A New Venture for Northrop
In a remarkable transformation for a company synonymous with aerospace, Northrop Grumman Corp. is set to become the world’s largest military shipbuilder with the acquisition of Newport News Shipbuilding Inc.
The $2.1-billion deal, approved by Newport News’ board Thursday, would make Century City-based Northrop a maritime behemoth, supplying virtually every type of vessel required by the Navy, from destroyers and transport ships to nuclear submarines and massive aircraft carriers.
Northrop would own a massive shipyard that spans two miles along the James River in Virginia where the world’s most sophisticated and the largest military ships are built. Newport News is the nation’s sole builder of aircraft carriers and one of only two suppliers of nuclear submarines.
“With Newport News, we are creating a $4-billion world-class, fully capable shipbuilding enterprise with expertise in every class of nuclear and nonnuclear naval vessel,” Northrop Chairman Kent Kresa said.
The purchase also would propel Northrop ahead of Raytheon Co. as the nation’s third-largest defense contractor--behind Lockheed Martin Corp. and Boeing Co.--and give the company significant ties to every major service and agency within the Pentagon. The combined company would have annual sales of $17 billion and a combined work force of 97,000.
Northrop also would become the largest industrial employer in three states--Louisiana, Mississippi and Virginia--where it would have shipyards and have some powerful allies in Congress, including Sen. John W. Warner (R-Va.), the top-ranking minority member of the Senate Armed Services Committee, and Sen. Trent Lott (R-Miss.), a longtime Republican leader.
Northrop’s entry into the shipbuilding business seemed almost accidental. It had fought a tough battle for supremacy in aircraft manufacturing for decades, but supremacy in shipbuilding was comparatively easy.
When the company acquired Litton Industries Inc. in April for $3.8 billion, Northrop was more interested in Litton’s military electronics business, and its shipbuilding subsidiary seemed like an afterthought.
“It was clear that once we acquired Litton we needed to think seriously about growing that business, and so I would say that Newport News was in our future,” Kresa said in an interview Thursday. “But prior to Litton, we had no [planned] entry into the ship business.”
Litton’s shipbuilding business, which includes Navy surface combat ships and vacation cruise boats, was an odd fit for a company that touted its transformation from a metal-bending aircraft maker to a high-tech developer of sophisticated computers and military electronics.
Northrop, best known for its B-2 stealth bomber, has for years maintained that the company’s future was in sophisticated military and commercial electronics and information systems--in radar, surveillance, computer networks, air traffic control, target location and infrared countermeasures.
The company’s commitment to information technology includes hundreds of seemingly obscure “support” and “systems integration” projects.
Logicon, one of more than a dozen Northrop acquisitions in the last decade, maintains the White House Web site and provides technical support for the personal computers used in the President’s executive office.
“I think we’ve done an awful lot,” Kresa said two years ago as he outlined the company’s strategic goals. “We’ve moved over the last five to seven years from basically an airplane company into a much broader defense electronics company, with a large focus on the things of the future.”
So it puzzled analysts when Northrop decided to keep the shipyards that came with Litton, putting itself back in the metal-bending business.
Kresa said there was logic to keeping Litton’s shipbuilding business since ships could provide the platform for various electronic devices that Northrop designs and builds, including radars and communication equipment.
Then the company surprised analysts once more when it decided in May to make a rival unsolicited bid for Newport News, which just two weeks earlier had agreed to be acquired by General Dynamics Co.
“We see ships as a logical extension of the kinds of things that we’ve done,” Kresa said. “We see this as another opportunity for us to grow that broad capability.”
Paul H. Nisbet, an analyst with JSA Research Inc., said, “Over the long term, Northrop is thinking of doing everything itself. I think their idea is to be the first company capable of doing the electronic systems integration and building ships.”
Northrop said it was always interested in talking to Newport News about a merger, but it was distracted by its acquisition of Litton. It said the General Dynamics-Newport News deal would have created a monopoly in nuclear submarines and aircraft carriers that would have put the bulk of Navy research and development investment into the hands of one company. It would in essence have left Northrop as a subordinate contractor to General Dynamics, its archrival.
Last month, the Pentagon and the Justice Department agreed, saying they would object to the General Dynamics deal, leaving Northrop as the only suitor for Newport News. The decision was a stunning blow to favored bidder General Dynamics, then the largest builder of warships.
“It was defensive in nature,” said Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a Los Angeles-based investment bank specializing in defense companies. “If they started with a clean sheet without the Litton shipyards, they might have looked at it differently. However, with their investment, this was an excellent move to make.”
As a result, in a span of barely six months, Northrop is poised to become the owner of three of the five largest shipyards in the country, and Newport News is expected to be the crown jewel of its operations.
It is currently building the nuclear-powered aircraft carrier Ronald Reagan, scheduled to be commissioned in 2003, and has a $3.8-billion contract to design and build the 10th Nimitz-class aircraft carrier, CVN 77. The Navy recently announced the Ronald Reagan would be based in San Diego, creating 3,000 jobs and adding $226million a year to the local economy.
Each aircraft carrier, whose flight deck stretches three football fields, takes about seven years to build and is assembled in a dry dock under a 900-ton crane, the largest in the nation. The aircraft carrier is literally pieced together in the dry dock with some parts that weigh as much as 700 tons.
Newport News also recently started refurbishing the aircraft carrier Eisenhower, a $1-billion, three-year task that includes replacing the nuclear power plant. Newport News is the only shipyard that can overhaul and refuel Navy nuclear submarines and aircraft carriers.
At four large enclosed docks that look like concrete hangers, the company also is putting together components for the first two Virginia-class nuclear submarines. Unlike the aircraft carriers, the highly classified submarine work is not visible from the shipyard.
In what seems like an anachronism in the age of outsourcing and subcontracting, almost all the parts and components for the aircraft carriers and the submarines are built at the sprawling, 550-acre complex. Even steel is fabricated at an 11-acre facility and iron formed at its own foundry. With help from the state, Newport News also recently opened a research center adjacent to the shipyard where it expects to house 600 engineers to design and develop next-generation military ships.
In all, the company has about $2billion in annual sales and has nearly $8 billion in backlog, or enough to sustain current work levels for at least five to seven years.
Northrop officials said Thursday that although they don’t anticipate “significant layoffs,” some redundant jobs will have to be cut, particularly within corporate headquarters.
It was not immediately clear whether the company will continue with its plans to hire an additional 1,000 workers. More than 17,800 people work at Newport News, which would become a subsidiary of Northrop Grumman.
Under the terms of the deal, Newport News shareholders have the option of receiving $67.50 per share in cash or of equivalent value of Northrop shares. The value of the offer could rise or fall if the average price of Northrop shares over the next 10 days rises above $100 or falls below $80. Northrop also is assuming $500million in Newport News debt.
Newport News stock was trading at $55.05 per share on April 24, the day before General Dynamics made its offer. That means shareholders would reap a premium of more than 22%.
In trading on the New York Stock Exchange, Northrop shares were up $1.87 to $97.95 while Newport News stock was up 70 cents to $67.75.
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Newest Leader
Northrop Grumman’s purchase of Newport News Shipbuilding would create the world’s largest builder of warships.
Navy contracts for fiscal year 2000, in billions*
Northrop**: $3.96 billion.
Lockheed Martin: $3.83 billion.
Boeing: $3.82 billion
Raytheon: $2.75 billion
General Dynamics: $2.18 billion
* Includes all Navy defense spending
** Includes Litton and Newport News
Source: Defense Department
