Northrop, Litton mapping steps on acquisition trail?

Two local companies -- Litton Industries Inc. and Northrop Grumman Corp. -- have moved into the forefront of speculation on possible changes in the defense industry.

Fresh off its successful $2.2 billion acquisition of Grumman Corp. earlier this year, Century City-based Northrop is now looking to bolster its electronic communications business by possibly buying Magnavox Electronic Systems Co., said industry sources.

Meanwhile, Beverly Hills-headquartered Litton is the subject of speculation about whether it will buy another defense company or be acquired.

Litton's board of directors added fuel to the speculation fire last Wednesday, Aug. 17, when it approved a shareholder plan that would prevent a hostile takeover.

The next day, Aug. 18, Litton announced a tentative deal to acquire the electronics systems division of Teledyne Inc. of Century City. The Teledyne unit is projecting 1994 sales of more than $150 million. Further details of the proposed deal were not available.

A Litton spokesman said the action was not taken in anticipation of a specific hostile bid by any company or individual.

The spokesman, Robert Knapp, did not reject the possibility of Litton being bought but said the company is "looking at a number" of possible acquisitions. He declined to say how serious those inquiries are but said Litton officials are "talking with people" at several companies about potential deals.

He said the company is interested in any business that can improve its core functions. "That means it can be a small company or a large company or it can mean buying parts of a company or a whole company," said Knapp.

In a statement, Litton's president and chief executive officer, John Leonis, said, "We intend to pursue ... a strategy based on anti-dilutive acquisitions to maintain and grow our leading market positions, selected dispositions of non-core businesses and timely share repurchase programs."

Defense industry sources said Litton, which at the beginning of the year spun off its commercial operations into a separate company, has to take some action to survive a shrinking market.

"Right now Litton is the perfect example of a fence sitter. There is a lot going on around it in the industry but so far Litton hasn't made a move," said one source. "They're going to have to do something."

Litton is an electronics and military shipbuilding company with annual revenue of about $3.5 billion. Since it spun off its commercial business, about 90 percent of Litton's work is related to military contracts and it has said it will remain in the defense industry.

Since it beat out Martin Marietta Corp. in March to acquire Grumman, Northrop has moved up in rankings of defense companies and is now considered a prime contender in the acquisition field.

According to sources who did not want to be named, Northrop is interested in Magnavox because of its expertise in electronic communications equipment, including airborne radio systems.

Northrop, with pre-Grumman 1993 sales of $5 billion, produces high-tech weapons, communications and surveillance systems. It also builds the B-2 stealth bomber and is a major subcontractor on the F-18 military fighter program. Northrop also makes the fuselages for the commercial 747 aircraft.

A Northrop spokesman, Jim Hart, said it is company policy not to comment on speculation about possible business deals.

Adding to the speculation about a possible Northrop-Magnavox deal is the fact that the Fort Wayne, Ind.-based company is owned by the Carlyle Group, a Washington, D.C.-based investment company. Northrop and Carlyle have a history of successful deals.

Just last month Northrop and Carlyle announced a tentative agreement for Northrop to buy Carlyle's 51 percent interest in Vought Aircraft Co. in Dallas.

In 1992, Northrop bought 49 percent of Vought form Carlyle. Vought manufactures military and commercial aircraft.

Carlyle representatives did not return phone calls for comment, and officials at Magnavox were unavailable for comment last week. Magnavox, with a facility in Torrance, has commercial and defense segments and was bought by Carlyle two years ago.

"It's Carlyle's practice to buy a company and then sell it," one analyst said. "That's what it does."

One analyst, Paul Nisbet of JSA Research in Newport, R.I., said an important factor against a possible Northrop-Magnavox deal is Northrop's debt. Since the Grumman deal, it has gone up to more than $2 billion from $160 million at the end of first-quarter 1993.

Alfred Pastore, managing director of Moody's Investors Service, a New York-based credit rating firm, said he could not comment on specific companies but the defense industry is consolidating.

"Half the defense companies out there have been involved in deals so far and I expect that the other half will be too," he said.