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War footings
In a decade, Kent Kresa took Northrop Grumman from the edge of extinction to perhaps the nation's best-positioned defense colossus. Can his successor make the war machine roll?
In a decade, Kent Kresa took Northrop Grumman from the edge of extinction to perhaps the nation's best-positioned defense colossus. Can his successor make the war machine roll?
By Steven Brull
November 2002
Institutional Investor Magazine
War may be hell, but there's no getting around one simple, uncomfortable truth: It's also big business.
As the U.S. fights global terrorism and prepares for an attack on Iraq, Northrop Grumman Corp. ought to be sitting pretty. U.S. defense spending is once again rising -- this year's budget grew by the biggest year-over-year jump since the end of the cold war -- and the company has assembled a collection of weapons capabilities since 1992 through canny and aggressive deal making. A campaign against Saddam Hussein will depend heavily on the most high-tech elements of Northrop's arsenal: B-2 stealth bombers, unmanned aerial vehicles such as the Global Hawk and airborne warning and control systems, or Awacs, aircraft, to name a few. The company's pending acquisition of TRW will bring new capabilities in space and missile defense.
"It's real clear that the world is getting more dangerous, and that undoubtedly is going to require additional technology for defense," says Ronald Sugar, Northrop's president and chief operating officer. "I'm bullish on the opportunities. But I regret the circumstances."
Still, as Northrop Grumman investors discovered to their dismay last month -- when the company posted a surprise loss of $59 million for the third quarter, despite revenues that soared 24 percent to a third-quarter-record $4.2 billion -- the opportunities and the multiyear, multibillion-dollar contracts don't always mean big profits. The news, coming in the midst of Wall Street's biggest rally in 70 years, sent Northrop shares plunging by almost 12 percent, to $101.50. Recently, they sold at about $103.
The problem -- losses on two discontinued businesses and cost overruns that plagued two weapons platforms in development -- is a stark reminder that as hard as it was to assemble a defense colossus with several thousand programs spanning the life cycle from design and development to manufacturing and maintenance, managing it will be even harder. That complex task is likely to fall to Sugar, 51, a brilliant, genial engineer with deep defense industry experience. Chairman and CEO Kent Kresa, the steely architect of Northrop Grumman's decadelong buildup (see box page 38), is set to retire at 65 next spring, and Sugar is the odds-on choice to succeed him.
Sugar, who came to Northrop last year when Kresa acquired Litton Industries, of which Sugar was COO, faces a daunting task. He'll have to manage the integration of the spate of acquisitions that, following the scheduled closing of the TRW deal in early to mid-December, will have boosted the company's workforce to 120,000 employees -- a tripling in just two years. And as he works to synchronize the sprawling contractor's movements in six business sectors -- electronic systems, information technology, integrated systems, ship systems, Newport News Shipbuilding and component technologies -- and its operations in 44 states and 25 countries, he'll have to keep it nimble during a period of unusual uncertainty over Pentagon weapons strategy.
"Kresa has put together a company that is unequivocally in the first tier," says Wolfgang Demisch, a highly regarded aerospace analyst and former head of research at UBS Securities. "But they have a very full plate, and the task of making them sing in harmony is very demanding." That task will fall mostly to Sugar.
But if the challenge is immense, so too is the potential. Few, if any, defense executives take joy in battlefield brutality. But Northrop has devoted the past decade to positioning itself for the coming era of network-centric warfare, one where information from space, air, land and sea is combined to form a more complete picture of the battlefield and boost military effectiveness exponentially. Through a series of 16 deals, culminating in the $11.8 billion acquisition of TRW, Northrop has soared from the margins of the defense industry to a place alongside Lockheed Martin Corp., the No. 1 contractor, and Boeing Co.
It was Kresa who aggressively engineered the acquisitions that have put Northrop in the sweet spot of today's defense spending priorities. Beginning in 1992, he purchased businesses such as Grumman Corp., Westinghouse Electric Corp.'s defense electronics group, Litton Industries and Newport News Shipbuilding; the last two made Northrop the nation's biggest shipbuilder. Now, with an enhanced array of assets, political clout and financial strength, Northrop is better positioned to be the prime contractor for major new defense projects, rather than a supplier with lower margins and little ability to set the direction of future program developments.
Indeed, if and when the U.S. goes to war against Iraq, it will be as if Northrop Grumman itself is shipping out. The naval battle groups that will be positioned in the Middle East each have at their center $10 billion aircraft carriers built by Newport News Shipbuilding. The carriers are protected by F-14 interceptors, built by Grumman, and screens of cruisers and destroyers, built mostly by Litton's Ingalls and Avondale shipyards. When an attack begins, it will probably be initiated from submarines, some built by Newport News, followed by strikes from F/A-18 fighters with Northrop-designed electronics. Grumman supplies the EA-6B planes that disrupt an enemy's electronics systems; the E-2C Awacs aircraft that manage the air battle; and Joint Stars, the Joint Surveillance Target Attack Radar System airborne surveillance and battle management software, which manages everything else.
To this group, Cleveland's TRW will add increasingly valuable space-based assets. TRW builds the government's most advanced snooping satellites, chock-full of sensors that can detect heat plumes from missiles and eavesdrop on wireline phone conversations. These are ever more valuable in waging war -- and winning a bigger share of the growing spending on missile defense.
Yet although Northrop has broken into the top tier, some analysts rap Kresa for paying too much for his acquisitions. "Shareholders have taken it a little on the chin," says Paul Nisbet, an analyst at JSA Research, an independent aerospace equity research firm in Newport, Rhode Island.
Kresa bristles at the criticism. "If you look at any of the history of any of the deals we made, every one of them started out with, 'We paid too much.' Six months later it's 'brilliant'; a year later, 'phenomenal.'"
Indeed, although Northrop's debt has more than tripled since 2000, it remains at investment grade, largely because cash flow has tripled as well. Net debt fell to $4.6 billion in the third quarter, from $5.0 billion in 2001, reducing the company's debt-to-capital ratio from 38 to 36 percent. The number of shares will have increased dramatically, from 71 million in 2000 to 187 million after the TRW deal is done, because of all the acquisitions. Yet, according to Nisbet, equity per share has sharply increased, from less than $55 per share in 2000 to an estimated $91 per share in 2003. Cash flow per share is expected to increase 11 percent to $15.50 next year.
