Northrop Bids $5.9 Billion for TRW

Posted 9:37AM on Sunday 24th February 2002 ( 23 years ago )

NEW YORK - In a bid to gain a strong foothold in the lucrative military satellite market, defense giant Northrop Grumman Corp. made a surprise $5.9 billion offer Friday to buy TRW Inc. TRW shares soared more than 26 percent in response to the unsolicited bid, closing above the offering price on speculation that other bidders - such as rivals General Dynamics Corp., Lockheed Martin Corp. or Boeing Co. - could emerge, or that Northrop might raise its bid. In an interview, Northrop chief executive Kent Kresa called the bid ``a very fair offer,'' but TRW labeled it low and ``regrettable,'' coming just days after its chief executive announced his departure, news that had pushed the company's stock down. Cleveland-based TRW makes space and defense products including spacecraft and satellites, defense communications equipment and high-energy lasers. Northrop would sell TRW's automotive parts business, which accounts for 64 percent of TRW's sales and 58 percent of profits, if TRW accepts Northrop's offer. Kresa declined to estimate how much the division would fetch. Analysts said Northrop would benefit most from TRW's satellite production unit, which makes satellites used by the military to spy on enemies and coordinate the movement of troops, ships and airplanes. Northrop make sensors for satellites, but is a relatively small player in the market for military products used in outer space. ``Northrop Grumman doesn't have very much presence in space, and TRW is a leader in space. The theory is, it's a growth opportunity,'' said John Pike, director of the GlobalSecurity.org defense analysis think tank. TRW has also been involved in the U.S. ballistic missile program for nearly 50 years, and is the Pentagon's prime contractor for intercontinental ballistic missiles, the chief delivery vehicle for nuclear warheads. And TRW's information technology unit that makes software used to run weapons systems would complement Northrop's IT division, said Paul Nisbet, an analyst with JSA Research. Kresa said Northrop executives have not yet spoken with officials from the Defense Department and Justice Department who would have to approve the deal, but said lawyers predict there will be no significant antitrust hurdles. A Northrop-TRW combination would also need approval from the European Union. ``We feel very comfortable that we have no significant overlap that would give us a problem,'' Kresa said. Kresa didn't disclose whether Northrop would be willing to raise its bid, but analysts said it could represent the first volley in a wave of offers - noting that Northrop successfully outbid General Dynamics last year in another takeover contest, paying $2.1 billion to buy Newport News Shipbuilding Inc., the nation's only nuclear aircraft carrier builder. Northrop said the deal with TRW would generate sales in 2003 of between $26 billion and $27 billion, putting the company slightly ahead of Lockheed Martin, the largest U.S. defense contractor, in terms of total sales. But based strictly on Pentagon contracts, the combined company would still lag behind Lockheed and Boeing, according to the Defense Department. TRW was the Pentagon's eighth largest contractor in 2001 and 2000, with sales of $1.9 billion in 2001 and $2 billion in 2000. Under terms of the offer, Los Angeles-based Northrop would exchange $47 in stock for each TRW share, an 18 percent premium over the company's closing share price of $39.80 Thursday on the NYSE. The offer was outlined in a letter dated Thursday to TRW management and released by Northrop on Friday. Northrop would also assume about $5.5 billion of TRW debt, said Northrop spokesman Frank Moore. TRW said in a brief statement that its board would review the proposal to determine what action will serve the best interests of shareholders and other constituencies. However, it added, ``TRW finds it regrettable that Northrop Grumman has chosen to make this proposal immediately following the unexpected departure of (TRW's) former chief executive officer, David Cote, and the aberrationally low stock price that resulted.'' The offer came three days after TRW announced Cote had resigned to take the top job at rival Honeywell International. TRW shares fell 5 percent over the next two days; their previous high for the past year had been $45.45 a share. TRW shares rose $10.50 to close at $50.30 Friday on the New York Stock Exchange, while Northrop shares fell $7.85, or 6.7 percent, to $109.95. Cote, 49, had served for just over six months as chairman, president and CEO of TRW. He spent 25 years before that in various management and leadership positions for GE. Northrop has about 100,000 employees in 44 states and 25 countries.TRW has about 94,000 workers. Northrop spokesman Frank Moore said about 30,000 of TRW's employees have jobs with business units Northrop wants to keep, and that there would no widespread job cuts in those divisions.

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