If it doesn't get Grumman, what will Northrop do?

Defense giant needs big acquisition, or it will be bought

Like a beautiful woman who must choose between equally eligible suitors, Grumman Corp. could be holding in its hands the fate of Los Angeles County's second largest private employer.

As Grumman faces rival suitors Northrop Corp. and Martin Marietta Corp., at stake locally is perhaps thousands of jobs at Century City-based Northrop, which is being pushed into a proverbial corner in the evolving new defense industry.

Like all suitors chasing a perfect mate, Northrop must make some major strategic moves if it wants to remain competitive and among the biggest defense contractors in the country.

But as of the middle of last week, Northrop was still waiting to learn the fate of its $2.04 billion hostile takeover bid for Bethpage, N.Y.-based Grumman, another defense contractor with about half the number of employees and Pentagon contracts as Northrop.

The stakes are high for Northrop, a company with 1993 revenues of $5.1 billion and 32,800 employees (24,800 in Los Angeles County).

If its bid is rejected by Grumman's shareholders, there would be no immediate impact on Northrop. But in the long run, as its existing Pentagon projects shrink or expire, Northrop needs to pick up some new business or be forced to significantly downsize.

Alternatives for Northrop, said defense industry analysts and experts, is putting itself on the auction block or looking for other acquisitions that may not be as suitable as the Grumman match.

"The general theory on Wall Street right now when it comes to Northrop is that it either has to buy something or be bought," said Ken Frankel, a financial analyst with Drake Capital Securities in Santa Monica. "Something has to happen and probably will. It's just a question of when and who's going to be involved."

On March 10 Northrop submitted a $60-a-share bid for Grumman just days after the company had tentatively agreed to a $55-a-share, or $1.9 billion, offer from Martin Marietta, a Bethesda, Md.-based defense and aerospace company with 1993 revenue of $9.4 billion. Martin Marietta is generally considered the country's largest defense contractor, followed by McDonnell Douglas Corp. and then Northrop. Grumman is the 11th largest Pentagon supplier with Department of Defense contracts worth $2.2 billion a year.

Before the tentative agreement with Martin Marietta, Northrop had made a $50-a-share offer for Grumman.

Last week, there were some analysts who said the bidding war for Grumman may escalate. They noted the bidding could go as high as $70 a share as Northrop has about $2.8 billion available for acquisitions and Martin Marietta has $2.4 billion.

Adding to the corporate drama in mid-week was the emergence of a possible third bidder -- Calabasas-based Lockheed Corp.

The company, an aerospace and defense contractor, released a statement that it "would be pleased to consider other acquisition opportunities." Lockheed declined further comment but the statement was enough to provoke speculation among analysts that the company was preparing to enter the battle for Grumman.

For its part, Grumman remained silent. A spokesman said the company was studying the Northrop offer but did not have a timetable for taking action on either bid.

Grumman's board of directors was scheduled to meet last Thursday, March 17, but the spokesman declined to comment on the agenda.

The central issue at Northrop, and the reason for the Grumman bid, is what the company is going to do as Department of Defense funding continues to shrink and the industry is forced to consolidate.

Despite all the discussion in the industry about converting to commercial work, Northrop's product mix has remained decidedly in the defense sector. Over the past five years, as its annual revenues have fluctuated between $5.2 billion and $5.7 billion, commercial work has accounted for no more than 10 percent of the company's sales.

And roughly one-half of its total sales are tied up in the B-2 bomber project, which is winding down and is scheduled to be completed by 1998.

Hence the moves by Northrop to acquire Grumman. According to industry sources, Grumman had recently failed in efforts to acquire divisions of General Dynamics Corp. and International Business Machines Corp.

Among last week's published reports were also items that Northrop is looking beyond Grumman to possible acquisitions of units of Litton Industries Inc. and Rockwell International Corp.

Other possible moves, according to the published speculation, is that McDonnell Douglas and Martin Marietta may be interested in acquiring Northrop.

But most of the attention was on Northrop's hostile bid for Grumman.

A local industry expert, Jon Kutler, president of Century City-based Quarterdeck Investment Partners Inc., a company that specializes in providing funding for defense companies, said it was a good move for Northrop.

"The company needs to make a big, dramatic move for its shareholders, who are quite aware of the company's previous unsuccessful bids," he said. "The Northrop-Grumman match would be a good one for Northrop. Northrop needs to increase the size of its electronic defense business, which the Grumman deal would do. In addition, Northrop has been an (U.S.) Air Force shop while Grumman has been a Navy shop. And Grumman would give Northrop a large East Coast presence."