"It's a fair criticism to say that Kresa's strategy has centered on being big rather than on financial returns," says John Hayes, a senior analyst with Atlantic Trust Pell Rudman, a division of Amvescap, in Boston. "But if you look at the share price, which has grown eightfold in the past decade, you can see it's been the right decision. Size and scope matter in this business."
NORTHROP GRUMMAN HAS COME A LONG, long way in ten years. When Kresa rose to chairman and CEO of Northrop Corp. in September 1990, the company was in deep crisis. The end of the cold war meant smaller defense budgets and the paring of numerous long-term programs. One victim of the peace dividend was Northrop's cash cow, the B-2 stealth bomber program, which was eventually slashed from a planned 132 aircraft to 21. And the company had lost to Lockheed in a bid to build the next generation of stealth fighters. Northrop, which also made airplane parts and electronics systems, needed to decide whether it had a future in the defense business.
"We had to exit totally, by closing the company or selling it and giving the money to shareholders, or figure out another way to go," says Kresa.
To find a new direction, a special strategy committee led by Albert Myers, Northrop's treasurer and M&A point man, began in 1990 to ponder the shape of war in a world with one superpower. Their conclusion: Post-cold-war conflicts would be less predictable and more regional, and Pentagon spending would fall sharply from Reagan-era peaks.
It was a dilemma faced by the entire defense industry, and companies were trying to grow bigger or sell out to the highest bidder. "You had a cadre of eight or ten good-size firms, but none anywhere near as large as the ones today," says Nisbet.
Northrop decided it could no longer afford to fund R&D for new military aircraft projects that typically stretch out for 15 to 25 years, and therefore had to ditch an aerospace identity that dated back to the era of founder Jack Northrop. He designed the "Little Red Bus," which Amelia Earhart successfully flew across the Atlantic in 1932, and developed the XB-35 in 1946, a propeller-pushed flying wing that was the conceptual precursor of the stealth bomber Northrop built 40 years later. "This was a tough pill to swallow," recalls Myers. "This was a military airplane company, and we had just concluded that there ain't going to be any on the horizon."
With U.S. defense program costs skyrocketing, Northrop reckoned wisely that boosting the effectiveness of existing platforms, such as ships, planes and satellites, would be critical. Doing so would require large-scale data collection, analysis and integration. The future thus put a premium on electronics, particularly for reconnaissance, surveillance, long-range precision-strike weapons, battlefield management and survivability. "Every transaction we did through the '90s addresses a specific strategic element of our vision," says Myers.
Kresa went about acquiring those capabilities (see table, page 38) in an unusually aggressive manner for the clubby defense establishment. In part, he had no choice but to be tough as his bids often faced stiff competition. In 1994, after a couple of small deals, Kresa set his sights on Grumman Corp., the Bethpage, New York, company that built the F-14, of Top Gun fame, and, even more important, Joint Stars. Kresa outbid Martin Marietta Corp. and landed Grumman for $2.2 billion in cash.
With Northrop's shares having quadrupled since his move into the chairman's office, Kresa next turned to Westinghouse's defense assets, which included what was probably the nation's top military radar house. Westinghouse had bought CBS and needed to divest its defense businesses to pay for the acquisition. In January 1996 Kresa closed a deal with Westinghouse chairman and CEO Michael Jordan for its defense electronics group. "Kresa offered $3 billion in cash, plus $600 million in unfunded pension liabilities, but it came with a 24-hour fuse -- on Christmas eve," says Petros Kitsos, who runs Salomon Smith Barney's defense and aerospace M&A business and has worked with Northrop on all its deals since the Grumman takeover.
Kresa had also gotten into deep talks about acquiring TRW, aiming at its defense assets. But TRW CEO Joseph Gorman didn't want to bail on its large auto-parts business. "For whatever reasons, Joe Gorman heard a different drummer from anyone else in the world," says Myers. Priorities diverged further in 1999, when TRW bought brake maker LucasVarity for $6.8 billion in cash and assumed net debt. Kresa walked away.
But by 1997 Northrop -- having acquired Grumman, Westinghouse's defense electronics and Logicon, which makes software for carrier battle group coordination -- had itself become an attractive target. Reenter Norman Augustine, who, as CEO of Martin Marietta, had been outbid by Kresa for Grumman. He was now CEO of the nation's biggest defense contractor, Lockheed Martin (created by a 1995 merger of Lockheed Corp. and Martin Marietta). For months Augustine wooed Kresa, who finally received an offer he couldn't refuse.
But the Northrop head erred when he reluctantly agreed to sell the company to Lockheed Martin on July 3, 1997, for $8.3 billion in stock, plus assumed debt, a sum that was a stunning 34 percent premium over Northrop's closing share price of a day earlier. The combined company would command 25 percent of the nation's defense budget and own a virtual monopoly in military electronics. In March 1998, after an extensive government review that cost Northrop $5.6 million just in photocopying charges, the Department of Justice nixed the deal on antitrust grounds. Northrop's stock, which had been driven by the expectation of approval to a high of $139 in February 1998, collapsed, falling 50 percent, to $69.50, that December.
"The press said Kresa had just crashed the aircraft full of fuel and passengers at the end of the runway," says James McAleese, a McLean, Virginiabased government-contracts attorney and Northrop adviser. "Everybody counted Kresa as dead, except for him and a cadre of shareholders."
In fact, the Justice Department ruling served to ignite a fuse under Northrop. If the decision signaled that the company was too big to be acquired by a top-tier contractor, it also gave a green light for Northrop to continue to scale itself up with acquisitions. In 1999 Kresa, sensing the potential of unmanned aerial vehicles, paid $140 million in cash to buy Ryan Aeronautical, the San Diego unit of Allegheny Teledyne that was developing the Global Hawk.
Then in 2001 he made two major deals that turned Northrop into the nation's largest shipbuilder -- although that was not his original intention. Still focused on acquiring electronics capabilities, Kresa agreed that April to shell out $5.2 billion in cash and stock to buy Litton Industries, mainly to pick up its defense electronics and information technology. "Ships came with it," he says. But Kresa felt he had no choice but to double his bet on ships when General Dynamics Corp. made an all-cash offering for Newport News Shipbuilding, the Virginia builder of nuclear submarines and aircraft carriers. "General Dynamics was going to use this as an opportunity to essentially minimize us in the ship business," says Kresa. "We either had to be in it big or we were going to be out. This deal was the only one that wasn't planned in an orderly way." In November, after its heavy lobbying had convinced Washington that a General Dynamics Newport News deal would be a merger-to-monopoly in nuclear-powered shipbuilding, Northrop paid $2.6 billion in cash and stock to buy Newport News.
