CEO’s Exit Could Lead to Breakup of TRW

David Cote’s abrupt departure as chief executive of TRW Inc. is only one step in a process that could see the aerospace-electronics and auto parts company be split up or acquired within the next two years, sources with knowledge of TRW operations said Wednesday.

Both Lockheed Martin Corp. and Northrop Grumman Corp. are eager to acquire TRW’s Redondo Beach-based defense business, according to investment banking sources. But a third large company from outside the aerospace industry also has expressed interest in acquiring TRW’s defense business, the sources said.

When news of Cote’s departure to Honeywell International Inc. broke Tuesday, several large defense contractors contacted TRW to ask about the possibility of acquisition, sources said.

TRW has remained a nonplayer in the aerospace industry’s consolidation over the last decade, the only major defense concern that did not acquire or divest significant assets. Its absence from the market has long left deal makers wondering about its strategy.

Any deals involving TRW will take time, however, because it must reduce the large debts taken on three years ago to make an acquisition in its Cleveland-based automotive parts operations.

Cote, 49, who came to TRW as chief executive in 1999 from General Electric Co. resigned to accept the same position with Honeywell. Cote had been pushing to separate TRW’s auto parts business with its roughly $9 billion in annual sales, from aerospace electronics with its revenue of more than $7 billion, according to analysts estimates.

If, as sources suggest, TRW is on its way to being acquired, that would tend to boost the stock price. But meanwhile, investors reacted negatively to Cote’s departure, slashing an additional $2.95 a share from TRW’s price Wednesday.

Since Tuesday’s announcement, TRW has lost 14% of its value, falling $6.24 to $38.80 in New York Stock Exchange trading.

At the end of 2001, TRW’s net debt stood at $5.5 billion, more than 70% of its total capital, according to analyst Byron Callan of Merrill Lynch. The company had reduced debt from $6.4 billion in the last year.

TRW’s defense operations, noted for sophisticated electronics and surveillance satellites, are particularly attractive at this time, analysts said, because the company is benefiting from contracts in the expanded Pentagon budget for fiscal 2003.

TRW and partner Lockheed have won a contract to develop a military communications satellite and has major contracts with the Army and Navy. It is also a strong candidate to win the multibillion-dollar contract for the National Polar Orbiting Observation Satellite.

Lockheed Martin is known to be interested because the addition of TRW’s high-energy lasers and other sophisticated technologies would boost Lockheed’s standing in missile defense.

Century City-based Northrop Grumman would like to acquire TRW, sources said, because it would give Northrop a strong presence in space defense technology. Northrop recently acquired an Aerojet General’s unit in Azusa that makes sensors used in space.

TRW, founded in the 1950s by scientists Simon Ramo and Dean Wooldridge, merged with auto parts maker Thompson Products in the 1950s in order to attain the protection of size, Ramo said in an interview last year. “In those days,” Ramo said, “a company needed the stability of big revenues and paying a dividend. There was less capital available.”

Sheltered inside the auto parts maker, TRW became a principal firm for secret high-technology programs for the military. But even as the defense industry consolidated in the early 1990s, TRW retained its independence as other defense contractors had no wish to take on massive automotive operations.

However, TRW’s stock price has languished even in the new expansion cycle for aerospace-defense business because the automotive industry was in a down cycle, and TRW had borrowed $7 billion to acquire Britain’s LucasVarity, a leading brake maker.

So beginning in 1999, Cote’s mission was to prepare the automotive and aerospace operations for separation.

This would have happened within the next two years, sources close to TRW said Wednesday.

An irony, said one source, is that had Cote completed his mission, he would have been out of a job because TRW’s defense business, which is now headed by Tim W. Henneman, and its auto business, now to be run by John Plant, would not need a “surplus chief executive.”

As it is, Cote has gone to head Honeywell, a firm with strong aviation electronics operations and also automotive component operations in its former Allied-Signal properties.

The possibility that Cote and Honeywell, aided by GE Capital, would someday enter bidding for TRW was raised Wednesday among the many scenarios for TRW being bandied about in aerospace and financial circles.

Pae reported from Washington and Flanigan from Los Angeles.