STRONG DEFENSE PLAYER EMERGES NORTHROP, LITTON MERGER A REALITY.

Byline: Jesse Hiestand Staff Writer

Playing to their strengths is more than good business strategy for Northrop Grumman Corp. and its new subsidiary, Litton Industries Inc. - it's precisely where military spending is heading in the next decades, analysts said Tuesday.

The two companies, which formally combined Tuesday, most closely complement each other in defense electronics and information technology, areas where U.S. forces hope to gain advantage over enemies by further bringing computers to bear on the battlefield.

``What the rest of corporate America has been doing for the past 10 years is where the Pentagon is going now,'' said Pierre A. Chao, a Northrop analyst for CS First Boston.

``Over the last 50 years Northrop has done an amazing job of always staying at the cutting edge of military technology,'' Chao said, noting early advances in stealth technology and flying wing prototypes that inspired the B-2 Spirit stealth bomber. ``Now they're one of the early guys moving into defense electronics and unmanned vehicles, which is probably the next generation of weaponry.''

Just last month, Northrop was awarded America's top aviation honor for its unmanned, computer-controlled Global Hawk spy place, which is built in Palmdale.

Early indications are that the Bush administration, while undertaking a top-down review of military spending, is partial to high-tech advances and plans to increase military spending, he said.

Northrop better positioned itself for such business with its $5.1 billion acquisition of Woodland Hills-based Litton, a deal first announced in late December. The combined company becomes the third-largest defense contractor with 80,000 employees and expected yearly revenue of $15 billion.

Moving from second-tier contractors to a defense powerhouse will not necessitate large-scale layoffs, although Litton's corporate staffers will be affected somewhat as they move to Northrop's Century City offices.

``Northrop is in a buildup mode where they're been hiring so they may take them out of Litton,'' said SG Cowen Securities Inc. analyst Cai Von Rumohr.

No radical overhauls are foreseen in Litton's vast military shipbuilding arm or Northrop's aviation business, two areas that are further complementary because they diversify the company and make it less vulnerable if programs are canceled, Rumohr said.

``It will make them stronger compared to Lockheed Martin or Raytheon than they were before because they'll have more areas of expertise,'' he said.

As it moves to complete the Litton integration by year's end, Northrop will likely spin off Litton's shipbuilding and commercial electronics divisions into separate divisions. Analysts say the latter is not an obvious fit in the puzzle and could be phased out.

Like others, Rumohr sees the primary emphasis on electronics and information technology, such as bringing secure, networked communication to front-line troops and boosting coordination between sea, air and land forces.

As a first step, Northrop announced Tuesday that Ronald D. Sugar has been elected to its board of directors, increasing it to 14 members.

Sugar becomes corporate vice president, president and chief executive officer of Northrop's Litton Sector after having served as Litton's president and chief operating officer.

Prior to joining Litton, Sugar worked for nearly 20 years with TRW Inc., playing a major role in its military, commercial space and electronics programs before becoming president and chief operating officer of TRW Aerospace and Information Systems.