Northrop Grumman Corp., just weeks away from the expected approval of its $5.1 billion acquisition of Litton Industries Inc., is aggressively moving to retake its position as a premier defense contractor.
Poised to almost double in size, it is suddenly empowered to compete for contracts for which it was not formerly in the running.
“(With the Litton acquisition), they now have the in-house resources to compete for much larger contracts,” said Thomas Meagher, an analyst with BB & T; Capital Markets. “Regardless of whether you’re looking at manufacturing or services, size matters. This acquisition really bolsters their competitive position in both of those areas.”
While the merger will bolster Northrop’s prowess overseas, it is here in the U.S. that its newfound clout will bear the sweetest fruit, industry observers said.
“The Pentagon wants one-stop shopping,” Meagher said. “They don’t want to award three different contracts for procurement of hardware, systems integration and maintenance. By default, only the folks with the most capabilities can manage those (contracts.)”
Century City-based Northrop isn’t wasting any time launching efforts to land several gorilla contracts. Among them are:
>A thick slice of President Bush’s proposed $60 billion missile defense shield, which would consist of intelligence-gathering systems and lasers or small missiles to intercept and destroy enemy missiles launched at American and allied targets.
>A design contract to be awarded in April for the Navy’s next-generation DD-21 Zumwalt land attack destroyer. Thirty-two of the ships are to be delivered between 2005 and 2020, at an estimated total cost of $25 billion. Construction contracts for 16 of those ships are expected to be awarded to defense teams headed by Litton, which is the largest producer of non-nuclear ships for the Navy, and General Dynamics Corp. Northrop previously had only a meager role as a systems integrator on the Litton team.
>A contract for a yet-to-be-determined number of unmanned Global Hawk high-altitude reconnaissance planes, which the Air Force is looking to buy for $16 million each beginning in 2005. Northrop has already been awarded an $84 million development contract for the plane.
But the latest metaphor of Northrop’s aggressive strategy can be seen in the $35 million that the company invested in the Pegasus unmanned demonstrator surveillance aircraft, a model of which was rolled out of an El Segundo hangar last week to great fanfare.
Demonstration project
The aircraft, now being tested at the China Lake Naval Weapons Test Center, will not be mass produced. Its sole purpose is to showcase the aerodynamic prowess of Northrop as evidence of the company’s commitment to remaining a prime contractor in systems integration.
The imminent re-emergence of Northrop as a top-tier defense contractor comes after a long period during which Los Angeles was on the losing end of aerospace/defense mergers. Northrop, in fact, had been considered a sitting duck takeover target ever since the Pentagon firebombed its proposed sale to No. 1 contractor Lockheed Martin Corp. in 1998.
The acquisition of Litton’s assets and capabilities, coupled with Northrop’s status as a leading information technology and defense electronics firm, ensures the company will remain among the handful of Fortune 500 companies based in the city.
“After the failed acquisition of Northrop Grumman by Lockheed Martin, Wall Street and the Pentagon were quick to write Northrop Grumman’s epitaph,” said Jon Kutler, president of Quarterdeck Investment Partnerships Inc., a defense consulting firm. “With the Litton deal, they are now back on center stage. They have regained their status as a critical player in the industry. And after a decade of prime contractors leaving L.A. through mergers, it is a shot in the arm to the local community to have these two players joined together. Another acquirer of Litton would have been much more likely to tear apart the company and migrate work from Southern California to less-than-capacity facilities elsewhere.”
Final approval of the Northrop/Litton merger from the Pentagon and the European Union is expected to come as early as the end of this month, authorities said.
Elevated status
The merged company’s projected $15 billion in revenues in 2001 would make it the No. 3 or No. 4 contractor, at worst trailing only No. 3 Raytheon Co., No. 2 Boeing Co. and Lockheed, analysts and company officials said. Northrop also has revised upward the revenue projections for its existing operations, excluding Litton. It is now projecting those operations to generate revenues of $9 billion this year and $9.5 billion to $9.8 billion next year.
The alliance will create a combined workforce of more than 80,900 employees, including 10,200 in the Los Angeles area.
However, Litton’s Woodland Hills headquarters is expected to close, sending nearly all of its 250 employees packing, said Randy Belote, a Litton spokesman.
“It’s already made very clear that Northrop Grumman has no desire to have two headquarter operations,” he said. “The Litton Industries headquarters will go away.”
The new company will realize $250 million in savings over the next few years as a result of post-merger consolidation moves, Northrop officials said.
Nonetheless, the merger will not result in a mass exodus of jobs to out-of-state headquarters, as have earlier defense mergers, analysts pointed out. Indeed, the number of defense industry jobs in Los Angeles County has dropped from 274,000 in 1988 to 113,800 today, records show.
Overall, Northrop’s Los Angeles employee base has dwindled from 35,300 people in December 1987 to about 7,000 today.
“Defense industry consolidation resulted in a vastly changing landscape for those companies that remained in business,” said Bob Bishop, a Northrop spokesman. “That period was a very tough time for Northrop Grumman and the defense industry in Southern California.”
Trail of acquisitions
Northrop has not been sitting idly since the cutbacks, however. It has quietly been buying subcontracting companies as part of a strategic plan to shift its focus to systems integration. Its purchases include:
> Westinghouse Defense Electronics, a Baltimore radar manufacturer, in 1996.
> Logicon Inc., a Torrance-based information technology software company in 1997.
> Ryan Aeronautical Center Corp., a San Diego firm specializing in the development and production of unmanned air vehicles, in 1999.
“We had to prepare,” said Jim Hart, a Northrop spokesman. “Where was our next business going to come from?”
And with those earlier acquisitions, Northrop enjoyed a certain amount of success in winning sizable contracts. Among its recent awards are:
>A contract to produce the center and rear fuselages, twin vertical tails and all of the electronic systems for 548 FA-18 Super Hornet fighter jets that the Navy will buy through 2010 for $40 million each, with Northrop raking in 40 percent.
>A $300 million contract awarded in late February to Northrop for radar systems in four of Australia’s Airborne Early Warning and Control aircraft as part of its Project Wedgetail program.
>A $2 million initial design contract for the Naval Unmanned Combat Air Vehicles, designed to blow up enemy land-based missile and radar sites and conduct surveillance operations.
“We’ve had a few rough years where people wondered if we were going to survive,” Kent Kresa, Northrop’s president and CEO, told the audience at the rollout of the Pegasus. “Well, you know what? The sun’s coming out and we’re back.”