In what is likely his swan song, Kresa bid for TRW in early 2002. The opportunity arose on February 19 when TRW's CEO, David Cote, unexpectedly bolted to take the top job at Honeywell International. Just two days later Kresa, who had long dreamed of merging the electronics assets of Northrop, Litton and TRW, settled on a bold strategy to land the company: He launched an unsolicited tender offer, worth $47 a share, for all of TRW's assets -- including its auto-parts business, which made up about $10 billion of the company's $16 billion total sales in 2001 -- betting that no aerospace bidder would take on the heavily indebted auto division.
Kresa had an ace up his sleeve when he made his audacious bid. His No. 2, Sugar, had worked at TRW for nearly 20 years. He coached Kresa on valuation and negotiation strategy.
After Northrop raised its bid to $53 on April 14, TRW said it would open its books to other suitors, effectively putting the company in play. Its nonexecutive chairman, Philip Odeen, cleverly outlined a competing "value enhancement plan" that envisioned selling or spinning off TRW's main businesses -- auto parts, aeronautics and defense -- in pieces. But executing the plan, which required selling the assets in a prescribed sequence into a weak market, was harder than TRW let on. After Northrop's rivals BAE Systems, General Dynamics and Raytheon Co. bid only for TRW's defense assets, as Kresa had hoped, TRW entered into de facto exclusive talks with Northrop that concluded in New York on June 30 with a $60-per-share all-stock deal valued at $11.8 billion, including $4 billion in assumed debt.
Last June Goodrich Corp. agreed to buy TRW's commercial aeronautics business, which makes engine controls and electrical components, for $1.5 billion, a deal that closed on October 2. Northrop is also planning to sell its components business next year. Kresa has been negotiating jointly with Carlyle Group and Blackstone Group to sell TRW's auto-parts business. Sources close to the deal say that Northrop will likely get $4.5 billion and off-load $2.8 billion in TRW debt. Sugar says that Northrop, which now has a debt-to-capital ratio of some 36 percent, will be able to pay off the debt over the next four to five years -- barring any more major acquisitions -- in large part because of the huge cash flows from shipbuilding.
Kresa says he expects 2003 revenues of $26 billion and low-double-digit growth in revenues and earnings for the next several years, outpacing the expected growth rate in defense budgets. Northrop estimates that total Department of Defense spending on military procurement and research will grow 7.4 percent, compounded annually, from $104 billion last year to $157 billion in 2007.
After the TRW acquisition closes, Northrop will be the second-biggest defense contractor, just behind Lockheed and ahead of Boeing. Northrop will be a major force in defense electronics; a leading maker of unmanned aerial vehicles, precision-strike systems and spy satellites; the government's largest supplier of IT; and the nation's biggest shipbuilder. These carefully acquired capabilities make Northrop perhaps the best positioned in the the U.S.'s vision of the future of warfare.
Lockheed is Northrop's only peer. Also strong in defense electronics and systems integration, Lockheed is the leading supplier of military aircraft, including the F-22 and the future F-35 Joint Strike Fighter. Lockheed is also big in space, making satellites and space-based reconnaissance systems.
Boeing continues to grow a defense business it established over the past few years mainly through acquisition. Major purchases included satellite maker Hughes Space & Communications Co. in 2000 and McDonnell Douglas Corp. in 1997, which brought Boeing the F/A-18, the navy's primary strike fighter, and the air force's premier interceptor, the F-15. Boeing and Lockheed are each trying to develop unmanned aerial vehicles as well.
With a price-earnings ratio of 17, Northrop seems fairly valued. But weaker companies like General Dynamics and Raytheon both have P/E ratios of 16. Lockheed's P/E is 26. Boeing, weighed down by its commercial aircraft business, trades at a P/E of 10.
Northrop is in a strong position to benefit from rising defense budgets. A war in Iraq would likely boost the perceived value of the company's airborne reconnaissance systems, defense electronics and data integration skills. And its recent acquisitions make it a contender to win lucrative systems contracts in the future. Northrop has a funded-order backlog of $22 billion, a figure that would soar by tens of billions if programs that have been awarded but not yet funded were added.
"The acquisition strategy over the past five to seven years has really given them the potential for accelerated growth in the future," says Atlantic Trust's Hayes. "They're sure to see strong funding going forward in any defense environment."
Shipbuilding, for instance, will be a major source of revenue. The navy plans to recapitalize the U.S. fleet, which has dwindled to 313 ships from a peak of 594 in 1987, and now aims to maintain 300 highly sophisticated vessels. Since much of today's fleet is ready for decommissioning, the navy will have to nearly double its production rate to meet its goal over the next two decades.
Northrop is beginning to win an increasing share of that business. Earlier this year the DD 21 destroyer design program was taken away from a furious General Dynamics after a defense review by the Bush administration, and a new contract was awarded to a team led by Northrop. The four-year, $2.9 billion deal is to complete the system design for the now-redesignated DD(X) family of stealth ships, which includes destroyers, cruisers and littoral combat ships. More than 50 such vessels will be built, at a total cost of $60 billion. General Dynamics will get part of the shipbuilding business but, as with investment banking, the lead takes home a disproportionate share of the profits.
In June Northrop and Lockheed Martin jointly won an $11 billion contract to overhaul the coast guard fleet over the next 20 years. Building ships offers double-digit margins, says Sugar. And, he adds, "Surface combatants are platforms stuffed with electronics and software. The value added going forward is more electronics and more software."
Northrop's space business will get a similar boost from TRW, which last August won a $2.9 billion contract to build a next-generation meteorological satellite system. Now North-rop, long mainly a subcontractor in space, is set to gain a bigger share of spending for satellite surveillance and missile defense. The Pentagon is spending about $8 billion annually on missile defense, a sum that will rise to about $12 billion in five years, estimates JSA Research's Nisbet. "There won't be any end to the life of this program, just as there's no end to building aircraft and ships," he says.
MAKING THIS BEHEMOTH RUN SMOOTHLY WON'T be easy. But tough tasks are nothing new to Sugar. Born in Canada, he grew up and went to school in angry, largely African-American, South Central Los Angeles, where his father ran a hair salon. "I was double-promoted a couple of times in school, so my body was not the same age as my mind," Sugar says. "It taught me how to deal with people who are not culturally the same as I am, people who don't have the same worldview as I do." He entered the University of California, Los Angeles at 17. A brilliant student, he graduated summa cum laude at 19, with a degree in electrical engineering, and got his Ph.D. at 23.
