Northrop Makes Bid for TRW
Northrop Grumman Corp. offered $5.9 billion Friday to acquire TRW Inc., in a deal that would complete its transformation from a bit player in the defense industry to one of the most powerful arms contractors in the world.
The audacious bid surprised Wall Street and fueled speculation about a bidding war for TRW, among the last unclaimed prizes in an industry that has gone through a decade of consolidation. Potential rival bidders include Lockheed Martin Co. and General Dynamics Co., analysts said.
Shares of TRW, fabled for powerful lasers, advanced battlefield software and spy satellites, shot up 26% after Century City-based Northrop disclosed its unsolicited proposal early Friday morning. TRW did not respond to Northrop’s offer, issuing a statement saying it would review the matter.
“We’re very excited about doing this,” Northrop Chairman Kent Kresa said in an interview Friday. “It adds tremendous capability to our aerospace business and rounds out the company.”
Under terms of its offer, Northrop would exchange $47 in stock for each TRW share, an 18% premium over the company’s closing share price of $39.80 on Thursday.
The proposed stock deal, if completed, would propel Northrop past Boeing Co. to become the nation’s second-largest defense contractor, trailing only Lockheed Martin, and give the company interests in virtually every facet of the nation’s military, from battlefield command-and-control systems to space-based lasers.
It would create a company with more than 194,000 employees in almost every state and 25 countries--20,000 of them based in Southern California. Through a series of bold deals over the last few years, Northrop has become an industry powerhouse. It completed its $2.1-billion deal for Newport News Shipbuilding Inc. just three months ago, making it the world’s largest military shipbuilder. Until the early 1980s, Northrop was primarily a builder of low-cost export jet fighters.
The industry’s flurry of mergers in the last decade has produced two behemoths, Lockheed and Boeing, and a handful of second-tier defense contractors. With the TRW acquisition, Northrop would be able to join the elite group, which analysts said the Pentagon may support because it would create more competition.
Northrop, in particular, wants TRW’s Redondo Beach-based aerospace and electronics division, which develops and makes military satellites, laser weapons and battlefield computer systems. It generates about $7 billion in revenue.
TRW’s satellite manufacturing operation is among the most secret in the world, but the company is generally thought to be the major producer of spy satellites that listen into data and telephone communications around the world. It has also built major research satellites, including NASA’s Chandra X-ray observatory.
“The real value of TRW is not its metal-bending businesses, but its software integration expertise in creating systems for the entire battle space,” said James McAleese, president of McAleese & Associates, a law firm that specializes in defense mergers and acquisition. “It would be a nice complement to Northrop.”
As such, Northrop executives said the company would immediately spin off or sell the automotive parts business, which accounts for about 60% of revenue but which has been a drag on earnings and has saddled TRW with $5.5 billion in debt. The company’s huge auto-related debt has kept potential buyers at bay, analysts said.
But pressure is building for TRW to be broken up.
“They need to be separated,” said Simon Ramo, who founded the company with Dean Wooldridge in the 1950s. “Keeping them together handicaps the company. The TRW board has to either merge or do it on their own.” TRW’s former chief executive, David Cote, abruptly resigned three days ago after pushing such an agenda.
Kresa asserted Friday that the business was “very attractive for other people in the auto business,” adding that he has already talked to potential buyers. He declined to provide details. A Northrop spokesman said the company would assume TRW’s debt and then jettison the auto-related portion of the debt when it is spun off or sold.
The bid came after three days of turmoil for TRW. Cote left to take the top post at TRW’s rival Honeywell International. With the sudden leadership void, investors began to unload their TRW stock, sending the value of the shares down by more than 15% in two days. But as quickly as it dived, it swiftly began to rise again with Northrop’s announced bid.
Rumors swelled on Wall Street that Lockheed and General Dynamics, a defense contractor known for its M-1A1 main battle tank, were considering a bid of their own. Both companies declined to comment, but investment bankers said Lockheed executives were quietly trying to quell the speculation.
Industry sources said two companies held emergency board meetings to discuss potential TRW bids.
In responding to Northrop’s proposal, TRW executives said they would review it but criticized the timing of the offer.
“TRW finds it regrettable that Northrop Grumman has chosen to make this proposal immediately following the unexpected departure of former chief executive, David Cote, and the aberationally low stock price that resulted,” the statement said.
But Kresa tried to downplay the criticism, saying that Northrop had been considering acquiring TRW for years and that the timing seemed right to finally make a formal proposal. Kresa said he spoke with Philip Odeen, a former TRW executive who was brought out of retirement to lead TRW while it searches for a new chairman.
“Phil agreed to take up with the board,” Kresa said. “I hope to get an answer back next week.”
Shares of Cleveland-based TRW, which had tumbled earlier in the week, shot up $10.50 to close at $50.30 in trading Friday, while Northrop shares dropped $7.85 to close at $109.95. Some analysts hailed the timing of the bid, which came as TRW shares plunged by more than 15% shortly after Cote’s resignation was disclosed.
“It’s vintage Northrop,” said Jon B. Kutler, president of Quarterdeck Investment Partners Inc., a defense industry investment bank. “They’ve been talking about a deal with TRW for years and this seemed to be the window to strike.”
Indeed, many analysts discounted Northrop making any kind of bid since it’s been enveloped in integrating several major acquisitions including the recent purchase of Newport News.
The shipyard acquisition was itself surprising because it came shortly after Northrop had acquired Litton Industries for $3.8 billion. Again analysts thought Northrop would be too engrossed in the integration to have the will to make another acquisition.
It has not been surprising to Kresa, who has led more than a dozen acquisitions in the last decade, cobbling together a defense electronics powerhouse. But acquiring TRW, his biggest deal yet, would represent Kresa’s crowning achievement.
Northrop has about 100,000 employees in 44 states and 25 countries. TRW has about 94,000 workers. A Northrop official said he didn’t immediately know how many of those employees are involved in the business units Northrop wants to keep, but said no significant job cuts are expected to affect those workers.
Kutler said Northrop’s acquisition of TRW “would benefit Southern California, because there would be little redundancy in operations. Northrop has no local space business and because Northrop is the last major defense contractor left in the region, the acquisition would strengthen and reinforce it.”
A number of employees at TRW’s Redondo Beach facility were reluctant to comment on the proposed takeover. But Quin Kan, a senior TRW technical staffer who manages databases, said that based on the market reaction Friday to the announcement, a takeover of his company might be a good thing.
“Personally, I don’t think it would make a difference,” he said. “I don’t foresee things changing here in the near future.”
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Times staff writer Elena Gaona contributed to this report.
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