Northrop plans to expand with London bridge: contractor hopes European Union contracts can offset expected slowdown in U.S.

When Northrop Grumman Corp. opened a United Kingdom-based European subsidiary last week, it highlighted an unpleasant fact for it: war-fueled defense spending in the United States is expected to slow.

But with the creation of Northrop Grumman UK Ltd., the Los Angeles-based defense contractor is betting that it can take advantage of defense and homeland defense work across the Atlantic.

"Nearly every other defense contractor has a presence in Europe, and it was only a matter of time before Northrop established a position," said Paul Nisbet, an analyst with Newport, R.I.-based JSA Research. "There will be a lot of business over there and now we're seeing a lot of jockeying for position."

An example of such work in Europe is the Identl program, a $250-million biometric identification system Northrop developed for the U.K. It is part of an integrated computer system linking more than 50 police forces and agencies in England, Wales and Scotland.

Most European countries haven't even begun the huge endeavor of integrating their homeland defense systems amid the looming threat of terrorism.

"Northrop is really ramping up and preparing for growth here," said Ken Beedle, a spokesman for Northrop's European operations. "That is our main objective--to expand business. The civilian-side business, mainly in ID management, is an area where, given Northrop's strengths, we feel we can excel in and an area where there is great growth potential."

However, with the new office, Northrop will still seek European defense contracts. Northrop already has a contract for support on the Royal Air Force's E-3D airborne warning and control system aircraft, worth about $1 billion over 15 years. It has another contract for the Royal Navy's new Type 45 destroyer ships.

Northrop has been doing business in the U.K. and Europe for years, but the creation of the British holding company signals a commitment to the continent. The new company. located in London, will act as a headquarters for all its business in Europe. Northrop already has close to 3,000 employees scattered across the continent.

Last year, Northrop did about $400 million worth of business in Europe--only a fraction of the company's $37 billion in worldwide and annual revenue--but the pace of European business is expected to accelerate.

IT growth

Aside from defense contracting, one of the company's strengths is in non-defense information technology, a sector that is expected to undergo tremendous growth in Europe. That's something driven partly by; the need for government agencies to increase their communication infrastructure as European Union countries further integrate.

The company is already the second-largest provider of such services to the U.S. government, doing some $5 billion a year in business.

And that's in a sector that was essentially non existent a few years ago. A recent study predicts that federal funding for U.S. information technology projects will hit more than $120 billion in 2007. with the lion's share doled out by the Department of Homeland Security.

This year, for example, Northrop has won contracts from the Los Angeles Police Department for refurbishing and increasing capabilities of its communication systems; from the Department of Justice for help desk services and information technology management services; and from the Department of Homeland Security for development, implementation and management of biometric identification systems, among many other contracts.

That level of business prompted Northrop to recently form a separate business group within its information technology unit called the Civilian Agencies Group, which will deal exclusively with non-defense government information technology projects.

"Northrop has seen the cyclical nature of the defense market and they are simply placing some of their bets elsewhere," said Jon Kutler, founder of Los Angeles-based Admiralty Partners, a defense sector private equity firm.

Nisbet, the JSA Research analyst, said the move into Europe is a necessary strategy by Northrop in order to begin the long process of building relationships and laying groundwork for future contracts.

Northrop's move to expand in Europe comes as times are good for the company, which has seen its revenue and profit more than double since 2001. But with the war in Iraq appearing to reach its apex amid widening sentiment for a pullout, defense spending will inevitably slow.

However, Kutler said major consolidation among international defense contractors over the last decade means that there will be more work for U.S. companies in Europe.

Indeed, the current incarnation of Northrop was formed by the 1994 merger of Northrop Aircraft and Grumman Aerospace. And since then the merged company has bought up a series of rivals, including TRW, Litton Industries and Newport News Shipbuilding.

"The U.S. is the leading country and naturally other nations will turn to U.S. companies to get the work done," Kutler said.

BY ALLEN P. ROBERTS Jr.

Staff Reporter