After graduation Sugar worked briefly for several southern California defense companies before joining TRW's space operations in Redondo Beach, next to Los Angeles. Sugar spent nearly 20 years at the company, including stints in Cleveland as CFO and as the head of several automotive businesses with operations in 14 countries. "That was an interesting experience because the sun never set on my troubles," he recalls. "I did that for several years and turned that business around."
His success led to a promotion to run the company's aerospace and information systems division. But Sugar bolted in 2000 after it became clear that he had no shot at becoming TRW's CEO. Returning to southern California, he became president and COO at Litton, which Northrop acquired last year.
Sugar's immediate challenge will be to fashion Northrop into a cohesive entity. Two thirds of acquisitions fail, and problems often don't surface until 18 to 24 months after a deal closes. "There will be a change in management at a critical time," worries Atlantic Trust's Hayes. "The risk is that projects can spiral out of control. They get behind schedule and over budget, and then there's no cash flow for the next year."
Northrop, though, considers integration a core competency. Having acquired 15 companies before TRW, it prides itself on the systems it has developed. A team of 25 executives works full-time on a checklist of some 700 items. Each team member has five to ten other people to draw on as needed. The result, says Sugar, is a smooth transition. Litton's integration took four to five months because it was a complicated company, but folding in Newport News took just ten weeks.
"Sugar is a guy who is as smart as anybody in the game, and it helps a lot that he's seen this all before," says analyst Demisch. "I'm hopeful that he can cope."
Integrations, Sugar says, "are short-term, high-intensity projects. We run them like we would an aerospace project. We lay out a time line, with 700 milestones and due dates. Everybody's got a task. And everyone is accountable."
It's an advantage that Northrop is relatively decentralized. "Our scheme is not to scramble all the eggs into one enormous omelette," says Sugar. "We want to apply Northrop Grumman systems and disciplines but maintain continuity of leadership and organization." TRW, for example, will add two new sectors to Northrop: space technologies and mission systems.
Sugar's bigger problem will be managing the multifaceted Northrop machine. "We've got thousands of programs," he says. "We've got to manage them. We've got to deliver. We've got to make money. That's basic blocking and tackling."
Yet more challenges loom. Sugar, like other defense chieftains, must face the "black pit," a lack of visibility into Pentagon planning. In addition, new technologies -- and Congress -- can easily whipsaw those plans. "The hang-up for Sugar is that he'll have a whole bunch of enterprises, with no clear idea of what's coming down the pike and a customer who is less than exemplary in terms of business practices," says Demisch.
The outlook is unusually clouded because Iraq has put on hold the Pentagon's strategic plan to restructure the military into a lighter, faster, more lethal force -- one more geared to conflict in Afghanistan and Kosovo than a Soviet invasion of Europe. And assumptions could easily be changed by the outcome of the next war. For instance, planners could decide that the problem isn't too little reconnaissance, but too little analysis of information, a task a company like NCR Corp. might handle more easily than Northrop. Domestic terrorism is another twist, siphoning defense dollars to homeland security. And rising deficits could drag down today's estimates of Pentagon spending growth, sending prices of defense stocks lower.
"It's unclear where we're going to apply our assets," Sugar concedes. "But it's going to be much more information-system-intensive and will still involve electronic sensing, probably distributed sensing and lots of IT. Much will depend on how the U.S. government organizes itself, and that chapter is not yet written."
Sugar thinks himself fortunate to take the reins of a defense giant positioned to profit as the new era of network-centric warfare takes shape. But Kresa's impressive legacy is also a burden. "You know, in some ways Kent hasn't done his successor any favors," says Sugar. "He's done a fabulous job."
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Acting tough with Kent Kresa
It's the rare child actor who ends up running a huge war machine. A movie studio, maybe. For Kent Kresa the path was set by his frustrations as a performer -- and, more important, by his failures.
Kresa's father, the late Helmy Kresa, was a German immigrant who was Irving Berlin's principal arranger for 60 years. Berlin composed ageless songs such as "God Bless America" but couldn't read or write music.
Raised in show business, Kresa fils, 64, appeared on radio and TV programs and in commercials for Coca-Cola, Chevrolet and others. But he hated the frequent and capricious rejections at auditions. "For no obvious reason, other than your hair was the wrong color, you weren't tall enough, you were too young or old, you were not right for the part," he says. "I found that very dissatisfying."
Kresa found greater predictability in engineering. He earned bachelor's and master's degrees in aeronautics and astronautics from the Massachusetts Institute of Technology. He managed research programs at the Defense Advanced Research Projects Agency, including embryonic work on the B-2 bomber, before joining Northrop Corp. in 1975 to run the company's research. He headed the aerospace group before becoming president.
Kresa's acquisitions have earned him a reputation for aggressiveness. "He seems quite gentlemanly, but he just clobbers you," says analyst Paul Nisbet of JSA Research. Retorts Kresa: "If they want to say I'm aggressive, fine. It's probably true. But if you're doing it for the right logical reasons, not just firing for effect, people will understand."
That logical mind-set is classic Kresa. But he has a playful side. On weekends, he and his wife bike, ski, play tennis or go in-line skating along Venice Beach, side by side with aspiring starlets and songwriters. -- S.B.
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Bankers aweigh
CEO Kent Kresa has spent $28.3 billion, including the assumption of $7.5 billion in debt, on a string of 16 acquisitions to make has-been airplane maker Northrop Corp. a defense leader. Below are the most critical deals and the key capabilities they brought.
GRUMMAN CORP.
$2.2 billion
1994
Airborne surveillance; battlefield management; radar-jamming aircraft
WESTINGHOUSE ELECTRIC CORP.'S defense and electronics systems group
$3.6 billion (including $600 million in unfunded pension liabilities)
1996
Air-defense radar; sensors; systems integration
LOGICON
$980 million
1997
Software for systems integration and carrier battle group coordination; command, control communications and information technology development, primarily for defense and other government agencies
LITTON INDUSTRIES
$5.2 billion
April 2001
Defense electronics; shipbuilding
NEWPORT NEWS SHIPBUILDING
$2.6 billion
November 2001
Nuclear-powered aircraft carriers and attack submarines
TRW
$11.8 billion
2002
Satellite and missile technologies; information systems
Sources: Northrop Grumman, Salomon Smith Barney, Institutional Investor research.
