Northrop Grumman's $11 billion bid for TRW shakes government market

Northrop Grumman Corp., which just two months ago finished absorbing Litton Industries Inc., made another bold move Feb. 22 to bolster its position in the government information technology sector with its $10.8 billion offer to purchase TRW Inc.

Northrop Grumman is offering $47 per share for TRW stock, or about $5.9 billion, and assumption of about $4.94 billion in debt.

A possible driver for the timing of the unsolicited bid was the unexpected resignation Feb. 19 of David Cote, TRW's chairman, president and chief executive officer.

Jon Kutler, chairman and chief executive officer of Quarterdeck Investment Partners LLC, a Los Angeles investment house, said Cote's departure from TRW and its subsequent impact on TRW's share price played a major part in Northrop's decision to make an offer quickly.

"Clearly, Northrop would have chosen a different time if it had its druthers," he said. "There's a new regime there with Ron Sugar [Northrop Grumman's new president and chief operating officer], they've got a lot to digest with Newport News Shipbuilding, but they've always shown a great willingness to strike quickly... Cote's departure was a too-good-a-deal-to-turn-down reason."

In a terse response to the offer, Cleveland-based TRW said it was "regrettable" that Los Angeles-based Northrop Grumman chose "to make this proposal immediately following the unexpected departure of its former Chief Executive Officer, David Cote, and the aberrationally low stock price that resulted."

Cote submitted his resignation, effective immediately, on Feb. 19, to become president and CEO of Honeywell Inc. TRW's stock, which closed Feb. 15 at $45.04 per share, dropped to $41.75 the day of Cote's announcement, and fell to $39.80 Feb. 21, the day before Northrop Grumman's offer was announced.

The Northrop Grumman offer provided a boost to TRW's stock price, which closed at $50.30 on Feb. 22, $10.50 higher than the close the day before and a new 52-week high. Northrop Grumman's stock, meanwhile, dropped $7.85, to close at $109.95.

Randy Belote, director of communications and public affairs for Northrop Grumman, described the offer as "very fair," representing a 22 percent premium over the average trading price over the past 12 months, 4 percent over TRW's 52-week high at the time of the offer.

"We feel that the combination would significantly expand our defense business; it would add a key communications technology and multiple capabilities to our space businesses, and it would certainly enhance our IT business," Belote said. "I think they're extremely complementary to our existing business and would serve to expand our footprint in those areas."

Northrop Grumman previously has discussed purchasing part of TRW's business with TRW officials, according to the offer letter sent by Northrop Grumman.

Kutler said the deal, should it go through, would have a significant impact on the government IT sector. Most press accounts have focused on the impact to the defense industry, but "the IT universe is completely overlooked because it doesn't have a high profile," he said.

Northrop Grumman ranked no. 2 last year in Washington Technology's list of Top 100 prime contractors in the federal IT market. TRW ranked no. 8.

William Loomis, managing director of the investment banking firm Legg Mason Wood Walker Inc. of Baltimore, said that Northrop Grumman is already so large there would be little competitive gain in the acquisition, "but I'm sure it'll help plug up some holes."

Kutler characterized Northrop Grumman's speedy action as pre-emptive, but he said competition for TRW is likely: "Today, based on the phone calls I've received, most companies and investment banks are dusting off their TRW files."

The "poison pill" in TRW's profile is its automotive business, Kutler said. The announcement from Northrop Grumman confirmed that the company would move to separate the automotive division after the prospective purchase is completed.

Belote confirmed that Kent Kresa, Northrop Grumman's chairman and chief executive officer, Kresa has said he has had conversations with potential buyers for the automotive business.