Engineer of a Defense Powerhouse
On Wednesday, if all goes as planned, shareholders will approve Northrop Grumman Corp.’s $7-billion purchase of TRW Inc., which will culminate a decade of dazzling deal-making for Northrop’s longtime chairman, Kent Kresa.
Shortly after what many consider to be his greatest acquisition, the 64-year-old Kresa is expected to announce his retirement and turn over the helm to Ronald D. Sugar, 54, who will be left with a defense behemoth with interests in virtually every aspect of the nation’s military.
In a remarkable transformation -- much of it engineered by Kresa -- Northrop will become the nation’s second-largest defense firm, with $26 billion in annual revenue, rivaling No. 1 Lockheed Martin Corp. and ahead of No. 3 Boeing Co. It will have 120,000 employees scattered from coast to coast in 44 states and 25 countries.
With TRW -- Kresa’s 16th acquisition in eight years -- Century City-based Northrop will become one of Southern California’s largest companies, employing 24,000 people in El Segundo, Redondo Beach, San Diego and Palmdale and helping revive the region’s once-dominant role as home to the nation’s leading aerospace firms.
“What Kresa did with Northrop is a truly amazing story,” said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. “Kresa quietly crafted together one of the most successful aerospace firms, and he did it ethically.”
The company’s ascension to the top echelons of the defense industry is all the more remarkable considering how just a decade earlier it couldn’t do anything right and was on the brink of elimination.
“Ethically” also wasn’t a word that many would have used in those days when speaking of Northrop.
“They were clearly on the verge of being marginalized,” said Jon B. Kutler, president of aerospace investment bank Quarterdeck Investment Partners Inc.
When Kresa took the helm in 1990 -- 15 years after joining the company from the Pentagon’s top-secret research and development lab -- Northrop had 38,000 employees and about $5 billion in revenue and appeared doomed to become a second-tier supplier. In addition to the dim business prospects, Northrop’s reputation had been severely tarnished as it moved from one scandal to another in the 1980s, including selling the Pentagon defective parts and allegedly bribing officials overseas. There have been no such allegations since Kresa became chairman.
In a surprising admission, Kresa said last week that Northrop had come dramatically close to shutting down altogether. “In the early 1990s, we had a critical decision to make,” Kresa recalled in an interview on the corporate jet as he flew back to Los Angeles from a cross-country road show in which he was touting the TRW acquisition to institutional investors. “We could just go out of business and give money back to our shareholders or we could reinvent ourselves.”
After extensive internal studies and heated debates, “it became clear to us we could take the latter path.”
It was a bold move because many analysts and investors had written off the company after it lost two major bids to build new fighter jets. At the same time, its biggest moneymaker, the B-2 Stealth Bomber, was being curtailed by budget cuts at the Pentagon. Originally slated to purchase 132, the Air Force eventually bought 21.
Moreover, some executives in the defense industry snickered at Kresa’s appointment. Even-tempered and cerebral, he seemed like the direct opposite of his predecessor, Thomas V. Jones, the flamboyant chairman who had ruled Northrop with an iron fist for 27 years.
“When Tom turned it over to Kent, the industry likened it to George Bush picking Dan Quayle” as a running mate, a longtime aerospace executive said. “There wasn’t much respect for him, so people were underestimating him. He just wasn’t like the other chief executives.”
Kresa said he was keenly aware that he was a different breed from the old aerospace culture that fueled strong, charismatic leaders. The chief executives of the 1960s and ‘70s modeled themselves after legendary figures who created the nation’s aerospace industry -- Jack Northrop, William Boeing and Simon Ramo, the “R” in TRW.
“Clearly, I was not part of the original aircraft mafia, so to speak,” Kresa said. “I’m sure that in some ways I was resented, but in the end it was just a question of proving myself.”
Kresa, whose shy demeanor belies an intense competitive streak, is now one of the most feared executives in the industry, known for his tenacity and refusal to swallow rejection.
Northrop’s breadth of defense work is staggering. If the U.S. goes to war in Iraq, some piece of Northrop’s product line -- from hardware to software -- will be on virtually every weapon system deployed there. Aircraft carriers and submarines (built at Northrop’s Newport News, Va., shipyard) to bombers (B-2) and spy satellites (TRW) will have Northrop’s signature.
The TRW acquisition completes the company’s transformation, Kresa said.
“It culminates the vision that I had when I began this job,” he said. “This will be our last major acquisition for a while.”