By Steven Brull
November 2002
Institutional Investor Magazine
War may be hell, but there's no getting around one simple, uncomfortable truth: It's also big business.
As the U.S. fights global terrorism and prepares for an attack on Iraq, Northrop Grumman Corp. ought to be sitting pretty. U.S. defense spending is once again rising -- this year's budget grew by the biggest year-over-year jump since the end of the cold war -- and the company has assembled a collection of weapons capabilities since 1992 through canny and aggressive deal making. A campaign against Saddam Hussein will depend heavily on the most high-tech elements of Northrop's arsenal: B-2 stealth bombers, unmanned aerial vehicles such as the Global Hawk and airborne warning and control systems, or Awacs, aircraft, to name a few. The company's pending acquisition of TRW will bring new capabilities in space and missile defense.
"It's real clear that the world is getting more dangerous, and that undoubtedly is going to require additional technology for defense," says Ronald Sugar, Northrop's president and chief operating officer. "I'm bullish on the opportunities. But I regret the circumstances."
Still, as Northrop Grumman investors discovered to their dismay last month -- when the company posted a surprise loss of $59 million for the third quarter, despite revenues that soared 24 percent to a third-quarter-record $4.2 billion -- the opportunities and the multiyear, multibillion-dollar contracts don't always mean big profits. The news, coming in the midst of Wall Street's biggest rally in 70 years, sent Northrop shares plunging by almost 12 percent, to $101.50. Recently, they sold at about $103.
The problem -- losses on two discontinued businesses and cost overruns that plagued two weapons platforms in development -- is a stark reminder that as hard as it was to assemble a defense colossus with several thousand programs spanning the life cycle from design and development to manufacturing and maintenance, managing it will be even harder. That complex task is likely to fall to Sugar, 51, a brilliant, genial engineer with deep defense industry experience. Chairman and CEO Kent Kresa, the steely architect of Northrop Grumman's decadelong buildup (see box page 38), is set to retire at 65 next spring, and Sugar is the odds-on choice to succeed him.
Sugar, who came to Northrop last year when Kresa acquired Litton Industries, of which Sugar was COO, faces a daunting task. He'll have to manage the integration of the spate of acquisitions that, following the scheduled closing of the TRW deal in early to mid-December, will have boosted the company's workforce to 120,000 employees -- a tripling in just two years. And as he works to synchronize the sprawling contractor's movements in six business sectors -- electronic systems, information technology, integrated systems, ship systems, Newport News Shipbuilding and component technologies -- and its operations in 44 states and 25 countries, he'll have to keep it nimble during a period of unusual uncertainty over Pentagon weapons strategy.
"Kresa has put together a company that is unequivocally in the first tier," says Wolfgang Demisch, a highly regarded aerospace analyst and former head of research at UBS Securities. "But they have a very full plate, and the task of making them sing in harmony is very demanding." That task will fall mostly to Sugar.
But if the challenge is immense, so too is the potential. Few, if any, defense executives take joy in battlefield brutality. But Northrop has devoted the past decade to positioning itself for the coming era of network-centric warfare, one where information from space, air, land and sea is combined to form a more complete picture of the battlefield and boost military effectiveness exponentially. Through a series of 16 deals, culminating in the $11.8 billion acquisition of TRW, Northrop has soared from the margins of the defense industry to a place alongside Lockheed Martin Corp., the No. 1 contractor, and Boeing Co.
It was Kresa who aggressively engineered the acquisitions that have put Northrop in the sweet spot of today's defense spending priorities. Beginning in 1992, he purchased businesses such as Grumman Corp., Westinghouse Electric Corp.'s defense electronics group, Litton Industries and Newport News Shipbuilding; the last two made Northrop the nation's biggest shipbuilder. Now, with an enhanced array of assets, political clout and financial strength, Northrop is better positioned to be the prime contractor for major new defense projects, rather than a supplier with lower margins and little ability to set the direction of future program developments.
Indeed, if and when the U.S. goes to war against Iraq, it will be as if Northrop Grumman itself is shipping out. The naval battle groups that will be positioned in the Middle East each have at their center $10 billion aircraft carriers built by Newport News Shipbuilding. The carriers are protected by F-14 interceptors, built by Grumman, and screens of cruisers and destroyers, built mostly by Litton's Ingalls and Avondale shipyards. When an attack begins, it will probably be initiated from submarines, some built by Newport News, followed by strikes from F/A-18 fighters with Northrop-designed electronics. Grumman supplies the EA-6B planes that disrupt an enemy's electronics systems; the E-2C Awacs aircraft that manage the air battle; and Joint Stars, the Joint Surveillance Target Attack Radar System airborne surveillance and battle management software, which manages everything else.
To this group, Cleveland's TRW will add increasingly valuable space-based assets. TRW builds the government's most advanced snooping satellites, chock-full of sensors that can detect heat plumes from missiles and eavesdrop on wireline phone conversations. These are ever more valuable in waging war -- and winning a bigger share of the growing spending on missile defense.
Yet although Northrop has broken into the top tier, some analysts rap Kresa for paying too much for his acquisitions. "Shareholders have taken it a little on the chin," says Paul Nisbet, an analyst at JSA Research, an independent aerospace equity research firm in Newport, Rhode Island.
Kresa bristles at the criticism. "If you look at any of the history of any of the deals we made, every one of them started out with, 'We paid too much.' Six months later it's 'brilliant'; a year later, 'phenomenal.'"
Indeed, although Northrop's debt has more than tripled since 2000, it remains at investment grade, largely because cash flow has tripled as well. Net debt fell to $4.6 billion in the third quarter, from $5.0 billion in 2001, reducing the company's debt-to-capital ratio from 38 to 36 percent. The number of shares will have increased dramatically, from 71 million in 2000 to 187 million after the TRW deal is done, because of all the acquisitions. Yet, according to Nisbet, equity per share has sharply increased, from less than $55 per share in 2000 to an estimated $91 per share in 2003. Cash flow per share is expected to increase 11 percent to $15.50 next year.
"It's a fair criticism to say that Kresa's strategy has centered on being big rather than on financial returns," says John Hayes, a senior analyst with Atlantic Trust Pell Rudman, a division of Amvescap, in Boston. "But if you look at the share price, which has grown eightfold in the past decade, you can see it's been the right decision. Size and scope matter in this business."
