Bigger Is Better for Northrop Grumman

Litton Deal Paves Way for Larger IT Projects<@VM>Northrop Grumman Corp. & Litton Industries Inc.

Steve Carrier

By Patience Wait, Staff Writer

Northrop Grumman Corp.'s planned $5.1 billion acquisition of Litton Industries Inc. is getting favorable reviews from analysts and industry officials who see a bigger and stronger company capable of pursuing large information technology projects, including outsourcing contracts, intelligence work and complicated defense systems.

With the acquisition, Northrop Grumman of Los Angeles is adding $5.6 billion in sales to its $7.6 billion, creating a $13.2 billion company with capabilities in advanced electronics, information systems and systems integration, as well as surface ship design and building.

Northrop Grumman officials are projecting 2001 revenue for the combined companies to hit $15 billion. The IT portion of the business will grow from $1.5 billion in 2000 to about $2.9 billion with the addition of Litton's TASC and PRC divisions.

"It considerably broadens [Northrop Grumman's] offerings in defense electronics and information technology areas," said Paul Nisbet, principal at JSA Research in Newport, R.I. "Secondly, it gets them into a brand new business: shipbuilding."

Major shipbuilding contracts for the Department of Defense now include very sophisticated information systems requirements, Nisbet said. Lockheed Martin Corp. and Raytheon Co. have been the prime contractors on these projects, but the acquisition of Litton of Woodland Hills, Calif., will give Northrop Grumman the opportunity to bid as a provider of both the ships and their systems.

"They may feel that would give them some advantage over the team approach," Nisbet said.

Steve Carrier, vice president of business development for Logicon Inc., Northrop Grumman's IT subsidiary, said he sees many opportunities coming out of the new company being created by the acquisition.

"Obviously, we'll be one of the three or four [first-tier] providers in the federal space," Carrier said, asserting that the company could now compete with the likes of Lockheed Martin, Science Applications International Corp. and TRW Inc.

"There's probably no IT offering we couldn't go after now," he said.

For example, Logicon did not bid as a prime vendor on the $6.9 billion Navy/Marine Corps Intranet contract, Carrier said. But with the addition of Litton's TASC and PRC information technology units, Logicon can pursue opportunities of a size and complexity similar to the intranet project.

The proposed purchase was announced Dec. 21. Northrop Grumman will pay cash for all of Litton's outstanding shares at $80 per common share and $35 per Series B preferred share. The acquisition includes assumption of about $1.3 billion in debt. The transaction is expected to close by the end of March.

In addition to Litton's TASC and PRC units, Northrop Grumman is acquiring two shipbuilding units, Avondale Industries and Ingalls Shipbuilding, and Litton's advanced electronics and electronic components and materials groups.

During an initial transition period, Litton will operate as a wholly owned subsidiary of Northrop Grumman. Ronald Sugar, 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 Brown, Litton's current chairman and CEO, plans to retire.

Logicon's Carrier said TASC will be a prime asset. "With their intelligence business, that's going to open up a whole new market," Carrier said. "That brings us instant credibility in that marketplace."

PRC, however, probably has "some significant overlap" with Logicon, he said. The two companies compete on major federal IT services contracts, including the General Services Administration's $25 billion ANSWER contract, the Department of Transportation's $10 billion ITOP II contract, and the $25 billion GSA Millennia contract. Carrier said Northrop Grumman already has a procedure in place to address contract overlap.

"One of the first things we've done with anyone we've ever bought is create a matrix, look at where the duplications are, try to figure out who really is the strongest in that area, and see what the customer's feeling is," Carrier said. "One thing you don't want to do in this business is bid against yourself."

"Since Northrop Grumman has a significant information services business, we expect PRC and TASC to play an integral part in reshaping those assets." said Randy Belote, director of corporate communications for Litton.

Before the purchase can be finalized, the Justice Department has to review it for potential antitrust concerns.

"I don't see a whole lot of antitrust concerns here. If you look at the business model, [the] only overlap is in information technology services and the defense electronics area," said Tom Meagher, vice president of equity research, BB&T Capital Markets, Richmond, Va. "Litton had [decided] to put the defense electronics business up for sale. Northrop may pull it off the block and consider what they want to keep."

At least one competitor, though, sees some antitrust issues; but those issues may create opportunities for his company as well.

"There are a number of conflict-of-interest issues between the Northrop Grumman side and the Litton PRC side, and some of those conflicts are in our market space," said Joseph Kampf, president of Anteon Corp., Fairfax, Va. "There are U.S. regulations that prohibit one company sourcing both the hardware manufacturing side and the software associated with [weapons systems], and I think they're going to have problems."

Kampf said he'll be looking at any units that might go up for sale.

Litton's commercial electronic components and materials business, some half-dozen entities which have a combined $700 million in annual sales, might be one area that could be sold off, Nisbet said. "That probably could be sold for a billion and a quarter, and enable them to pay down quite a bit of debt," he said.

Nisbet also said another company could make a competing bid for Litton, though he would not speculate on who that might be.

After the purchase agreement was announced, Litton's stock price rose close to Northrop Grumman's bid price, Nisbet said.

"The market seems to feel there will be another bidder here for all or part of Litton," he said.

When the purchase was announced, Litton was in the midst of reorganizing its IT units into a more focused group headed by Jim Frey, vice president of Litton's information systems group and president of TASC.

The reorganization was intended to achieve double-digit growth across the group and create a shared services organization across the four businesses, Frey said in an interview before the deal with Northrop Grumman was announced.

The strengths of the Litton IT group include information systems management, information security, health informatics, e-government and enterprise solutions, he said.

Northrop Grumman Corp.

Business: Aerospace and defense industries, integrated systems and aerostructures, electronics and information technology (including Logicon Inc. and Federal Data Systems)

Based: Los Angeles

Employees: 39,000

1999 Revenue: $7.616 billion

Ticker: NOC on the New York Stock Exchange

Litton Industries Inc.

Business: Information technology and services, defense and commercial electronics technology, components and materials, shipbuilding

Based: Woodland Hills, Calif.

Employees: 40,300

2000 Revenue: $5.588 billion

Ticker: LIT on the New York Stock Exchange

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