Northrop’s Bid Bucks Norm for Aerospace
In the staid and often chummy world of defense contractors, hostile takeover attempts such as Northrop Grumman Corp.’s bid for TRW Inc. are rare occurrences.
A friendly handshake to complete a deal is typical in the industry, where most chief executives not only know each other but have worked with each other on government programs and try to avoid confrontations.
But for Northrop Chairman Kent Kresa, whose mild-mannered, studious demeanor belies a tenacious maverick, the hostile bid for TRW is the latest in a string of high-profile and contentious acquisitions that have reshaped the Century City-based defense contractor into a powerhouse.
And more often than not, Kresa has succeeded, a track record that analysts believe will serve Northrop well as it goes after the industry’s biggest remaining prize.
Under Kresa’s leadership, Northrop has been on a corporate acquisition spree, taking over 14 companies in the last decade and amassing a business that has interests in virtually every aspect of the nation’s military, from unmanned spy planes to aircraft carriers. TRW, which develops spy satellites and battlefield command systems, would be its largest trophy.
“It looks like Kresa is going to end up being the most successful defense executive of the post-Cold War era,” said Loren Thompson, director of the national security program at the Lexington Institute, a public policy research firm. “When you meet him, it’s hard to believe this is the same guy that put the screws to so many organizations.”
If Kresa succeeds in acquiring TRW--and many analysts believe he will--Northrop would grow to a company with $27billion in annual revenue, compared with $8billion before its first major deal in 1994.
Kresa, 63, is one of the longest-serving chief executives in the defense industry, serving in that job since 1990. He came to Northrop in 1975 after working as a deputy director of the Defense Advanced Research Agency, a Pentagon unit that funds the nation’s leading- edge and most secretive weapons programs. He has graduate degrees in engineering, aeronautics and astronautics from the Massachusetts Institute of Technology.
A fiercely competitive tennis player, Kresa also Rollerblades. He has a base salary of $1 million, but he earned $2.8 million in bonuses last year. Kresa, who projects an image of a bumbling professor, first stunned the industry and ruffled corporate boardrooms in 1994 when he made a $2.1-billion hostile bid for Navy aircraft maker Grumman Corp. It came just days after Grumman reached a friendly pact to be acquired by Martin Marietta.
He made a similar move last year when Northrop went after Newport News Shipbuilding Inc., after the military shipbuilder already had inked a deal with rival General Dynamics Corp.
In both cases, Kresa portrayed Northrop as a jilted victim who already was talking to the partners about a merger only to have them turn around and hook up with others. Kresa prevailed in both cases.
And two weeks ago, Kresa was making a similar argument as Northrop made a surprising unsolicited offer for TRW. In vintage Kresa style, he said Northrop had been talking to TRW for years about a possible merger but that it now was forced to act because of the unusual circumstances when TRW Chairman David Cote abruptly resigned to take a top post at Honeywell International, leading to speculation that it had become an acquisition target.
Although Northrop’s so-called “bear hug” proposal was considered friendly, the company was gearing up for a fight, hiring a proxy solicitation firm to wage a battle for shareholders.
On Monday, Northrop began applying pressure on TRW directors, saying it was filing three lawsuits challenging laws in TRW’s home state of Ohio that, among others, would prohibit Northrop from splitting up the business within three years of completing the acquisition. Northrop wants to sell or spin off TRW’s automotive parts business, which is saddled with debt and has been a drag on earnings. Another law Northrop is challenging prohibits shareholders who acquired more than $250,000 in TRW stock since the bid was announced from voting on the deal.
At the same time, Northrop launched a hostile bid and said it would begin appealing to TRW shareholders. The moves came less than 24 hours after TRW directors rejected as inadequate Northrop’s initial offer of $47 a share, or $5.9 billion.
TRW’s board reiterated its criticism at the timing of the proposal, calling it an “opportunistic attempt” at a time when “TRW’s stock price was temporarily depressed” after the sudden departure of its chairman. Northrop made an unsolicited offer just three days after Cote’s resignation, which set off a selling frenzy that saw TRW stock plummet 26%.
But TRW also left open the possibility that it could entertain a higher bid. The statement noted that its shares had closed at $50.05 Friday, or $3 more than Northrop’s offer. But the stock has remained at about $50 with investors anticipating a rival bid.
Lockheed Martin Co. and General Dynamics were considered potential competitors, but sources said Monday that both firms are backing away from possible bids because the acquisition would pose some problems. Lockheed, for instance, has significant satellite and missile defense businesses much like TRW, which could prompt intense regulatory scrutiny.
Another firm that has been keenly interested faces another issue altogether. The U.S. unit of BAE Systems, one of the largest defense contractors in Europe, wants TRW’s defense electronics business but the Pentagon may be reluctant to have a British firm have its hands on some of TRW’s most secretive military programs.
To be sure, Northrop has lost some battles including the acquisition of Hughes Electronics and Texas Instruments, both of which were purchased by Raytheon Co. and were regarded as carrying unjustifiable price.
Ironically, one of the few friendly deals--a pact to be acquired by Lockheed Martin--was derailed by regulators.
Paul H. Nisbet, an analyst with JSA Research Inc., said Northrop has put TRW directors in a bind. If no competing bid comes forth, TRW shares are sure to drop, giving Northrop the leverage it needs to seek a deal close to its initial offer. And if Northrop were to walk away from the table, TRW shares could fall even lower.
“I suspect that it’s more likely they’ll reach an agreeable price level and more or less force TRW to agree to be taken over,” Nisbet said. “Not being taken over would risk the stock going below $40, and stockholders would not be pleased with that.”
To Jon B. Kutler, a longtime defense investment banker who has followed many of Northrop’s acquisitions in the last decade, the latest action against TRW provides a classic example of Kresa’s acumen for acquisitions.
“It’s once again a brilliant execution,” Kutler said. “They’re playing their cards just right.”