NORTHROP GRUMMAN HAS COME A LONG, long way in ten years. When Kresa rose to chairman and CEO of Northrop Corp. in September 1990, the company was in deep crisis. The end of the cold war meant smaller defense budgets and the paring of numerous long-term programs. One victim of the peace dividend was Northrop's cash cow, the B-2 stealth bomber program, which was eventually slashed from a planned 132 aircraft to 21. And the company had lost to Lockheed in a bid to build the next generation of stealth fighters. Northrop, which also made airplane parts and electronics systems, needed to decide whether it had a future in the defense business.
"We had to exit totally, by closing the company or selling it and giving the money to shareholders, or figure out another way to go," says Kresa.
To find a new direction, a special strategy committee led by Albert Myers, Northrop's treasurer and M&A point man, began in 1990 to ponder the shape of war in a world with one superpower. Their conclusion: Post-cold-war conflicts would be less predictable and more regional, and Pentagon spending would fall sharply from Reagan-era peaks.
It was a dilemma faced by the entire defense industry, and companies were trying to grow bigger or sell out to the highest bidder. "You had a cadre of eight or ten good-size firms, but none anywhere near as large as the ones today," says Nisbet.
Northrop decided it could no longer afford to fund R&D for new military aircraft projects that typically stretch out for 15 to 25 years, and therefore had to ditch an aerospace identity that dated back to the era of founder Jack Northrop. He designed the "Little Red Bus," which Amelia Earhart successfully flew across the Atlantic in 1932, and developed the XB-35 in 1946, a propeller-pushed flying wing that was the conceptual precursor of the stealth bomber Northrop built 40 years later. "This was a tough pill to swallow," recalls Myers. "This was a military airplane company, and we had just concluded that there ain't going to be any on the horizon."
With U.S. defense program costs skyrocketing, Northrop reckoned wisely that boosting the effectiveness of existing platforms, such as ships, planes and satellites, would be critical. Doing so would require large-scale data collection, analysis and integration. The future thus put a premium on electronics, particularly for reconnaissance, surveillance, long-range precision-strike weapons, battlefield management and survivability. "Every transaction we did through the '90s addresses a specific strategic element of our vision," says Myers.
Kresa went about acquiring those capabilities (see table, page 38) in an unusually aggressive manner for the clubby defense establishment. In part, he had no choice but to be tough as his bids often faced stiff competition. In 1994, after a couple of small deals, Kresa set his sights on Grumman Corp., the Bethpage, New York, company that built the F-14, of Top Gun fame, and, even more important, Joint Stars. Kresa outbid Martin Marietta Corp. and landed Grumman for $2.2 billion in cash.
With Northrop's shares having quadrupled since his move into the chairman's office, Kresa next turned to Westinghouse's defense assets, which included what was probably the nation's top military radar house. Westinghouse had bought CBS and needed to divest its defense businesses to pay for the acquisition. In January 1996 Kresa closed a deal with Westinghouse chairman and CEO Michael Jordan for its defense electronics group. "Kresa offered $3 billion in cash, plus $600 million in unfunded pension liabilities, but it came with a 24-hour fuse -- on Christmas eve," says Petros Kitsos, who runs Salomon Smith Barney's defense and aerospace M&A business and has worked with Northrop on all its deals since the Grumman takeover.
Kresa had also gotten into deep talks about acquiring TRW, aiming at its defense assets. But TRW CEO Joseph Gorman didn't want to bail on its large auto-parts business. "For whatever reasons, Joe Gorman heard a different drummer from anyone else in the world," says Myers. Priorities diverged further in 1999, when TRW bought brake maker LucasVarity for $6.8 billion in cash and assumed net debt. Kresa walked away.
But by 1997 Northrop -- having acquired Grumman, Westinghouse's defense electronics and Logicon, which makes software for carrier battle group coordination -- had itself become an attractive target. Reenter Norman Augustine, who, as CEO of Martin Marietta, had been outbid by Kresa for Grumman. He was now CEO of the nation's biggest defense contractor, Lockheed Martin (created by a 1995 merger of Lockheed Corp. and Martin Marietta). For months Augustine wooed Kresa, who finally received an offer he couldn't refuse.
But the Northrop head erred when he reluctantly agreed to sell the company to Lockheed Martin on July 3, 1997, for $8.3 billion in stock, plus assumed debt, a sum that was a stunning 34 percent premium over Northrop's closing share price of a day earlier. The combined company would command 25 percent of the nation's defense budget and own a virtual monopoly in military electronics. In March 1998, after an extensive government review that cost Northrop $5.6 million just in photocopying charges, the Department of Justice nixed the deal on antitrust grounds. Northrop's stock, which had been driven by the expectation of approval to a high of $139 in February 1998, collapsed, falling 50 percent, to $69.50, that December.
"The press said Kresa had just crashed the aircraft full of fuel and passengers at the end of the runway," says James McAleese, a McLean, Virginiabased government-contracts attorney and Northrop adviser. "Everybody counted Kresa as dead, except for him and a cadre of shareholders."
In fact, the Justice Department ruling served to ignite a fuse under Northrop. If the decision signaled that the company was too big to be acquired by a top-tier contractor, it also gave a green light for Northrop to continue to scale itself up with acquisitions. In 1999 Kresa, sensing the potential of unmanned aerial vehicles, paid $140 million in cash to buy Ryan Aeronautical, the San Diego unit of Allegheny Teledyne that was developing the Global Hawk.
Then in 2001 he made two major deals that turned Northrop into the nation's largest shipbuilder -- although that was not his original intention. Still focused on acquiring electronics capabilities, Kresa agreed that April to shell out $5.2 billion in cash and stock to buy Litton Industries, mainly to pick up its defense electronics and information technology. "Ships came with it," he says. But Kresa felt he had no choice but to double his bet on ships when General Dynamics Corp. made an all-cash offering for Newport News Shipbuilding, the Virginia builder of nuclear submarines and aircraft carriers. "General Dynamics was going to use this as an opportunity to essentially minimize us in the ship business," says Kresa. "We either had to be in it big or we were going to be out. This deal was the only one that wasn't planned in an orderly way." In November, after its heavy lobbying had convinced Washington that a General Dynamics Newport News deal would be a merger-to-monopoly in nuclear-powered shipbuilding, Northrop paid $2.6 billion in cash and stock to buy Newport News.
