Staff Reporter

Now what?

In the wake of Lockheed Martin Corp.'s decision last week to call off its $11.6 billion merger with Northrop Grumman Corp., the question is whether Northrop can survive on its own, facing larger, more powerful competitors.

As of late last week, analysts were betting that it could although given the roller coaster ride of the last few months, it's really anyone's guess what will happen to Century City-based Northrop.

For the moment, it appears unlikely that another aerospace giant, such as Seattle-based Boeing Co. or Lexington, Mass.-based Raytheon Co., would make a bid for Northrop particularly given the opposition the Lockheed-Northrop merger faced from the U.S. Defense and Justice departments.

"I think Northrop's future is just fine," said aerospace analyst Wolfgang H. Demisch of BT Alex.Brown. "I don't think there's any reason why a Northrop $10 billion defense enterprise shouldn't do quite well going forward."

Demisch said Northrop has a strong future ahead of it in defense electronics and information technology, and as a major supplier of parts for Boeing jets. He and other analysts said it's likely Northrop will continue to build its information-technology business something it started last year when it purchased Torrance-based Logicon Inc., which Northrop last week opted to merge with its Herndon, Va.-based Data Systems and Services Division.

"That could be a precursor to making acquisitions in that area," said Jon Kutler, president of L.A.-based aerospace investment firm Quarterdeck Investment Partners Inc. "Information technology is very fragmented."

Information technology and services account for about $1 billion of Northrop's annual revenues, but the company expects those sales to double over the next five years.

Despite the merger's uncertainty, analysts and company officials said that Northrop has continued as a strong independent competitor. For example, Northrop's acquisition of Logicon happened last August, after the announcement of the proposed Lockheed merger.

Just hours before Lockheed dropped out of the deal last Thursday, Northrop reported net income for the second quarter ended June 30 of $93 million ($1.34 diluted earnings per share), a 13.9 percent drop from $108 million ($1.59 a share) for the like year-earlier period. The company attributed the shortfall to charges related to cost increases in its E-8C and E-2C surveillance aircraft programs, and to plant closures.

But Northrop spokesman Jim Taft said the company's long-term viability cannot be assessed based on one quarter's earnings results. Northrop, he said, is prepared to continue as an independent company.

"Now that the uncertainty surrounding the transaction is behind us, we will continue on our strategic path as a strong, independent competitor in the aerospace marketplace," Taft said. "Northrop Grumman is well-positioned in our chosen markets with a solid business posture and strong long-term growth prospects."

Kutler, Demisch and other analysts agreed. Despite the industry's ongoing consolidation, they don't expect another company to try to take over Northrop in the near future.

Demisch said Boeing has a full plate trying to get its commercial aircraft production up to speed, particularly given its 737 production problems in Renton, Wash. In Raytheon's case, "I have to think that if Lockheed had a big challenge in integrating Northrop in getting past the Justice Department it doesn't seem Raytheon would have a radically easier time," he said.

Nevertheless, he said, "nothing is inconceivable."

Federal regulators opposed the Lockheed-Northrop merger on grounds that it would give the combined company a near monopoly over tactical and strategic aircraft, airborne radar, sonar and other defense systems.

A day before Lockheed's announcement last Thursday that it was calling off the merger, the Defense Department released a statement saying discussions with the companies over settling its merger-blocking lawsuit had been unsuccessful, and that the "government is proceeding with its plans to try the case in court."

That, Lockheed Martin Chairman Vance Coffman said in a statement, is what led the company's board to call off the proposed merger.

"Our inability to reach an acceptable solution, combined with our concern over the litigation with our principle customer, necessitates this decision. Continuing the litigation at this point is simply not in the best interests of Lockheed Martin's customers, shareholders or employees," he said.

The notion that Northrop can continue as an independent company is quite a turnaround from the view a year and a half ago that the aerospace industry would merge until only two or three large aerospace companies were left. But that came at a time when the Defense Department still seemed to be pushing for consolidation of the defense industry.

Since then, Joel I. Klein took over the Justice Department's antitrust division, and Jacques Gansler became the Pentagon's acquisition chief. Both men have made it clear over the past year that they feel it is in the best interests of the federal government to have greater competition within the defense industry.

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