Northrop Grumman's acquisition of TRW, if successful, would inject some dynamism into an increasingly polarised US defence market
With the aerospace industry's attention focused on winning the hearts and minds of wary customers at Asian Aerospace 2002, Northrop Grumman's bid to take over TRW may not have been the talk of the exhibit halls and hospitality chalets. But as executives return from Singapore to catch up with the news, the implications of the move may take on new significance.
As Flight International went to press it was not known whether TRW would accept or reject Northrop's offer. But one thing is certain - the aerospace and automotive company is now in play. If its proposal is rejected, Northrop could go hostile, taking the offer direct to TRW's shareholders. To defend itself, TRW could seek a white knight buyer for the whole company or separately for its aerospace and automotive businesses.
While this latest chapter in the consolidation of the US aerospace and defence industry would have seemed from Singapore to be of relevance only to the North American market, the outcome of this particular boardroom battle could have profound implications well beyond the USA's borders.
If the story began in 1994, when Northrop acquired Grumman, took control of Vought and began to expand beyond its core military aircraft business, then a turning point came in 1998 when the US government blocked a merger with Lockheed Martin. Two years later, Northrop Grumman sold its commercial aerostructures business to focus on defence electronics, information technology and, a distant third, military aircraft.
Last year, the company acquired Litton Industries. The move strengthened Northrop Grumman's electronics and information sectors but brought with it a substantial shipbuilding business. Within months, what seemed like an orphan activity turned into a core capability when Northrop Grumman acquired nuclear warship builder Newport News. Within a year, the company doubled its revenues and today is almost three times the size it was in 1993, when it was plain old Northrop.
TRW has an equally illustrious history, but a less than spectacular financial performance in recent years. Other than its $8 billion acquisition of US/UK automotive firm LucasVarity in 1996, which brought with it Lucas Aerospace, the company has not participated in the consolidation binge. The LucasVarity deal doubled the size of TRW's automotive business but left the company burdened with debt.
Analysts attribute Northrop Grumman's growth to the bold and deft leadership of chairman and chief executive Kent Kresa, and the TRW move bears his hallmark. But an equally important player is the company's new president, Ron Sugar, who was Litton's president at the time of its acquisition and, before that, led the very TRW businesses that Northrop Grumman now wants. If anyone understands the value of TRW's aerospace activities, it should be Sugar.
Kresa is clear about the benefits the acquisition would bring. Northrop Grumman is already a prime contractor in military aircraft, including unmanned systems, and warships, including aircraft carriers. Acquiring TRW would make it a prime contractor in satellites and space systems. It would also give Northrop Grumman a key role in the USA's multi-billion-dollar missile defence programme, something the company sorely lacks.
More importantly, securing TRW would make Northrop Grumman the second largest US defence contractor, just ahead of Boeing and not far behind Lockheed Martin. And the upper ranks of the industry would look very different. Instead of just two system integration titans, Boeing and Lockheed Martin, supported by rival defence electronics giants, Northrop Grumman and Raytheon, the US industry would be led by three multi-platform system integrators with annual sales in the $25-27 billion range. This could change the complexion of future transatlantic, and even global, industrial co-operation and consolidation. The US defence aerospace market is becoming increasingly polarised between the rival camps of Boeing and Lockheed Martin. With three major primes, the market would become more dynamic, creating opportunities.
At Singapore, Airbus may have mocked Boeing's diversification away from commercial aircraft, but majority owner EADS surely understands the value of having a prime contractor capability in multiple platforms: just as industry executives returning from Asian Aerospace 2002 will understand the significance of Northrop Grumman's move on TRW.
Source: Flight International
