Northrop Taking Flight?

WITH ALL DIVISIONS BASED ELSEWHERE, FIRM HAS LESS REASON TO KEEP HQ IN L.A.

NORTHROP Grumman Corp., one of L.A.'s last remaining major corporations, is aggressively reorienting its operational focus to the East Coast, raising questions about whether it might soon abandon L.A. altogether.

The latest sign that the aerospace company may be pulling up stakes came two weeks ago when it agreed to sell its commercial jet-making operations. That $1.2 billion sale to the Carlyle Group of Washington, D.C., includes Northrop's Hawthorne plant, where 1,000 workers make fuselages for the Boeing 747.

Once the sale is complete, Northrop plans to relocate its Dallas-based Integrated Systems and Aerostructures Sector to the Washington, D.C. area. That division makes military aircraft, and a Northrop source said the relocation is being undertaken to put the unit closer to its customers -- the U.S. Air Force Air Combat headquarters in Norfolk, Va., and the Pentagon in Arlington, Va.

The relocation will result in all three of Northrop's divisional headquarters being in the Washington area. Its defense electronics division is based in Baltimore and Logicon, its Internet technology subsidiary, is based in Herndon, Va.

Nonetheless, Northrop says it has no intention of leaving L.A. anytime soon.

"We have a long history in Los Angeles and we have no plans at this point to relocate our corporate headquarters," said Kent Kresa, Northrop's chairman and chief executive. "We've made commitments to our personnel here that we'll stay in Los Angeles for the foreseeable future. Of course, I spend a lot of time in Washington, but with the high quality of electronic communications nowadays, there is really no urgent need to have the corporate headquarters in the same location as the divisional ones."

But "no urgent need" is clearly different than "no need." And industry analysts say a relocation of Northrop's corporate headquarters to Washington could very well be in the cards.

"It doesn't seem to make a whole lot of sense to have your corporate headquarters on the West Coast if all your divisions are based on the East Coast," said Paul Nisbet, president of JSA Research Inc. in Newport, R.I., an aerospace industry research firm.

And Nisbet is not alone in his conclusions.

Transatlantic merger?

"You can't do business in the defense aerospace industry without having top people in Washington, where the decisions are made," said Anita Antenucci, a managing director with Quarterdeck Investment Partners in Washington, D.C. "So it may make sense for Northrop to move (its headquarters there from L.A.). But at the same time, they will look further down the line and may plan to make major acquisitions on the West Coast. On the other hand, if they ever will do a transatlantic merger, as they are always rumored to, they will very likely move to the East Coast."

Ever since the U.S. Department of Justice scuttled the proposed 1998 merger between Northrop and Lockheed Martin Corp., the company has been mentioned as a likely takeover target of various European defense conglomerates, such as DaimlerChrysler Aerospace AG, even though the political obstacles to such a merger would be daunting.

Antenucci believes, however, that smaller-scale, transatlantic joint ventures between Northrop units and European firms provide very good opportunities and could be an additional factor for Northrop to relocate closer to the Atlantic seaboard. In addition, Northrop is said to be in the market for Lockheed Martin's Sanders electronic warfare division, which is based in New Hampshire, and that acquisition would also deepen the company's involvement on the East Coast.

Northrop will hardly be the first L.A.-based company that has its headquarters here but almost all of its operations elsewhere. Occidental Petroleum Corp. and Unocal Corp., for example, have their corporate headquarters in the L.A. area, but neither company has any substantial operations here.

The case of Northrop is slightly different, however, considering that these two oil companies have their operations scattered around the globe, whereas Northrop is concentrating its division headquarters in one area, close to its base of customers.

In recent years, the one-time defense giant has undergone dramatic downsizing in Los Angeles, closing its B-2 bomber plant in Pico Rivera and other aerospace facilities while going from a total of 29,000 local workers in 1990 to about 8,000 today.

At this point, Northrop's main local facilities are in El Segundo, where about 2,500 workers build fuselage parts for the F/A-18 Super Hornets constructed by Boeing Co., and in Palmdale, where about 1,500 workers do upgrades to existing B-2 bombers. An additional 3,000 employees work at Logicon sites in San Pedro and elsewhere in the county and at the company's headquarters in Century City. The other 1,000 workers, at the Hawthorne plant, will soon be Carlyle employees.

Northrop has been diversifying into new market segments since the mid-1990s.

It acquired the defense electronics division of Westinghouse in 1996, and picked up Logicon in 1997. Those acquisitions helped Northrop become a major force in defense electronics before the merger attempt with Lockheed in 1998. But that work was still a relatively minor part of the Northrop's overall operation.

The failed union, together with the dwindling demand for Boeing 747 fuselages and the winding down of the B-2 program, forced the company to rethink where it was going in order to survive as an independent company.

As the war in Kosovo amply illustrated, military superiority is becoming more and more a matter of sophisticated electronic gadgetry and of analyzing and dissecting battlefield information than of bigger bombs and faster aircraft. Hence, Northrop's Electronic Sensors and Systems Sector, which produces such things as the AWACS radar system, and Logicon, which produces software for the Department of Defense, are expected to be the company's growth engines.

The company anticipates that the value of new contracts for electronic sensors and systems will hit $4 billion this year, compared to $3.1 billion in 1999 -- a 29 percent increase.

"Northrop's strategy has made a lot of sense," said Antenucci. "The electronic component is the most important element of modern airplanes, and it is much easier for budget-minded governments to upgrade the electronic system of an existing aerostructure than to be buy a new one."

As a result of the diversification of the company's core business, Northrop's Integrated Systems and Aerostructures (ISA) division accounted for 78 percent of the company's revenue in 1995 but only 55 percent last year. Kresa expects that in the coming years that percentage will decline even further, to between 35 and 40 percent.

Big-stakes program

The future of Northrop's local military aerostructures program will depend to a large extent on the decision about who will build the Joint Strike Fighter for the U.S. Air Force, Navy and Marine Corps. Both Boeing and Lockheed Martin are developing competing models for the JSF in Palmdale, and Northrop is part of the Lockheed Martin team. If Lockheed were to win the mega-contract, the largest ever in U.S. military history, Northrop would handle about 20 percent of the work. For the U.S. military alone, the JSF order is to be a $200 billion-plus contract for 2,852 planes, and the JSF has the potential of an additional $200 billion from foreign sales.

At this point, neither Boeing nor Lockheed has made any commitment about where the fighters would be built. However, there is a good chance that at least part of the work would be done in Los Angeles.

But the Pentagon has discussed the possibility of splitting the project between Boeing and Lockheed, perhaps leaving Northrop out in the cold. Kresa has spent lots of time recently in the nation's capital lobbying against that possibility.