NORTHROP TO BUY LITTON MERGER COULD PUT VALLEY HQ OUT OF BUSINESS.

Byline: Jesse Hiestand Staff Writer

Northrop Grumman Corp. will buy Woodland Hills-based Litton Industries Inc., for $5.1 billion, combining Los Angeles' last two major defense contractors in a deal that could further erode the industry in the San Fernando Valley.

Executives at Century City-based Northrop Grumman, which announced the deal after the market closed Thursday, said Litton would become a wholly owned subsidiary during the transition but that restructuring is planned. Officials noted the greatest impact would be felt in headquarters offices since the companies largely operate in different areas.

The combined companies would be one of the world's largest defense and aerospace firms, with $15 billion in revenue, merging Northrop Grumman's aerospace and information technology expertise and Litton's massive military shipbuilding and electronics business.

``We think this is an extraordinary opportunity for Northrop Grumman, for Litton and for Southern California,'' said Kent Kresa, Northrop Grumman's chairman and president, at a Century City news conference. ``We think this is a win-win for our customers, our shareholders and our employees.''

Northrop Grumman plans to use cash to buy outstanding shares of Litton for $80 per common share and $35 per Series B preferred share. Litton's stock closed Thursday at $62.62. The $5.1 billion deal includes assuming $1.3 billion of Litton debt.

The new company will ultimately have one headquarters, calling into question the future of Litton's corporate headquarters in Woodland Hills, where it employs 3,000 of its 40,000 workers.

Northrop Grumman spokesman Jim Taft said the company has no intention of moving out of its Century City headquarters. Litton divisions based in Woodland Hills will remain in operation.

Needs approval

The deal still requires approval of the Department of Defense and other federal regulatory agencies, but executives voiced confidence it can be accomplished within the first quarter of 2001.

The Northrop-Litton merger should produce about $100 million in cost savings in the first year and at least $250 million over the next few years, officials said.

No immediate plans for specific divisions of the companies were announced.

Litton employees said talk of the buyout, which had been under negotiation for about six months, has been rampant in the past month. One engineer, who declined to give his name, said he was glad it was over.

``We don't know if it's good or bad, but it's been hanging over our heads for quite a while,'' he said. ``Originally, they said they were selling only 12 divisions. It was a big surprise that Northrop Grumman bought the whole thing.''

Northrop was believed to have considered buying the 12 divisions of Litton's Advanced Electronics Group when Litton put it up for sale in October.

Northrop Grumman, with 39,000 employees and annual revenue of $9 billion, is the nation's fifth-largest defense contractor, creating information systems and electronics. For the U.S. Air Force, it makes the Joint STARS battlefield surveillance system and AWACS radar as well as upgrades and maintenance for the B-2 stealth bombers.

Builder of ships

Litton, the No. 7 defense contractor, with almost $6 billion in annual revenue and 40,000 employees, makes navigation, guidance, electronic warfare systems and electronic components. It is the leading builder of non-nuclear ships for the U.S. Navy and also designs, builds and overhauls surface ships for the government and commercial customers worldwide.

The merger is a continuation of Northrop Grumman's previously announced plans to strengthen its electronics and systems integration sectors as it continues the move away from its airframe manufacturing business, said John Harbison, a defense industry analyst with Booz-Allen and Hamilton, a national aerospace and defense consulting firm.

``It's no longer the center or core of the company,'' Harbison said. ``They used the flow of cash from the B-2 program to accomplish the move to electronics.''

The fact that both companies have their corporate headquarters in Los Angeles should help with the merger process and lessen the chances for disruptions, Harbison said.

``We expect there would be cost benefits, and cost benefits translates into fewer people. I don't think their endgame is to have two corporate headquarters 30 miles apart.''

Post-Cold War cuts

The merger is another example of post-Cold War consolidation of defense companies, like Lockheed joining with Martin-Marietta and McDonnell-Douglas being purchased by Boeing.

Northrop bought Grumman in 1994, then Vought Aircraft the same year. Northrop Grumman bought the defense and electronics systems businesses of Westinghouse Electric Corp. in 1996.

The consolidations have been driven by the end of the Cold War and the reduction in defense spending.

``My first thought is I'm glad to see Northrop Grumman strengthen themselves,'' said Assemblyman George Runner, R-Lancaster, whose district includes a stealth bomber modification plant in Palmdale. ``There had been a great deal of speculation about Northrop Grumman being consolidated into one of the other prime contractors. If they can strengthen themselves it is a good thing.''

The two companies overlap in defense electronics.

``My sense is Northrop may try to cherry-pick pieces of that and sell the rest,'' said Thomas Meagher, an analyst with BB&T Capital Markets in Virginia.

Each company also provides information technology systems for the federal government, which if combined would generate up to $4 billion in revenue, about half the size of El Segundo-based Computer Sciences Corp.

One Litton division that does not appear to be an obvious fit is electronic components, which is highly profitable but geared to the commercial market.

``We certainly will attempt to keep the very good Litton people in their role in this new company,'' said Kresa, adding he hoped to grow revenue from $15 billion to $18 billion by 2003. ``Integration may free up some people so we may not have to hire as many as we're looking at today.''

Michael R. Brown, Litton's chairman and chief executive officer, plans to retire and will be replaced by Ronald D. Sugar, currently the company's president and chief operating officer.

Kresa said he did not anticipate anti-trust problems.

Defense giant Lockheed Martin called off its $8.3 billion deal to buy Northrop Grumman in 1998 because of government concern it would reduce competition in electronics and missile warnings systems.

Last year, Litton sought to buy Newport News Shipbuilding Inc. but withdrew its bid in the face of federal opposition because it would reduce the number of major military shipbuilders from three to two.

``The only down side is we lost another corporate headquarters,'' said Jack Kyser, chief economist of the Los Angeles County Economic Development Corp. ``But it is staying in Southern California and it makes Northrop Grumman much more competitive. They were at an awkward size before and if this goes through, they should be able to compete with anyone.''

Staff Writers Harrison Sheppard, Jim Skeen, Rick Orlov and Brent Hopkins contributed to this report.

CAPTION(S):

2 boxes

Box: (1) Litton Industries Inc.

(2) Northrop