- The Washington Times - Tuesday, July 2, 2002

Northrop Grumman Corp. yesterday said it has agreed to purchase TRW Inc. in a deal that would create the second-largest defense contractor and another dominant player in the missile-defense sector.
The long-anticipated merger is expected to be completed by the end of the year. It caps more than five years of efforts to transform Northrop from the prime contractor on the B-2 Stealth bomber to the country's largest shipbuilder, a leader in unmanned and computer warfare, and a major diversified defense contractor on par with Boeing Co. and Lockheed Martin Corp.
"This merger enhances the competitive landscape in areas most critical to our nation's defense," Northrop Chief Executive Officer Kent Kresa said at a press conference yesterday.
Northrop's rapid growth came as it bought Litton Industries, then Newport News Shipbuilding and several other smaller companies. But the bid for TRW was its largest so far.
Northrop will pay $60 per share for TRW and assume about $4 billion in debt. The sale price is about 22 percent higher than Northrop's original offer of $47 in February. Northrop said yesterday that a review of TRW's internal records showed that the company was more valuable than it originally believed.
"We can say [after] a very detailed evaluation that indeed the value is there," Mr. Kresa said.
Northrop, based in Los Angeles, said it would sell or spin off TRW's prominent auto-parts business but keep the Cleveland-based company's space and missile-defense systems. TRW said last month it agreed to sell its aerospace unit to Charlotte, N.C.-based Goodrich Corp. for $1.5 billion.
Analysts and observers said the $60 price was more than fair, given that TRW's stock has never sold for even close to that price. TRWChief Executive Philip Odeen was exceptionally shrewd in getting Northrop to raise its offer several times, observers said.
"Odeen and the rest of his advisers did a terrific job in auctioning the company," said Scott Keller, an analyst with Dealanalytics.com.
Repeatedly during the past several months, Mr. Odeen told Northrop executives that their offers were too low and said an internal-restructuring plan would create more value for TRW shareholders.
Meanwhile, TRW received offers last week from rival defense firms BAE Systems, Raytheon Co. and General Dynamics for its space systems sector, reportedly for between $6 billion and $6.5 billion. Analysts said those offers were between $500 million and $1 billion above market value but that TRW was never inclined to sell itself in parts.
Nevertheless, analysts said Northrop was forced to raise its bid for TRW out of fear that BAE, Raytheon or General Dynamics would purchase the space systems unit.
Now, analysts said, the biggest challenge facing Northrop is integrating TRW. The recent acquisitions of Newport News and Litton Industries led to some problems with integration, analysts said. But, with Ron Sugar, a former TRW executive, on board as Northrop's president and chief operating officer, few major problems are expected, analysts said.
Company spokesman Randy Belote said TRW would first be established as its own business unit, then integration teams will determine how to divide the new firm's units. The Cleveland headquarters of the company will be closed, but it was not known whether there would be layoffs, Mr. Kresa said.
In this area, Mr. Belote said layoffs were unlikely and that new jobs were already being advertised. The information-technology sectors of both firms are based in Northern Virginia and employ a combined 27,300 people, the majority of whom work in the region.
Another challenge facing Northrop is the effort to sell TRW's auto-parts business. So far, no clear suitor has emerged for the unit, and most observers said Northrop will end up simply spinning off the unit.
Northrop shares fell 5.5 percent, or $6.81 a share, to close yesterday at $118.19 on the New York Stock Exchange. TRW shares fell 40 cents to $56.58.


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