Northrop makes deal with TRW

Northrop Grumman Corp.'s agreement last week to acquire TRW Inc. would create the second largest federal information technology contractor, with specializations ranging from computer reselling to intelligence data analysis.

The merger pact, valued at $7.8 billion, caps a series of Northrop Grumman buyouts dating to the mid-1990s, when defense contractors Northrop and Grumman merged. The company previously purchased Logicon Inc., Federal Data Corp., Sterling Software Inc.'s federal operations and Litton Industries Inc. Until now, Litton had been Northrop Grumman's largest acquisition at $5 billion.

Kent Kresa, Northop Grumman's chairman and chief executive officer, said TRW adds a "critical node" to his company's business: space. Indeed, TRW's $2 billion Space and Electronics unit, which makes satellite systems, fills a gap in Northrop Grumman's spectrum of services.

"The real plum in TRW is its ability in the space sector," said Ray Bjorklund, vice president of consulting services at Federal Sources Inc.

The combined companies, said TRW Chairman Philip Odeen, "will possess an even broader set of capabilities." Specifically, he cites TRW's work in intelligence data management and analysis, saying TRW will bring new customers to Northrop Grumman, including the Missile Defense Agency and civilian agencies.

While the acquisition is complementary in those respects, it will also create a few redundancies. Both Northrop Grumman and TRW, for example, are on the short list for the U.S. Transportation Command's Global Transportation Network 21 contract, potentially worth $337 million. The program is intended to improve the way the military tracks personnel and cargo.

In addition, Northrop Grumman and TRW are rival contractors on at least two multiple-award contracts: the Defense Information Systems Agency's $2 billion Encore program and the Air Force's $650 million IT Services blanket purchase agreement.

A spokesman for Northrop Grumman said an integration team will be formed once the merger is complete to deal with any overlapping programs.

In the past, the spokesman said overlaps have been handled by teaming agreements or "firewalls" built between competing divisions. Such a wall was built between Northrop Grumman units competing for the Coast Guard's recently awarded $11 billion Deepwater program. Northrop Grumman's Ingalls Shipbuilding unit teamed with Lockheed Martin to pursue the contract.

Some redundancy may be inevitable given the size of the contractors. Northrop Grumman was the third largest federal IT prime contractor in fiscal 2001, with contract obligations of $1.4 billion. The company trailed only Lockheed Martin Corp., with $2.8 billion, and Science Applications International Corp., with $1.5 billion, according to market research firm Input's analysis of Federal Procurement Data Center records. TRW, meanwhile, generated $600 million.

"Both already are exceptionally large," said Input's consulting manager, Payton Smith, describing Northrop Grumman and TRW.

The combined companies would hit the $2 billion mark and take second place in federal IT contracting, according to Input's analysis of fiscal 2001 contract data.

The proposed acquisition requires the approval of Northrop Grumman and TRW shareholders. Kresa said he does not expect the Defense or Justice departments to raise significant anti-trust concerns. n

Moore is a freelance writer based in Syracuse, N.Y.

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