Analysts Predict More Bids for TRW
Northrop Grumman Corp.’s offer Friday to acquire TRW Inc. for $47 a share, or about $5.9 billion, is just the first round of what could become a protracted bidding war that could see competing suitors offering as much as $58 a share, analysts and investment bankers said.
TRW, one of the last major arms contractors to avoid the defense consolidation trend of the last decade, became a prime acquisition target immediately after its chief executive abruptly resigned early last week to take the top job at aerospace rival Honeywell International Inc.
With reports that two major defense companies and a third non-defense-related conglomerate had contacted TRW about a possible merger, Northrop quickly put together the $47-a-share offer that analysts immediately derided as too low. Investors seemed to agree and drove up TRW shares to $50.30, or a 26% increase, Friday in anticipation of competing bids.
Sources said Sunday that the U.S. unit of British-based BAE Systems is considering a bid for TRW, joining a growing list that already includes Lockheed Martin Corp. and General Dynamics Corp. BAE officials could not be reached for comment Sunday. BAE, with its recent acquisition of Lockheed Martin’s defense electronics business, now is one of the nation’s largest defense contractors.
Investment bankers said merger and acquisition departments at several aerospace companies were scrambling over the weekend to assess TRW’s value. In some cases, such as that of Lockheed Martin, which already has a large military satellite business, antitrust concerns are being reviewed. TRW runs one of the nation’s top classified spy satellite businesses.
“We believe a deal will get done at $50 to $55 a share,” Ken Blaschke, an analyst with Deutsche Bank in San Francisco, said in his note to investors Sunday. “We do not see any logical reasons for TRW’s management or board not to sell the company.”
For its part, Northrop appeared to be anticipating a competing bid and left open the possibility of revising the offer for the company in its letter to TRW executives.
In the letter, dated Feb. 21 and addressed to Philip A. Odeen, a former TRW executive who was brought in last week to run the company while he helps find a chief executive, and to Kenneth W. Freeman, the company’s lead director, Northrop said the current offer of $47 represented a 22% premium over TRW’s average trading price for the last 12 months.
But it added that “we would welcome the opportunity to consider nonpublic information concerning TRW, and we are prepared to consider in our offer any enhanced values that may be demonstrated by such information.”
The letter, signed by Northrop Chairman Kent Kresa, said the company was looking forward to a response to the offer by Wednesday with the hopes of completing the deal by the end of the third quarter, an unusually tight deadline that may have been prompted by fears of a bidding war.
Still, several industry officials said Northrop may have an edge over other competing bids. Odeen is familiar with Ronald Sugar, Northrop’s president and chief operating officer, having worked with him while both were at TRW. Sugar is seen as taking over the top post at Northrop upon Kresa’s retirement, expected in the next year or two.
One issue that puzzled analysts was Northrop’s apparent confidence that it can sell or spin off TRW’s automotive business, which has been saddled with debt and has been a drag on earnings. For the last year, the problems in the auto parts business kept potential suitors at bay.
TRW’s automotive business, which included the production of air bag systems, brakes and steering systems, accounts for $10billion in sales annually, representing 60% of the company’s revenue.
But a company source said that the auto business appears to have made dramatic improvements in recent months and thus is more palatable to potential buyers.
Byron K. Callan, a Merrill Lynch & Co. analyst, said in a report this month that though he did not believe “TRW’s automotive business will turn into an engine of growth and profitability” in the next year, “we do think the downside risk from these businesses has decreased.”
