Bidding war expected for TRW

"We expect that once we reach a timely agreement with the TRW board of directors, we will be able to close this transaction in the 2002 third quarter." | Kent Kresa, Northrop Grumman

Northrop Grumman Corp. may not be alone in its desire to acquire TRW Inc. of Cleveland. Analysts and published reports indicate other defense contractors, such as the Boeing Co., General Dynamics Corp. and Lockheed Martin Corp., could be readying their own bids.

Northrop Grumman, Los Angeles, is offering $47 a share and the assumption of $5.5 billion in debt, bringing the total value of the offer to $11.4 billion. At the time of the Feb. 22 offer, TRW's stock was trading at $39.80 a share, but news of Northrop Grumman's bid drove the stock to a closing price of $50.30 that day. The stock has continued to hold steady and it closed at $50.75 Feb. 26.

Northrop Grumman's bid was unsolicited and came just days after David Cote, TRW's chairman, president and chief executive officer, resigned. His resignation triggered a downward slide of TRW stock.

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 Grumman'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 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, TRW said it was "regrettable" that 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, Feb. 19 to become president and CEO of Honeywell Inc.

The merger of Northrop Grumman and TRW would create a defense company with $26 billion to $27 billion in annual revenue. If Northrop Grumman completes the deal, it plans to sell off TRW's automotive parts business.

"This combination would further our long-term strategic goals by strengthening our space business, adding communications technology and capabilities and enhancing our information technology business," said Kent Kresa, Northrop Grumman chairman and CEO. "We expect that once we reach a timely agreement with the TRW board of directors, we will be able to close this transaction in the 2002 third quarter."

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. Northrop Grumman's IT business is led by Herb Anderson.

William Loomis, managing director of the investment banking firm Legg Mason Wood Walker Inc. of Baltimore, said 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 saw 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."

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