Northrop Grumman To Acquire Litton

Friday, December 22nd 2000, 12:00 am

By: News On 6

LOS ANGELES (AP) â€” One of the nation's largest defense contractors â€” building everything from airplanes to Navy destroyers â€” could be formed if a merger between Northrop Grumman Corp. and Litton Industries Inc. is approved.

Northrop said Thursday it will buy Litton for $3.8 billion in cash. The comany will also assume $1.3 billion in Litton debt.

Company leaders are optimistic they'll get approval for the deal, saying it could be consummated by the first quarter of 2001.

The combined companies will create products for virtually every branch of the U.S. military, including destroyers, planes and electronics.

Under the deal, Northrop Grumman will pay $80 per Litton common share. Shares of Litton soared 24 percent, or $15 a share, to $77.63 in midday trading Friday on the New York Stock Exchange. Northrop Grumman shares slumped 8.6 percent, or $7.06 a share, to $74.88.

If approved by regulators, the combined company will have $15 billion in revenues in 2001, growing to $18 billion by 2003, the companies estimated.

The combined company would have approximately 79,000 employees, although Northrop Grumman chairman and chief executive officer Kent Kresa said there would be some layoffs, particularly as the companies consolidate their headquarters.

Northrop Grumman makes weapons systems, including radar and navigation systems. Litton Industries builds non-nuclear ships for the Navy and provides advanced information technology for commercial and defense customers. Both companies are based in Los Angeles.

The companies said they expect to save more than $250 million over the next few years as a result of the deal, including $100 million in the first year following the transaction.

``Some of it is in people reduction, particularly at the headquarters,'' Kresa said. ``This is a growing corporation. We have need for people. I can't speak to layoffs. We would hope there are good people who are flexible and can move into other areas.''

The companies said they expect the transaction to close sometime in the first quarter.

Company executives said informal talks had been ongoing for years, but that the two firms signed a confidentiality agreement and pursued a deal in earnest in June.

``We were in control of the process to examine our strategic alternatives,'' Michael R. Brown, Litton's chairman and chief executive officer, said. ``It was our election to accept an overture by Kent, 'We should get together and talk.' But at anytime, we both had the opportunity to walk.''

Following the close, Litton will be operated for six months as a wholly owned subsidiary. Ronald D. Sugar, currently Litton's president and chief operating officer, will become Northrop Grumman's corporate vice president and president and chief executive officer of the new Litton subsidiary, the companies said.

After six months, Kresa said decisions will be made on how to more fully integrate the two operations.

Brown said he plans to retire.

The companies said they do not expect any regulatory problems. A proposed purchase of Northrop Grumman by Lockheed Martin in 1998 was scrapped because of government opposition.

``We feel there is virtually no overlap here, where there was great concern in the Lockheed Martin, Northrop Grumman merger,'' Kresa said. ``We think this will not be a problem.''

Kresa said his company briefed Pentagon officials on the proposal Thursday afternoon and would be ready to supply the government with data supporting the acquisition after the new year.

``We believe the case can be made,'' Kresa said. ``The data is not complex. We've done this many times.''

One problem might come from a subsidiary of Northrop Grumman's Logicon division, which is based in Herndon, Va., and provides information technology services.

Logicon generates about $2 billion in annual revenue, some of it from a program reviewing systems on Navy ships manufactured by Litton. Kresa said the subsidiary accounts for ``tens of millions'' of Logicon's revenue.

``There might be a conflict of interest being both the reviewer and the builder,'' Kresa said.

He said he hoped the Navy would allow the company to enact procedures to avoid a conflict. But if the Navy requires the company to sell the subsidiary, it would.

The deal was praised by analysts.

``It's a really nice fit,'' said Thomas Meagher, an analyst with BB&T Capital Markets.

Meagher said Northrop Grumman is paying 1.2 times Litton's revenue, which is at the high side for such deals.

``The fact they chose to pay 1.2 times revenue recognizes the size of Litton and the increased mass it gives them,'' he said.

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On the Net:

Northrop Grumman: http://www.northropgrumman.com

Litton Industries: http://www.litton.com