been rising steadily in recent months and has made impressive gains since closing at a 52-week low of $38.13 on April 11.

Wailes said Litton’s stock suffered when the company lost a $1.5-billion contract in December to build LPD-17 amphibious transport ships for the Marine Corps.

“In the last several months, people have begun to realize that our stock is undervalued and act on it,” she said.

The analyst in the BusinessWeek report said that both Litton and General Dynamics need to make a deal “if they are to survive in the consolidating aerospace and defense industry.” He said a buyout of Litton would cost $80 a share.

Litton has a market capitalization of $2.4 billion and is expected to reach $4.2 billion in sales this year. General Dynamics and Honeywell have market capitalizations of $4.8 billion and $10 billion, respectively.

Lockheed Martin’s $11.6-billion deal last week to purchase Northrop Grumman has sparked a new round of guessing about other candidates for consolidation. But with Lockheed preoccupied with Northrop, Boeing persuading European officials to bless its deal with McDonnell Douglas, and Raytheon digesting units from Texas Instruments and Hughes Electronics, attention has turned to smaller companies.

“Predicting a merger or a buyout is a crapshoot,” Jacobs said. “What’s really more likely is that Litton continues to do what it’s been doing, which is making smaller acquisitions and building its own critical mass.”

Times staff writer Barry Stavro and Times Wire Services contributed to this report.