Northrop to Buy Litton in a $3.8-Billion Deal

Northrop Grumman Corp. said Thursday it has agreed to acquire Litton Industries Inc. for $3.8 billion, melding two of Southern California’s storied aerospace companies to create one of the nation’s largest defense contractors.

The move, if approved, is expected to strengthen Southern California’s position as a dominant player in military electronics.

Some layoffs would be likely, with Northrop expected to close Litton’s Woodland Hills headquarters and shut down some redundant operations. The combined company would probably retain Northrop’s Century City headquarters.

The merged company would have revenue of $15 billion a year and more than 80,000 employees, with operations in 43 states and 17 countries. It would be one of the top contractors making military ships and electronic warfare equipment and providing computer networking and programming to the federal government. The two companies together employ nearly 11,000 people in Southern California.

“With this combination, Northrop moves out of the mid-size and into the top tier of defense, aerospace and [information technology] companies,” Northrop Chairman Kent Kresa said.

Analysts and company officials said the deal probably will not face the same kind of regulatory scrutiny as Northrop’s effort to merge with Lockheed Martin Corp. two years ago. That deal, the biggest ever in aerospace at the time, was rejected by the Pentagon because the combined company would have become the only defense supplier in some businesses. The Northrop-Litton merger does not appear to face that problem, analysts said.

Under terms of the deal, Northrop will pay $80 a share in cash for Litton stock and assume more than $1.3 billion in Litton’s debt.

Though Litton has long been seen as a takeover target, Northrop’s unexpected move surprised Wall Street, which was still digesting General Electric Co.’s $45-billion bid last October for Honeywell International Inc.

But some analysts said the move makes sense for Northrop and Litton, both of which have played increasingly supporting roles in recent years as rivals Lockheed Martin and Boeing have grown with acquisitions and the winning of larger contracts.

“This guarantees that Northrop remains in the first tier of defense contractors, along with Lockheed Martin Corp., Boeing Co. and Raytheon Co.,” said Loren Thompson, a defense analyst with the Arlington, Va.-based Lexington Institute. “They needed to do this.”

But the deal would leave only one large Southern California-based aerospace company following a wave of consolidation that has left the state with only a remnant of its long-dominant role in the industry.

Defense companies have been consolidating in the last five years to remain competitive in the face of shrinking defense budgets.

(President-elect George W. Bush has called for an increase in U.S. defense spending of about $45 billion over the next 10 years.)

The defense electronics business is expected to grow at a faster rate than the manufacturing of tanks, planes and other types of military hardware.

Northrop itself has been shedding traditional aerospace businesses, such as its airplane frame-making operations in Hawthorne last summer, focusing primarily on more sophisticated military electronics and information technology.

Northrop had been looking at Litton for most of the year, though it did not get serious until about six months ago, Kresa said.

One drawback was Litton’s shipbuilding operations, which had been under scrutiny by investors who felt that the business was dragging down Litton’s earnings. But after a closer look, Northrop decided that providing systems integration to shipbuilding could bring additional income.

For Litton, the purchase would bring to an end one of the storied names in the aerospace and defense industry.

In recent years, Litton has been shedding business, bringing it full circle from the day in 1953 when Charles V. Litton sold his electron-tube company to Charles “Tex” Thornton. The legendary industrialist built the company into a conglomerate that made everything from gyroscopes to typewriters to medical syringes. Thornton apparently retained Litton’s name because the products enjoyed a good reputation among Pentagon brass.

Eventually, the company became one of the largest suppliers of navigation equipment to the Pentagon. But in November, Litton announced plans to sell its defense electronics unit, which accounted for about 28% of annual revenue, as the company came under increasing pressure from investors to shed under-performing businesses and narrow its focus. Litton, the Navy’s third-largest contractor, owns the Avondale shipyard in Louisiana and the Ingalls shipyard in Mississippi.

For Northrop, now the No. 5 U.S. defense contractor, the Litton purchase represents a major victory after its sale to Lockheed Martin was rebuffed by the Pentagon two years ago.

In recent years, Northrop has concentrated on providing the electronic backbone for airplanes and other weaponry. Its best-known project, the B-2 stealth bomber, has been winding down after delivering its last plane last year.

Northrop also has forged into the information technology business, providing computer networking and programming to large government agencies. The Litton acquisition would make Northrop the top federal information technology provider, analysts said.

“It’s a much smaller pond than playing in the aircraft business, but it’s growing fast and it’s a terrific business,” said Jon B. Kutler, president of Quarterdeck Investment Partners Inc., an aerospace investment banking firm.

Northrop officials said the merger could result in about $250 million in annual savings, mainly from closing Litton’s headquarters and cutting some redundant operations.

At Litton headquarters in Woodland Hills, the mood Thursday was somber as employees expressed some surprise at the announcement.

“We’re all concerned we’re going to be laid off. Anybody over 50 is particularly concerned,” said Marie Keel, a 30-year veteran of Litton’s guidance and control systems division.

“A lot of people have been quitting or retiring. They did it because they didn’t want to face what was coming,” Keel said.

Litton shares, which had closed up 94 cents at $62.63 before the deal was announced, surged to $77 in after-hours trading. Northrop shares closed down 19 cents at $81.94 in regular trading. Meanwhile, Moody’s Investors Service Inc. and Standard & Poor’s Corp. said they may cut the credit ratings of Northrop and Litton because of the added debt burden. Northrop plans to finance the purchase with debt and the issuance of additional shares.

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Times staff writer Andrew Blankstein contributed to this report.

* CALIFORNIA IMPACT

The combination would give the Southland a big boost. C1