Aggressive acquisitions yield vastly different fortunes. (Banking & Finance: Special Report - To Deal or Not to Deal).

They're two of the biggest companies in Los Angeles.

Northrop Grumman Corp. is a major defense contractor that built the B-2 bomber and the Global Hawk reconnaissance plane. Universal Entertainment Group, part of the French conglomerate Vivendi Universal SA, is so much a part of the local fabric that its complex is vast enough to be called Universal City without irony.

Both trace their roots to early days of 20th century, when they were among the pioneering firms that helped define the modem Los Angeles economy: Northrop in aerospace and Universal in motion pictures and real estate.

Now, in the early years of a new century, Northrop and Universal share another distinction -- seeing the outcomes of the merger and acquisition activity they carried out in the 1990s.

Those outcomes could hardly be more different.

Today, Northrop is considered the model roll-up. In less than three years, acquisitions of TRW, Litton Industries and Newport News Shipbuilding have transformed it from a fading player to the nation's No. 2 defense contractor.

Universal, though, is in flux. Liquor industry heir Edgar Bronfman Jr.'s attempt to build a media and entertainment empire by joining forces with Vivendi is in tatters, and the company likely will be broken apart. Vivendi's board fired Chairman Jean-Marie Messier last July.

"Those are big messes, to be honest," said Michael Montgomery, president of Digital Coast Partners, a Santa Monica-based investment bank, referring to Vivendi as well as AOL-Time Warner Inc., another media empire on the critical care list.

Merger mania

Simply put, some mergers work, some don't. The problem is that during the go-go '90s, it was assumed that they would all work. Worse still was the rush to cut deals, sometimes based on little more than high-flying stock prices and the vague idea that bigger was somehow better. Why not sell customers CDs and mutual funds along with insurance? Why not run three, or 13, businesses with one chief financial officer?

There were the obligatory press conferences announcing these massive deals, with executives from the two companies shaking hands and promising the moon. What many of them failed to admit -- or perhaps even consider -- was that amid all the bright talk about synergy, debt accumulation loomed in the distance.

Greed also got the better of some executives, who fudged numbers to make their strategies look more successful. The Internet threw a gigantic wild card into the mix. Not knowing which direction it would take things, Wall Street placed bets on everything.

Now, as investors continue to lick their wounds, many companies must figure out what to do with what in some cases has become a hodgepodge of assets.

"In the '90s you had all these strategic acquisitions. But then you had it going to an extreme, where people convinced themselves that a water and wireless cable company in France somehow makes sense with a music and movie company in California," said Paul Wachter, chief executive of Main Street Advisors, an asset management firm in Santa Monica.

Vivendi Universal is just one of the companies trying to survive in the aftermath of merger excess.

Universal got its start in 1909 in New York, when Carl Laemmle founded Independent Motion Picture Co. Three years later he changed the name to Universal Pictures, and in 1915, after assembling Universal City, he moved the studio west.

In 1950, Decca Records bought the company and was in turn purchased by MCA Inc. in 1962. By 1990, when MCA was purchased by Japan's Matsushita Electrical Industries, the company was valued at $6.6 billion and included a movie studio, TV production company and theme parks.

Matsushita struggled for a few years to mesh with the show biz crowd before finally giving up in 1995. That's when the real trouble began -- Edgar Bronfman Jr., heir to the Canadian Seagram beverage fortune, sold his family's 24 percent stake in DuPont Co. to buy an 80 percent stake in MCA for $5.7 billion.

He embarked on what all agreed was a rocky stint in Hollywood. An aspiring songwriter, Bronfman purchased PolyGram Records for $10.4 billion, turning Universal Music Group into the world's largest music company. He was criticized for over-paying, and even his family was wary of his forays into the entertainment business.

Five years later, the sale of MCA to Vivendi offered what appeared to be a successful exit strategy. At a price of $34 billion, the Bronfman family came out with what was, at the time, a profit on its MCA investment. But the all-stock deal left the family with an 8 percent stake in Vivendi. For the investment to work out long term, the merged company had to be successful.

In June 2000, Messier explained the deal to investors in the U.S. and overseas. His pitch: Vivendi's communication assets, which had tens of millions of subscribers connected via cellular phones, Internet and digital television, would deliver content from Universal's film and music properties.

But even in the '90s, that was a hard sell.

"I never understood what they were about in the first place. I thought they were a French water company;" said Dennis McAlpine, managing partner of McAlpine Associates, a Scarsdale, N.Y.-based equity research firm that focuses on entertainment companies.

