TRW Is Strong in High Tech, but Wall Street Doesn't See It

By JAMES FLANIGAN

March 26, 2000 12 AM PT

RF Micro Devices, a small 6-year-old North Carolina company that makes advanced semiconductors based on gallium arsenide for wireless telephones, has roughly $300 million in annual sales and a stock market value of $12.8 billion. Its stock sells at about $160 a share, or 290 times per-share earnings.

TRW, a giant of auto parts and defense contracting that is based in Cleveland and Redondo Beach, also works with gallium arsenide semiconductors for wireless telephony. TRW has roughly $17 billion in annual sales but a market value of only $6.9 billion. Its stock sells at about $56 a share, or 10 times per-share earnings.

Is this another story of a “new-economy” small company using high technology to leave an “old-economy” warrior in the dust?

No, far from it. It’s a story of change and adaptation beyond the current cliches that tells how industries and technologies arise and how smart people find a way.

RF Micro’s success stems partly from its relationship to TRW, which supplied licenses and instruction for the use of gallium arsenide, introduced it to Nokia and other customers and owns 13% of RF Micro stock.

As RF Micro grows, so does the value of TRW’s stake. And grow it will as the demand for broader, clearer, faster wireless telecommunications continues at mania levels worldwide.

For TRW, a supplier of sophisticated electronic products to the Pentagon, NASA and U.S. intelligence agencies, the relationship is only the first of many. The company has equity holdings and technology-sharing ventures with more than a half-dozen fledgling, mostly private firms, including E-Sync Networks, Endwave, Astrolink, ISky and VCI.

TRW’s small holding already gives it a “hidden” equity value of more than $5 billion, analysts estimate. And more is to come. Within a year, TRW hopes to have equity relationships with 16 small companies, says Wes Bush, a vice president in charge of telecommunications and new business at TRW’s space park installation in Redondo Beach.

“We have a process going on that is unique in industry,” says Timothy Hannemann, executive vice president and head of TRW’s space and electronics group. “I am more excited about TRW and where we’re going than I have been in a long time.”

But financial markets have yet to feel the excitement. TRW stock--which on Friday ended up $1.31 at $56.81 on the New York Stock Exchange--has traded in the same low range since 1996. That’s not surprising, as company earnings have been up one year, down the next. The automotive group that accounts for 67% of total sales has borrowed heavily to acquire an air-bag supplier and a global brake manufacturer. Good moves for the future, but hard on current profit.

Rising earnings in the defense, space and electronics side of the business, which accounts for 33% of sales but 40% of profit, have been obscured by the automotive sector. But defense companies have been out of favor in the stock market anyway, so TRW had several strikes against it.

Yet that’s the problem with today’s stock market: Investment experts talk superficially of “high tech” but ignore the real strength of technology that resides in the defense companies.

Most of the high-flying tech companies that investors favor are adapting or marketing technology. But inventing and developing technology takes more time, money and human effort.

TRW worked to develop semiconductors of gallium arsenide over a decade in which the Defense Department invested $400 million and the company invested $300 million. Semiconductors made of gallium and arsenic, rather than silicon, allow electrical impulses to move at the faster speeds demanded by advanced telecommunications.

TRW developed the gallium arsenide devices for military and space satellites only to find growing demand for such chips in recent years from global telecommunications companies. “Our future lies with the world’s insatiable demand for bandwidth,” says Hannemann, an electrical engineer who in 31 years with TRW has won awards for his work in advanced semiconductors.

However, a chronic low stock price clouds that future. A science-oriented company such as TRW must attract and hold graduates in electrical engineering, computer science and other disciplines. But those are the graduates in greatest demand by small high-tech firms that can offer the promise of riches through stock options.

Also, TRW’s stock price forced it to pay cash for acquisitions, such as the $7-billion purchase last year of Britain’s LucasVarity, the leading brake manufacturer. The debt burdened TRW’s balance sheet until it sold some of its RF Micro holdings to reduce it.

So TRW decided two years ago to try new ways to attract financial-market recognition of its technological prowess. TRW’s Cleveland-based Chief Executive Joseph Gorman hired Mickey Schulhof, former head of Sony USA, to form a venture capital fund devoted to commercializing TRW technologies.

Schulhof helped form E-Sync Networks around communications technology that TRW had originally developed for the Central Intelligence Agency. Offering secure Internet connections to business, E-Sync had $7.5 million in revenue last year and is public.

Its partner firm, E-Certify, which offers encryption technology for Internet commerce, is still private but already represents about $500 million in hidden equity value for TRW, according to analyst Andrew Casey of Midwest Research, an institutional brokerage firm. Casey has written major reports on TRW’s small-company partnerships.

In California, where the predecessor of TRW was formed in the 1950s by CalTech graduates Simon Ramo and Dean Wooldridge, the company is setting up numerous partnerships.

This month it formed Endwave Corp., in partnership with a Sunnyvale, Calif., developer of transceivers and antennas for satellite Internet communication. Endwave will be brought public this year, Hannemann says.

TRW has invested $250 million in Astrolink, a Bethesda, Md.-based new company that will launch a global satellite in 2003 to bring two-way Internet communications to business and homes. Liberty Media, Lockheed Martin and Telespazio, a unit of Telecom Italia, have also helped put more than $1 billion into Astrolink.

In forming such partnerships, TRW is doing more than compiling an investment fund or trying to diversify. It is spreading the application of government-funded technology, thus creating new businesses for others, and it is finding new uses and value for its many technologies.

“We have always had a lot of good technology in this company,” says Si Ramo, now 86, and active in numerous pursuits. “If we had developed all of it ourselves we would have had to become a very large company.” But Ramo never wanted a huge firm. He was a pioneer in trying to spin off computer and semiconductor companies in the 1960s and ‘70s.

Ramo did merge his high-tech defense company, which designed ballistic missiles and the electronics of the first lunar module, with auto parts supplier Thompson Products in the 1950s. “In those days a company needed the stability of big revenues and paying a dividend. There was less capital available,” Ramo notes.

In the 1990s, TRW didn’t join the defense merger movement that has produced such trouble for Lockheed Martin, Raytheon and Boeing. Instead it focused on advanced technology programs for the Pentagon. Now it has years of work ahead on space-borne lasers for the military and on semiconductors made of indium phosphide, material that allows even greater performance than gallium arsenide.

And the company is working to create ways in which its employees can benefit from options on the equity that TRW is accumulating in its many partnership ventures. “Maybe one day we’ll issue a new stock in those equity holdings. Maybe we’ll do something else. All ideas are being discussed here these days,” Hannemann says.

Meanwhile, “the stock market doesn’t yet recognize what TRW is doing--but it will,” says analyst Casey, who estimates a value of $80 to $82 a share on TRW stock right now. If originality in the real economy counts for something, it will.

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Partners in Value[

TRW, a maker of auto parts and high-tech space and defense systems, has a stock market value of $6.8 billion on its own. But through technology sharing and investments in small companies, TRW has begun building additional billions in equity value. The list of ventures to date includes two public companies and five private ones for which value is estimated when available

TRW at a glance:

Market capitalization: 6.9 billion

Sales: $11.4 billion in auto parts, $5.6 billion in space and defense

A look at some TRW ventures:

RF Micro Devices

TRW ownership: 13.5%

Value of TRW’s stake: $1.73 billion

Type of business: Advanced electronic chips for cellular telephones.

E-Sync Networks

TRW ownership: 40%

Value of TRW’s stake: $32 million

Type of business: Secure e-mail and messaging business on Internet.