With its planned acquisition of Litton Industries Inc., Northrop Grumman Corp. is poised to retake its place as one of the top-ranking defense contractors in the U.S.
And if things work out, the deal will also elevate Los Angeles' diminished profile as a center for defense work.
Last week's announcement that Northrop will pay $5.1 billion in cash and assumed debt for Litton is seen as a huge boost for the L.A.-based company, which had become increasingly marginalized between defense powerhouses such as Boeing Co. and Lockheed Martin Corp.
"This is a great deal for Northrop," said Jon Kutler, president of Quarterdeck Investment Partners Inc., which specializes in the defense industry. "A lot of people on Wall Street and in the Pentagon had written them off, and they took a big beating after the deal with Lockheed fell through. But now they're back for prime time."
Three years ago, the Department of Defense nixed a proposed merger between Northrop and Lockheed. The failed merger together with the end of the B-2 bomber program spelled the end of Northrop as an A-list defense contractor, and the company has been refocusing its efforts on defense electronics and information technology.
These have proven very successful niche markets, as the Pentagon is quicker to upgrade a military airplane's electronic system than to order a new airplane. Now the reorganized and reinvented company has been quietly gathering its strength to make a major strategic move and again become one of the nation's main defense contractors.
"They were shut out of being a prime contractor for airplanes, so now (with the purchase of Litton) they are going to become a prime contractor for shipbuilding," said Kutler. "There is a huge psychological benefit in this in terms of the company being perceived as a major player."
Woodland Hills-based Litton is the Navy's third-largest shipbuilder, with shipyards in Louisiana and Mississippi. In addition, the company has defense electronics, information technology and electronic component programs. Litton had been shopping its defense electronics division around this year in an effort to boost its sagging bottom line, and Northrop had been mentioned as a potential buyer given the company's strength in this segment.
Apparently Northrop decided to buy the whole company instead, though there is some doubt that it will hold on to all of Litton's divisions.
"They have never been into shipbuilding, and it would not surprise me if they were to spin off this part," said John Chevedden, a shareholders activist who follows both Northrop and Litton closely. "Their have been concerns about their debt burden recently, and they also have a deferred $1 billion tax obligation."
In a conference call with analysts, Kent Kresa, chairman and chief executive of Northrop, left open the possibility that parts of Litton's operation might be sold off.
"We will look at all (of Litton's) business for cost reductions," said Kresa.
Northrop will finance the acquisition of Litton through debt and issuing additional shares. The combined company will have projected revenues of $15 billion in 2001 and $18 billion in 2002.
According to Kresa, the acquisition will make the company one of the largest federal information technology providers as well as heighten its profile as a defense systems integrator.
In addition, the new powerhouse will give L.A.'s image as a center of defense work a huge boost, after years of decline.
"It will help put Los Angeles back on the map," said Kutler. "Other buyers (of Litton) would have been likely to migrate work out of L.A. But with Northrop being the acquirer, I expect that more jobs will stay in the area."
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