Northrop to Buy Litton for $3.8 Billion

L O S  A N G E L E S, Dec. 22, 2000 -- One of the nation’s largest defensecontractors — building everything from airplanes to Navy destroyers— could be formed if a merger between Northrop Grumman and Litton Industries is approved.

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

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

Servicing the U.S. MilitaryThe combined companies will create products for virtually everybranch of the U.S. military, including destroyers, planes andelectronics.

Under the deal, Northrop Grumman will pay $80 per Litton commonshare. If approved by regulators, the combined company will have $15billion in revenues in 2001, growing to $18 billion by 2003, thecompanies estimated.

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

Northrop Grumman makes weapons systems, including radar andnavigation systems. Litton Industries builds non-nuclear ships forthe Navy and provides advanced information technology forcommercial and defense customers. Both companies are based in LosAngeles.

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

“Some of it is in people reduction, particularly at theheadquarters,” Kresa said. “This is a growing corporation. Wehave need for people. I can’t speak to layoffs. We would hope thereare good people who are flexible and can move into other areas.”

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

Company executives said informal talks had been ongoing foryears, but that the two firms signed a confidentiality agreementand pursued a deal in earnest in June.

“We were in control of the process to examine our strategicalternatives,” Michael R. Brown, Litton’s chairman and chiefexecutive officer, said. “It was our election to accept anoverture by Kent, ‘We should get together and talk.’ But atanytime, we both had the opportunity to walk.”

Transitional PeriodFollowing the close, Litton will be operated for six months as awholly owned subsidiary. Ronald D. Sugar, currently Litton’spresident and chief operating officer, will become NorthropGrumman’s corporate vice president and president and chiefexecutive officer of the new Litton subsidiary, the companies said.

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

Brown said he plans to retire.

No Regulatory ConcernsThe companies said they do not expect any regulatory problems. Aproposed purchase of Northrop Grumman by Lockheed Martin in 1998was scrapped because of government opposition.

“We feel there is virtually no overlap here, where there wasgreat 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 theproposal Thursday afternoon and would be ready to supply thegovernment with data supporting the acquisition after the new year.

“We believe the case can be made,” Kresa said. “The data isnot complex. We’ve done this many times.”

One problem might come from a subsidiary of Northrop Grumman’sLogicon division, which is based in Herndon, Va., and providesinformation technology services.

Logicon generates about $2 billion in annual revenue, some of itfrom a program reviewing systems on Navy ships manufactured byLitton. Kresa said the subsidiary accounts for “tens of millions”of Logicon’s revenue.

“There might be a conflict of interest being both the reviewerand the builder,” Kresa said.

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

Warm Reception on Wall StreetThe deal was praised by analysts.

“It’s a really nice fit,” said Thomas Meagher, an analyst withBB&T Capital Markets.

Meagher said Northrop Grumman is paying 1.2 times Litton’srevenue, which is at the high side for such deals.

“The fact they chose to pay 1.2 times revenue recognizes thesize of Litton and the increased mass it gives them,” he said.