A crucial shortcoming of the Vivendi-Universal strategy was that it depended on selling entertainment services no one had ever bought before. The company also tried to reap cost savings on a group of assets that ultimately proved to be unwieldy. To top it off, Vivendi increased its risk by borrowing heavily to finance its gamble.

When the plan didn't pay off, the company was left with an immense debt load of $41 billion, fully 67 percent of its total value.

To get the finances in order, Messier's successor, Jean-Rene Fourtou, has been trying to sell off huge pieces of the moribund firm, which could include the Universal assets. But he's inherited a dog pile of the old team's deal-making errors -- including giving entertainment executive Barry Diller certain leverage (no one can quite agree how much) to prevent a sale of Universal properties.

"Clearly they're going to get rid of the entertainment assets. They could be divided up all over the place," McAlpine said.

Visionary

At Northrop, the crisis came in the early 1990s, when the defense contractor had only one major project left, the B-2 Stealth bomber. Founded in 1932 by engineer John K. Northrop, the company was facing declining prospects. The Berlin Wall had come down, defense budgets were shrinking, and understated Chief Executive Kent Kresa wasn't exactly setting Wall Street afire.

One thing Kresa did have was a plan.

"He had a vision of where he wanted to go before the industry did," said Jon Kutler, president and chief executive of Quarterdeck Investment Partners, a Santa Monica investment bank that specializes in defense transactions. "If you talked to Kent Kresa a decade ago, there were these (building) blocks in his mind. He just didn't have the names attached;' said Kutler, whose firm is now part of Jefferies &Co.

Kresa envisioned a battlefield strategy now known as net-centric warfare. Generally speaking, it's the use of technology -- drones, unmanned vehicles, electronic sweeps -- to measure the opponent, and using advanced communications to more closely coordinate the constituent parts of a fighting force.

Net-centric warfare allows one ship to fire another ship's weapons, for example, and gives a Marine on the ground a better sense of the larger battlefield.

As any decent general would, Kresa moved quickly to press his advantage. Two large acquisitions, Grumman Corp. ($2 billion) in 1994 and Westinghouse Defense ($3.6 billion) in 1996, gave Northrop needed girth and access into radar and electronic systems for aircraft.

Smaller deals followed: Logicon in 1997, for command, control, communications and intelligence systems; and Sterling Software in 2000 for communications and air traffic management, were among them.

Still, Northrop was considered a second-tier defense firm, and by 1998 it was on the verge of being acquired by Lockheed Martin Corp., the No. 1 defense contractor. Then, unexpectedly, federal regulators blocked the deal on antitrust grounds. Suddenly, Northrop was on its own - and some said on death's door. But Kresa remained determined to enter the industry's big leagues.

With the company's three most recent deals -- the 2001 purchase of Litton Industries ($5 billion); the acquisition of Newport News Shipbuilding ($2.6 billion) later that year, and the just-completed acquisition of TRW Inc. ($10.7 billion) -- that is now a reality.

Northrop has a strong presence in all the major weapons categories: air, sea, land and even space. And it has communications systems to link them all together.

"I really like what I've seen over the last year or so, in terms of expanding their plat forms," said Domenick Fumai, a debt analyst following Northrop for BNP Paribas. "They have the broadest (product) portfolio of any of the major defense contractors."

Even with these big deals, Northrop has avoided taking on too much debt. While the early deals were mainly cash, Northrop of late has used its higher stock price as currency. The TRW deal, for example, will actually lower the debt-to-capital ratio, after the completion of the sale of TRW's automotive business to Black-stone Group.

The biggest challenge is to make it all work together. In that regard, Fumai and other analysts are eased by Northrop's strong track record of integrating its acquisitions, and the presence of Chief Operating Officer Ronald Sugar, heir apparent to Kresa, who reached the upper echelons of TRW before joining Litton and then Northrop.

Northrop's integration strategy, of keeping the new business unit operating as a standalone division, helps minimize the chance of disappointment. By keeping them separate, Northrop brass can get a sense of the new company's profit and loss statement, and figure out what ways the new unit can complement existing operations.

"I think that makes sense, because you and your investors have a much better understanding of the business;' Fumai said.

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Northop Grumman

Once reliant largely on the B-2 bomber, diversification has bolstered
firm's fortunes.

Stock Prices

Feb. 12, 2002  $108.02
Feb. 12, 2003   $91.40

Note: Table made from line graph

Vivendi Universal

Water company's foray into filmmaking, like '8 Mile,' has foundered
under weight of debt.

Stock Prices

Feb. 12, 2002  $41.15
Feb. 12, 2003  $15.45

Note: Table made from line graph