Integrating from within

Since its merger with Lockheed Martin was blocked in 1998, Northrop Grumman has transformed itself from an aircraft manufacturer to a broad-based systems integrator. The take-over of Litton, completed in April, has created "a global defence electronics powerhouse and a major federal information technology contractor", says chairman and chief executive Kent Kresa.

Barely was the ink dry on the $5.1 billion Litton purchase when the company launched a hostile $2.6 billion bid to overturn General Dynamics' agreed take-over of US aircraft carrier builder Newport News. The deal would make Northrop Grumman the USA's leading warship builder - quite a transformation for a company best known for building aircraft.

Northrop Grumman says the Litton purchase has lifted the company to third place among US defence/government contractors, behind Boeing and Lockheed Martin, but ahead of Raytheon. The combined company is expected to have revenues of $15 billion this year, up from $9 billion and rising to $18 billion by 2003.

In addition to strengthening Northrop Grumman's core defence electronics and information technology sectors, the Litton acquisition has broadened the company's business base, adding warship building and a small, but high-growth commercial electronics operation to its portfolio.

Kresa admits it was not part of Northrop Grumman's strategic plan to become a warship builder, but he believes the company can apply its systems integration expertise to help Litton design better ships. The shipbuilding business also brings with it a healthy cashflow and backlog, which will be increased if the bid for Newport News succeeds.

Northrop Grumman's "traditional" airborne integrated systems sector, meanwhile, is expected to grow more slowly than its other business areas, slipping from 20% of revenues in 2001 to 17% by 2003, while defence electronics grows from 31% to 35%. This reflects synergies from the Litton acquisition, says Kresa, including an enhanced electronic-warfare portfolio, expanded electro-optical capability and opportunity to integrate sensors and systems from both companies.

Cost savings are anticipated as Northrop Grumman integrates elements of Litton into its defence electronics and information technology sectors. The company aims for savings of $100 million in the first year and $250 million pa in near term.

Kresa does not expect Northrop Grumman to experience the post-merger pain which hurt other US firms. "Significant and rapid debt paydown has followed each of our major acquisitions," he says.

Source: Flight International