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.