In what is likely his swan song, Kresa bid for TRW in early 2002. The opportunity arose on February 19 when TRW's CEO, David Cote, unexpectedly bolted to take the top job at Honeywell International. Just two days later Kresa, who had long dreamed of merging the electronics assets of Northrop, Litton and TRW, settled on a bold strategy to land the company: He launched an unsolicited tender offer, worth $47 a share, for all of TRW's assets -- including its auto-parts business, which made up about $10 billion of the company's $16 billion total sales in 2001 -- betting that no aerospace bidder would take on the heavily indebted auto division.
Kresa had an ace up his sleeve when he made his audacious bid. His No. 2, Sugar, had worked at TRW for nearly 20 years. He coached Kresa on valuation and negotiation strategy.
After Northrop raised its bid to $53 on April 14, TRW said it would open its books to other suitors, effectively putting the company in play. Its nonexecutive chairman, Philip Odeen, cleverly outlined a competing "value enhancement plan" that envisioned selling or spinning off TRW's main businesses -- auto parts, aeronautics and defense -- in pieces. But executing the plan, which required selling the assets in a prescribed sequence into a weak market, was harder than TRW let on. After Northrop's rivals BAE Systems, General Dynamics and Raytheon Co. bid only for TRW's defense assets, as Kresa had hoped, TRW entered into de facto exclusive talks with Northrop that concluded in New York on June 30 with a $60-per-share all-stock deal valued at $11.8 billion, including $4 billion in assumed debt.
Last June Goodrich Corp. agreed to buy TRW's commercial aeronautics business, which makes engine controls and electrical components, for $1.5 billion, a deal that closed on October 2. Northrop is also planning to sell its components business next year. Kresa has been negotiating jointly with Carlyle Group and Blackstone Group to sell TRW's auto-parts business. Sources close to the deal say that Northrop will likely get $4.5 billion and off-load $2.8 billion in TRW debt. Sugar says that Northrop, which now has a debt-to-capital ratio of some 36 percent, will be able to pay off the debt over the next four to five years -- barring any more major acquisitions -- in large part because of the huge cash flows from shipbuilding.
Kresa says he expects 2003 revenues of $26 billion and low-double-digit growth in revenues and earnings for the next several years, outpacing the expected growth rate in defense budgets. Northrop estimates that total Department of Defense spending on military procurement and research will grow 7.4 percent, compounded annually, from $104 billion last year to $157 billion in 2007.
After the TRW acquisition closes, Northrop will be the second-biggest defense contractor, just behind Lockheed and ahead of Boeing. Northrop will be a major force in defense electronics; a leading maker of unmanned aerial vehicles, precision-strike systems and spy satellites; the government's largest supplier of IT; and the nation's biggest shipbuilder. These carefully acquired capabilities make Northrop perhaps the best positioned in the the U.S.'s vision of the future of warfare.
Lockheed is Northrop's only peer. Also strong in defense electronics and systems integration, Lockheed is the leading supplier of military aircraft, including the F-22 and the future F-35 Joint Strike Fighter. Lockheed is also big in space, making satellites and space-based reconnaissance systems.
Boeing continues to grow a defense business it established over the past few years mainly through acquisition. Major purchases included satellite maker Hughes Space & Communications Co. in 2000 and McDonnell Douglas Corp. in 1997, which brought Boeing the F/A-18, the navy's primary strike fighter, and the air force's premier interceptor, the F-15. Boeing and Lockheed are each trying to develop unmanned aerial vehicles as well.
With a price-earnings ratio of 17, Northrop seems fairly valued. But weaker companies like General Dynamics and Raytheon both have P/E ratios of 16. Lockheed's P/E is 26. Boeing, weighed down by its commercial aircraft business, trades at a P/E of 10.
Northrop is in a strong position to benefit from rising defense budgets. A war in Iraq would likely boost the perceived value of the company's airborne reconnaissance systems, defense electronics and data integration skills. And its recent acquisitions make it a contender to win lucrative systems contracts in the future. Northrop has a funded-order backlog of $22 billion, a figure that would soar by tens of billions if programs that have been awarded but not yet funded were added.
"The acquisition strategy over the past five to seven years has really given them the potential for accelerated growth in the future," says Atlantic Trust's Hayes. "They're sure to see strong funding going forward in any defense environment."
Shipbuilding, for instance, will be a major source of revenue. The navy plans to recapitalize the U.S. fleet, which has dwindled to 313 ships from a peak of 594 in 1987, and now aims to maintain 300 highly sophisticated vessels. Since much of today's fleet is ready for decommissioning, the navy will have to nearly double its production rate to meet its goal over the next two decades.
Northrop is beginning to win an increasing share of that business. Earlier this year the DD 21 destroyer design program was taken away from a furious General Dynamics after a defense review by the Bush administration, and a new contract was awarded to a team led by Northrop. The four-year, $2.9 billion deal is to complete the system design for the now-redesignated DD(X) family of stealth ships, which includes destroyers, cruisers and littoral combat ships. More than 50 such vessels will be built, at a total cost of $60 billion. General Dynamics will get part of the shipbuilding business but, as with investment banking, the lead takes home a disproportionate share of the profits.
In June Northrop and Lockheed Martin jointly won an $11 billion contract to overhaul the coast guard fleet over the next 20 years. Building ships offers double-digit margins, says Sugar. And, he adds, "Surface combatants are platforms stuffed with electronics and software. The value added going forward is more electronics and more software."
Northrop's space business will get a similar boost from TRW, which last August won a $2.9 billion contract to build a next-generation meteorological satellite system. Now North-rop, long mainly a subcontractor in space, is set to gain a bigger share of spending for satellite surveillance and missile defense. The Pentagon is spending about $8 billion annually on missile defense, a sum that will rise to about $12 billion in five years, estimates JSA Research's Nisbet. "There won't be any end to the life of this program, just as there's no end to building aircraft and ships," he says.
MAKING THIS BEHEMOTH RUN SMOOTHLY WON'T be easy. But tough tasks are nothing new to Sugar. Born in Canada, he grew up and went to school in angry, largely African-American, South Central Los Angeles, where his father ran a hair salon. "I was double-promoted a couple of times in school, so my body was not the same age as my mind," Sugar says. "It taught me how to deal with people who are not culturally the same as I am, people who don't have the same worldview as I do." He entered the University of California, Los Angeles at 17. A brilliant student, he graduated summa cum laude at 19, with a degree in electrical engineering, and got his Ph.D. at 23.
