Northrop Deal for TRW Makes Sense, for Now
Kresa Pays High Price To Buy Defense Rival
Northrop Grumman Corp. stretched, but didn't break, in paying top dollar for TRW Inc., the prized final piece of the defense-industry superpower that Chairman and Chief Executive Kent Kresa has been assembling for the past half-decade.
That's the consensus from analysts who've been following last week's agreement, which will make L.A.-based Northrop the No. 2 defense industry player after Bethesda, Md.-based Lockheed-Martin Corp.
Even supportive analysts acknowledge that the $60 per share Northrop agreed to pay for TRW after raising its initial offer twice from an original $47 per share is at the upper limit of what was reasonable to pay. The all-stock deal is valued at $7.8 billion plus assumed debt.
"They had to pay up but they started at a low level," said Tom Burnett, president of New York research firm Merger Insight. "We're convinced that on paper, and based on what we know, it's a sensible transaction at a good price for both companies."
The deal's success will come down to a number of factors, chief of which is the clarity of Kresa's vision, which calls for building advanced defense systems working in the air, the sea, on the ground and now in space. But it's also dependent on political factors that will determine whether the dollars envisioned for these systems materialize, and on whether the new Northrop Grumman can deliver from an operational standpoint. Only last year, Reston, Va.-based TRW Systems, which generated $2 billion and $3.2 billion in revenues respectively in 2001. With TRW properties, Northrop's new arsenal of space and electronics products would include:
The Space-Based Infrared System Low (SBIRS Low) is considered one of the most critical elements of the nation's missile defense because it is the program's only global tracking system, providing end-to-end infrared tracking of missiles. TRW is under a $665 million contract to build a yet-to-be-determined number of the missile tracking satellites.
The Missile Defense Agency's budget requests $3.6 billion for fiscal years 2003 through 2007 for the program, although it will extend beyond that period. Plans call for the first constellation of satellites to be launched in 2006 with upgraded versions to be launched in the years to follow.
>Joint Strike Fighter
TRW is manufacturing and integrating communications, navigation and enemy ground and aircraft identification systems for 3,000 Joint Strike Fighters under an existing $800 million contract that TRW officials believe could ultimately be worth as much as $5 billion over the 30- to 40-year production life of the plane.
The JSF contract is the largest in military history and is designed to develop the next-generation of replacement jet aircraft for the Air Force, Navy and Marines.
Northrop currently has a 20 percent stake in a $200 billion contract to build and integrate the center fuselages, weapons bay doors, radars and radar-jamming systems in El Segundo for the fighter.
>Advanced High Frequency System
TRW has won a $1.3 billion contract to build and integrate communications payloads for the Advanced High Frequency (AEHF) system, which consists of two next-generation military communications satellites.
With the country's fight against terrorism in the forefront, the AEHF is considered important because it is designed to track all ground and air forces together as well as help intercept enemy transmissions.
TRW has an unspecified share of a $1.1 billion multi-firm contract to develop the Air Force's first airborne laser, which from a converted Boeing 747 plane would detect, track and destroy enemy ballistic missiles after launch.
The high-powered laser comes with a state-of-the-art optical system capable of guiding a basketball-size spot of heat that can burn through the missile's shell from hundreds of miles away. It is currently the only successfully tested vehicle to destroy missiles right after they have been launched.
The Air Force has ordered 51 of Northrop's unmanned Global Hawk surveillance plane, which is assembled in Palmdale. But it has ordered a 50 percent reduction in costs of the $48.3 million plane.
The Global Hawk is considered the most advanced unmanned airborne vehicle in use by the military, having flown more than 1,000 hours over Afghanistan.
The surveillance craft can travel 350 miles per hour at 65,000 feet high for 35 hours, carrying a 2,000-pound sensor payload. (Next year's model will be able to carry a 3,000-pound payload.)
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