Lockheed, Northrop Cast for New Deals

By Bob Starzynski
Staff Writer

Executives from Lockheed Martin Corp. and Northrop Grumman Corp. are on the prowl for information technology acquisitions after their failed union, but the two companies won't be fishing the same waters, analysts said.

Arthur
Johnson

"Northrop has more interest in high-end systems integration work," said Byron Callan, an analyst who covers both companies for Merrill Lynch Global Securities in New York. "They don't have the appetite for the [state and local civil work] that Lockheed has been aggressively pursuing."

Bethesda, Md.-based Lockheed canceled its $11.6 billion bid to buy Los Angeles-based Northrop July 16, ending a drawn out legal battle between the nation's top defense contractor and its main customer, the U.S. government.

Kent Kresa, Northrop's chief executive, told analysts the next day that despite Wall Street's skepticism for his company's future, he wants to make acquisitions in the defense electronics, information technology and commercial aerostructures markets.

Vance Coffman, Lockheed's chief executive, said in a letter to shareholders July 21 that he will pursue strong growth in the commercial space and information technology businesses.

Roger Threlfall, an analyst with J.P. Morgan Securities in New York, said he would not be surprised to see Northrop go after some smaller systems integration acquisitions in the near future. However, he said, because of Northrop's high debt burden, "they could be a strong bidder for a $300 million business, but I wouldn't expect them to go much bigger."

"Lockheed should keep pointing to the municipal work," said Threlfall. "They have been aggressive there and have been able to grow that business quite nicely in-house."

"Northrop has tried to make a name for itself in defense systems integration," he said.

Although executives at Northrop and Lockheed declined to discuss specific acquisition strategies, company officials agreed with the analysts' assessment.

"Information systems has been one area the corporation has looked to for growth since the defense budget has been stable at best," said Ron Meder, a spokesman for Lockheed. State and local government contracting should account for a large amount of that growth. "We could grow 40 to 50 percent in that business this year," he said.

Lockheed may be best known for its fighter planes, missiles and electronics, but the company's Information & Services Sector, headed by Arthur Johnson, has more than 46,000 employees in 20 different businesses. That IT sector accounted for $6.5 billion of the company's $28 billion in revenue last year.

Some of Lockheed's more popular work in the IT sector has been municipal services, such as automating toll booths on highways, running census figures and installing cameras at intersections to film red-light runners. This, according to analysts, is where the company's forte ought to be.

Northrop reaffirmed its interest in the IT side of the defense industry July 14, when it announced that its Data Systems and Services Division would combine with Logicon Inc., which the company bought last year. The new division, to be housed in Herndon, Va., was named Logicon and will be Northrop's hub for systems integration work, according to company officials.

"The company has made it very public that it wants to play in the information technology market," said Bob Koch, a spokesman for Northrop.

Kresa, the company's top official, said July 14 that he wants the Logicon division to double its annual sales to $2 billion by 2002. Currently, the business accounts for 10 percent of Northrop's overall revenue. If Kresa meets his goal with Logicon, IT work will be 20 percent of total revenue in five years.

Koch affirmed that Logicon has a strong heritage doing information work for the Department of Defense but cautioned not to confuse the operation as strictly defense. "We work with civilian agencies as well," he said.

While Koch insists that Northrop is working in the commercial IT sector as well, analysts do not see the company making as strong of a push into commercial work as Lockheed has made.

In just two years, Lockheed has taken a commercial applications business from scratch to having an $800 million backlog.

"I don't detect Northrop Grumman doing as much on the commercial IT front [as Lockheed]," said Wolfgang Demisch, an analyst with Bankers Trust in New York.

Although most analysts agree that Lockheed and Northrop will not step on each other's toes as they grow their respective IT businesses, they will still be competitors.

"They will certainly compete in numerous areas," said Peter Aseritis, an analyst with Credit Suisse First Boston in New York. "People think that Northrop should move more strongly into IT. They will meet Lockheed head-on in that market. In order to compete as equals, Northrop will have to do some huge acquisitions."

But Merrill Lynch's Callan, who does not envision a blood bath between the two companies, said that Lockheed and Northrop are probably walking away from their almost union more cooperative than competitive.

"In an odd way, this whole process may have drawn the two a little closer," he said. "I expect to see them work together in some of their niches in the future."

Jacque Gansler, center, undersecretary of defense for acquisitions and
technology, explains to reporters March 23 the effects a Lockheed-Northrop
merger would have on competition in major product markets critical to
national defense. The companies dropped the merger bid July 16 after legal
threats from the U.S. government.