Northrop Grumman
Submits Offer to Takeover TRW
Northrop
Grumman Corporation (NGC) made an unsolicited bid of US$5.9
billion to acquire TRW. With the
assumption of debt, the bid value totals US$11.4 billion. TRW
responded to the offer with a brief statement saying its board of
directors would meet to decide the appropriate course of
action. TRW has advised its shareholders to take no action
while it considers the offer.
TRW has been the
subject of takeover speculation for years. Northrop Grumman's
offer was probably prompted by the unexpected departure on
February 19 of TRW's former chief executive officer, David Cote.
Other likely bidders for TRW might include Boeing, General
Dynamics, Goodrich and Lockheed Martin. Offers from General
Dynamics or Goodrich would likely face less scrutiny from
government regulators than a merger of TRW with Boeing or Lockheed
Martin. Other companies which might also be interested in TRW are
Alliant TechSystems Inc., L3 Communications Holdings Corp. and
GenCorp's Aerojet propulsion business. (GenCorp sold Aerojet's
electronic information systems business to Northrop Grumman in
2001.) TRW may respond by issuing a break-up plan of its own. If
separated, TRW's defense business could attract higher value.
If the merger
were to be approved it would result in four major defense
contractors of roughly equal size: Northrop Grumman, Lockheed
Martin Corp., Boeing Co. and Raytheon Co. The merger could also
start a new round of consolidation in the industry if smaller
companies start to consider mergers, or if other bidders for TRW
emerge.
Under terms of
the offer, Northrop Grumman would exchange US$47 in stock for each
TRW share, an 18 percent premium over the company's closing share
price of US$39.80. Based on the February 21 closing price on
the NYSE, Northrop is offering
0.398 of its shares for each TRW share. Northrop Grumman would
also assume about US$5.5 billion of TRW debt. Immediately
following the close of the transaction, Northrop Grumman would
sell or spin-off TRW's automotive business. Excluding TRW's
automotive business, Northrop Grumman projects combined 2003 sales
of approximately US$26 to 27 billion. The debt-to-capital ratio
for Northrop Grumman would be at 40 percent by the end of 2002.
TRW had 2001 sales of US$16.4 billion. TRW's automotive parts
business accounted for 64 percent of TRW's sales and 58 percent of
profits.
Northrop Grumman
has about 100,000 employees in 44 states and 25 countries. TRW has
about 94,000 workers. About 30,000 of TRW's employees have jobs
with business units Northrop Grumman wants to keep, and there are
no widespread job cuts expected in those divisions.
Northrop Grumman
would benefit most from TRW's satellite production unit, which
makes satellites used by the military for observation and to
coordinate the movement of troops, ships and airplanes. TRW has
built nearly 200 spacecraft. TRW has also been involved in the
U.S. ballistic missile program for nearly 50 years, and is the
Pentagon's prime contractor for intercontinental ballistic
missiles.
Northrop Grumman
has made 14 acquisitions since 1994. In 2001 it acquired Newport
News Shipbuilding for US$2.1
billion. Also, in 2001 it paid US$3.8 billion to acquire Litton
Industries. In 1998 Lockheed Martin attempted to purchase Northrop
Grumman, but abandoned its plans in the face of U.S. antitrust
concerns.
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