Just months after missing out on one of the aerospace industry's biggest mergers, Northrop Grumman Corp. announced an acquisition last week that helps explain why the company's stock is trading near its 52-week high, and why its long-term prospects remain bright.
Century City-based Northrop has agreed to purchase Torrance-based Logicon Inc. in a stock swap that would be valued at between $672 million and $821 million, based on the current price of Northrop stock.
While the Logicon deal pales next to the $9.5 billion merger of Raytheon Co. and Hughes Electronics Corp. the one that Northrop missed out on analysts said it would greatly improve Northrop's capacity to compete in the area of defense information systems.
But beyond that, it solidifies Northrop's status as one of the aerospace industry's major players not on a par with the likes of Lockheed Martin Corp. and Boeing Co. but enough to survive in the ever-consolidating industry.
"We have said for several years now that we're transforming the company more toward the defense electronics side of the business while maintaining a strong aircraft business at the same time," said J. Gaston Kent Jr., Northrop's director of investor relations.
Generally, Wall Street has been supportive, aside from fallout over the Hughes loss and, to a lesser extent, the loss to Lockheed Martin of a much-followed contract to build the new Joint Strike Fighter.
"Over the past five years," Kent said, "we have outperformed the market, assuming you call the S & P; 500 the market.
"We've been striving to educate the investment community that this company has a very bright future, that our acquisitions will continue, and that we will grow from an $8 billion company in 1996 to a $10 billion company in the year 2000 from internal growth alone," he said.
The stock remains near its 52-week high and first quarter earnings were solidly ahead of the year-ago period.
Paul H. Nisbet, an analyst with JSA Research Inc. in Newport, R.I., says part of the stock's strength is due to takeover fever, but even after several dips, it "has provided a 25 percent rate of total return over the 45 months we have had it on our hold list."
JSA recently upgraded its recommendation to buy from hold, he noted.
For most of the past three years the stock has been "at least a market performer," he said, rising from the $30 range in 1994 to more than $60 in 1995 and $80 in 1996.
"The first quarter report made it clear they had more earnings power than most of the street was thinking," he said.
Nisbet attributes Northrop's stock performance and quick rebound from the disappointments of recent months to Kent Kresa, Northrop's chairman, president and chief executive.
"He has everything to do with it," Nisbet said. "Kent is quietly aggressive, going back to the battle he had to acquire Grumman. You'll notice that he didn't wait long after the Raytheon deal to make this move with Logicon."
Northrop dropped out of the bidding on Hughes when the price got too high, a move that is looking better with time.
"We wanted to acquire Hughes, but we only wanted to acquire it at a reasonable price, so it's not as if someone snatched it away from us," said Kent. "Our primary criterion is shareholder value, and we won't pay a price that would be to the detriment of shareholders."
Analysts generally expect the stock to continue rising perhaps hitting $100 by the end of the year according to one estimate. Such an increase is seen as more reflective of the company's fundamentals than on takeover speculation.
Wolfgang Demisch, an analyst with Bankers Trust New York Corp., points to Northrop's own acquisitions Grumman and the Westinghouse defense and electronics business as evidence of the company's improved competitive position.
Logicon will only enhance that position in defense electronics.
With annual revenues approaching $560 million, the company designs and produces the kind of gee-whiz electronics that have become a big part of the modern military. That includes computer systems that simulate battle conditions without deploying troops or equipment.
What's more, Logicon's profit margins are among the highest in the industry, meaning that when the two companies merge, Logicon's management will likely improve the profit margins of Northrop's defense information operations.
Peter Aseritis, an analyst with Credit Suisse First Boston Corp., said the deal "gives Northrop the ability to compete better in the area of information technology. Without this merger Northrop might have been too small to really compete in that segment."
Aseritis said the costs of the Logicon merger could reduce Northrop earnings for fiscal 1997, but only by a nickel to $6.25 for the year.
"In the long run, this is a positive for the company," he said. "I've said all along that I thought Northrop would make selective acquisitions of this size after failing to acquire Hughes."
If the Logicon merger is approved by shareholders and the government, Northrop plans to form a new Logicon Information Technology Division with anticipated revenues of about $1 billion. It would be headed by Jack Woodhull, Logicon's chief executive and based in Torrance.
Aseritis figures that while the company is smaller than its chief competitors, its ties to powerhouse Boeing bode well for the future.
Northrop Grumman, best known as the prime contractor on the B-2 Stealth Bomber, is also a prime or subcontractor on many other military and commercial aircraft.
The company makes parts for 16 commercial aircraft programs for six major manufacturers, including doors, fuselage and other parts for the Boeing 747 and parts for Boeing's 737, 757 and 777 models.
Northrop is "Boeing's No. 1 substructure contractor, bar none," Aseritis said.
With the commercial aircraft industry on the upswing, Boeing's production is expected to double or triple in the coming years. "Boeing is a huge, huge part of the Northrop story," Aseritis said.
Similarly, on the defense side, Northrop is a huge subcontractor to McDonnell Douglas. Aseritis and Nisbet both said the prospect of more work on both the commercial and military sides gives Northrop a position that's actually stronger than its No. 4 size might suggest.
"The consensus seems to be that the Northrop Grumman consolidation effort has been stalled midway toward completion," Nisbet said. "But we believe that effort will continue."
Added Aseritis: "Assuming that Boeing and McDonnell Douglas will merge and be No. 1, No. 2 is Lockheed Martin and No. 3 will be Raytheon-Hughes. That makes Northrop Grumman No. 4."
For reprint and licensing requests for this article, CLICK HERE.