After graduation Sugar worked briefly for several southern California defense companies before joining TRW's space operations in Redondo Beach, next to Los Angeles. Sugar spent nearly 20 years at the company, including stints in Cleveland as CFO and as the head of several automotive businesses with operations in 14 countries. "That was an interesting experience because the sun never set on my troubles," he recalls. "I did that for several years and turned that business around."
His success led to a promotion to run the company's aerospace and information systems division. But Sugar bolted in 2000 after it became clear that he had no shot at becoming TRW's CEO. Returning to southern California, he became president and COO at Litton, which Northrop acquired last year.
Sugar's immediate challenge will be to fashion Northrop into a cohesive entity. Two thirds of acquisitions fail, and problems often don't surface until 18 to 24 months after a deal closes. "There will be a change in management at a critical time," worries Atlantic Trust's Hayes. "The risk is that projects can spiral out of control. They get behind schedule and over budget, and then there's no cash flow for the next year."
Northrop, though, considers integration a core competency. Having acquired 15 companies before TRW, it prides itself on the systems it has developed. A team of 25 executives works full-time on a checklist of some 700 items. Each team member has five to ten other people to draw on as needed. The result, says Sugar, is a smooth transition. Litton's integration took four to five months because it was a complicated company, but folding in Newport News took just ten weeks.
"Sugar is a guy who is as smart as anybody in the game, and it helps a lot that he's seen this all before," says analyst Demisch. "I'm hopeful that he can cope."
Integrations, Sugar says, "are short-term, high-intensity projects. We run them like we would an aerospace project. We lay out a time line, with 700 milestones and due dates. Everybody's got a task. And everyone is accountable."
It's an advantage that Northrop is relatively decentralized. "Our scheme is not to scramble all the eggs into one enormous omelette," says Sugar. "We want to apply Northrop Grumman systems and disciplines but maintain continuity of leadership and organization." TRW, for example, will add two new sectors to Northrop: space technologies and mission systems.
Sugar's bigger problem will be managing the multifaceted Northrop machine. "We've got thousands of programs," he says. "We've got to manage them. We've got to deliver. We've got to make money. That's basic blocking and tackling."
Yet more challenges loom. Sugar, like other defense chieftains, must face the "black pit," a lack of visibility into Pentagon planning. In addition, new technologies -- and Congress -- can easily whipsaw those plans. "The hang-up for Sugar is that he'll have a whole bunch of enterprises, with no clear idea of what's coming down the pike and a customer who is less than exemplary in terms of business practices," says Demisch.
The outlook is unusually clouded because Iraq has put on hold the Pentagon's strategic plan to restructure the military into a lighter, faster, more lethal force -- one more geared to conflict in Afghanistan and Kosovo than a Soviet invasion of Europe. And assumptions could easily be changed by the outcome of the next war. For instance, planners could decide that the problem isn't too little reconnaissance, but too little analysis of information, a task a company like NCR Corp. might handle more easily than Northrop. Domestic terrorism is another twist, siphoning defense dollars to homeland security. And rising deficits could drag down today's estimates of Pentagon spending growth, sending prices of defense stocks lower.
"It's unclear where we're going to apply our assets," Sugar concedes. "But it's going to be much more information-system-intensive and will still involve electronic sensing, probably distributed sensing and lots of IT. Much will depend on how the U.S. government organizes itself, and that chapter is not yet written."
Sugar thinks himself fortunate to take the reins of a defense giant positioned to profit as the new era of network-centric warfare takes shape. But Kresa's impressive legacy is also a burden. "You know, in some ways Kent hasn't done his successor any favors," says Sugar. "He's done a fabulous job."
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Acting tough with Kent Kresa
It's the rare child actor who ends up running a huge war machine. A movie studio, maybe. For Kent Kresa the path was set by his frustrations as a performer -- and, more important, by his failures.
Kresa's father, the late Helmy Kresa, was a German immigrant who was Irving Berlin's principal arranger for 60 years. Berlin composed ageless songs such as "God Bless America" but couldn't read or write music.
Raised in show business, Kresa fils, 64, appeared on radio and TV programs and in commercials for Coca-Cola, Chevrolet and others. But he hated the frequent and capricious rejections at auditions. "For no obvious reason, other than your hair was the wrong color, you weren't tall enough, you were too young or old, you were not right for the part," he says. "I found that very dissatisfying."
Kresa found greater predictability in engineering. He earned bachelor's and master's degrees in aeronautics and astronautics from the Massachusetts Institute of Technology. He managed research programs at the Defense Advanced Research Projects Agency, including embryonic work on the B-2 bomber, before joining Northrop Corp. in 1975 to run the company's research. He headed the aerospace group before becoming president.
Kresa's acquisitions have earned him a reputation for aggressiveness. "He seems quite gentlemanly, but he just clobbers you," says analyst Paul Nisbet of JSA Research. Retorts Kresa: "If they want to say I'm aggressive, fine. It's probably true. But if you're doing it for the right logical reasons, not just firing for effect, people will understand."
That logical mind-set is classic Kresa. But he has a playful side. On weekends, he and his wife bike, ski, play tennis or go in-line skating along Venice Beach, side by side with aspiring starlets and songwriters. -- S.B.
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Bankers aweigh
CEO Kent Kresa has spent $28.3 billion, including the assumption of $7.5 billion in debt, on a string of 16 acquisitions to make has-been airplane maker Northrop Corp. a defense leader. Below are the most critical deals and the key capabilities they brought.
GRUMMAN CORP.
$2.2 billion
1994
Airborne surveillance; battlefield management; radar-jamming aircraft
WESTINGHOUSE ELECTRIC CORP.'S defense and electronics systems group
$3.6 billion (including $600 million in unfunded pension liabilities)
1996
Air-defense radar; sensors; systems integration
LOGICON
$980 million
1997
Software for systems integration and carrier battle group coordination; command, control communications and information technology development, primarily for defense and other government agencies
LITTON INDUSTRIES
$5.2 billion
April 2001
Defense electronics; shipbuilding
NEWPORT NEWS SHIPBUILDING
$2.6 billion
November 2001
Nuclear-powered aircraft carriers and attack submarines
TRW
$11.8 billion
2002
Satellite and missile technologies; information systems
Sources: Northrop Grumman, Salomon Smith Barney, Institutional Investor research.