Northrop Grumman to Buy Litton for $5.1 Billion

Northrop Grumman Corp. has vaulted into the top tier of defense and information technology companies with its planned purchase of Litton Industries Inc. in a transaction worth an estimated $5.1 billion.


With annual revenue of $15 billion, the combined companies will be better positioned to challenge Boeing Co., Lockheed Martin Corp. and Raytheon Co. for defense and federal IT contracts.


"I think Northrop Grumman did it because they realized they needed more mass," said Tom Meagher, vice president of equity research, BB&T Capital Markets, Richmond, Va. "What this does is add roughly $6 billion of revenue to Northrop Grumman's $9 billion and puts them on a par with Raytheon."


The purchase agreement, announced Dec. 21, provides that Northrop Grumman will acquire for cash all of Litton's outstanding shares for $80 per common share and $35 per Series B Preferred share. The purchase includes assumption of Litton's approximately $1.3 billion in net debt.


Litton's share price, which closed Dec. 21 at $62.62, was trading at $77.62 mid-morning Dec. 22. Northrop Grumman's stock, on the other hand, dropped to $75.62, losing $6.62 from the previous day's close.


As part of the transaction, Northrop Grumman also announced that once the purchase is completed, it intends to raise additional capital through a stock offering.


Northrop Grumman, headquartered in Los Angeles, has been a leading developer of advanced weapons systems and technologies. At an analysts' meeting last week, company officials "stressed their military aircraft [business] is not going to grow; in fact it's going to shrink, and their two growth areas were going to be defense electronics and IT," Meagher said, which fits Litton's strengths.


Northrop Grumman will also pick up Litton's shipbuilding business, putting them back into manufacturing, he said.


Litton, based in Woodland Hills, Calif., had announced Dec. 5 it was reorganizing PRC Inc., its IT subsidiary, creating three divisions which, along with Litton TASC, would form the corporation's Information Systems Group.


In the government information technology market, Northrop Grumman's wholly owned subsidiary Logicon Inc. anticipates benefits, as well.


"For us, it adds $1.4 billion to Logicon," said Logicon spokesman Bob Koch. "We're still not sure what parts will come over to Logicon, but some of them will. [This] further rounds out our picture of being a full-service provider to our customers."


The acquisition will need review by the Justice Department for antitrust regulations, but BB&T's Meagher does not anticipate problems.


"I don't see a whole lot of antitrust concerns. If you look at their business models ... the only overlap is in IT services and the defense electronics area," Meagher said. "They'll be about $3 billion combined. CSC is $2 billion, [for example] and others are $1 billion to $2 billion. There's no one dominating player, so I don't see an antitrust issue here, either."


Northrop Grumman expects the transaction to be concluded within the first quarter of 2001, subject to the Justice Department's approval. During an initial transition period, Litton will operate as a wholly owned subsidiary of Northrop Grumman.


Ronald Sugar, currently Litton's president and chief operating officer, will become a Northrop Grumman corporate vice president, and president and chief executive officer of the Litton subsidiary.


Michael R. Brown, Litton's current chairman and CEO, plans to retire.