The building began shortly after Kresa took the reins of the company and began looking ahead. With the end of the Cold War, Kresa said, it became clear to him and others at Northrop that future conflicts would be more regional in nature and require highly sophisticated electronic equipment that would bolster the effectiveness of existing ships, planes and satellites.
That would mean developing more powerful reconnaissance and surveillance equipment, as well as weapons with more accurate guidance systems. Northrop officials predicted that electronic and information warfare would determine the outcome of battles, as was eventually shown in Afghanistan.
But Kresa said the company realized early on that it didn’t have the capability to develop those businesses internally.
So he looked outside. “We are a company of immigrants,” Kresa said, noting that only about 10% of Northrop’s employees today were at the company when he began his acquisition binge. He likened Northrop to the city of New York, where “different heritages are celebrated and embraced to make the entire city as dynamic as it is.”
The first big step was a $2.1-billion hostile bid for Navy aircraft maker Grumman Corp. in 1994, which at the time was not only the maker of the F-14 jets of “Top Gun” fame but a leader in electronic-jamming equipment. The bid came just days after Grumman had reached a friendly pact to be acquired by then Martin Marietta.
It was the first of several Kresa moves that would rock the aerospace industry.
He made a similar maneuver last year when Northrop went after Newport News Shipbuilding Inc., after the military shipbuilder already had inked a deal with General Dynamics Corp.
A General Dynamics-Newport News merger would have significantly hurt the shipbuilding business Northrop obtained when it acquired Woodland Hills-based Litton Industries months earlier for $5.2 billion.
In both cases, Northrop portrayed itself as a jilted victim that was talking to the partners about a merger only to have them turn around and hook up with others. Kresa made a similar argument as he made a surprising offer for TRW earlier this year. Kresa said he had been talking to TRW about a possible merger since 1996 but that Northrop was forced to act when TRW Chairman David Cote abruptly resigned. That led to speculation that TRW had become an acquisition target.
In all of its acquisitions -- friendly or hostile -- Northrop has never strayed from its blueprint of creating a defense electronics powerhouse, Kresa said.
“We’ve always had that vision, and that’s why it’s easier for us to pursue a company that we think will fit,” he said, adding that his targets were bought at the “right price, not at any price.”
“There is no room for ego,” Kresa said.
With the major building blocks in place, it will be up to Sugar, the company’s president and a home-grown engineer, to not only keep them together but also fine-tune them at a time when defense spending is expected to rise for the foreseeable future.
Born in Canada but raised in Hawthorne in the shadows of Northrop’s former aircraft plant, Sugar entered UCLA at 17, receiving a doctorate in engineering by 23. He spent the next 20 years at TRW, mainly at the Redondo Beach facility, before he left the company to run Litton in 2000 after he was passed over for TRW’s top job.
Northrop acquired Litton in 2001 and named Sugar president. When the TRW deal is completed, and if Sugar succeeds Kresa as expected, Sugar will be back as head of TRW.
“It’s one of those things you ask yourself: How in the world did this happen?” said Sugar, who added that following Kresa won’t be easy. “They’re going to be very big shoes to fill.”
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Kent Kresa
Age: 64
Hometown: New York
Education: B.S., MIT, 1959; M.S., 1961; engineering degree in aeronautics and astronautics, 1966
Career highlights:
* Strategic planning executive at the Defense Advanced Research Projects Agency, 1968 to 1975
* Joined Northrop in 1975
* Group vice president of Northrop’s Aircraft Group, 1982 to 1986
* Became president in 1987
* Became chief executive and chairman in 1990
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The new Northrop
Since becoming chairman in September 1990, Kent Kresa has led Northrop Corp. into unprecedented growth, including the 1994 merger with Grumman Corp. His biggest deal yet--for TRW Inc.--is about to close.
December 1990
* Employees: 38,200, 75% in Southern California
* Revenue: $5.5 billion
* Major products: B-2 stealth bomber, F/A-18 Hornet components, 747 fuselage
* Debt: $988 million
After Northrop Grumman merges with TRW
* Employees: 120,000, 24% in Southern California and operations in 44 states and 25 countries
* Revenue: $26 billion
* Major products: Aircraft carriers, destroyers, submarines, F/A-18 Super Hornet components, radar systems, battle-management software, spy satellites, information technology, missile defense, unmanned aircraft
* Debt: $5 billion
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Sources: Northrop Grumman, Times research
