Northrop offers to buy TRW
Defense contractor offers to pay nearly $6 billion for manufacturing conglomerate.
February 22, 2002: 9:48 a.m. ET
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NEW YORK (CNN/Money) - Northrop Grumman Corp. has offered to buy TRW Inc. for nearly $6 billion, Northrop said Friday, in what may be an attempt to take advantage of a recent drop in TRW's stock price, although Northrop also hinted it may be willing to raise its offer.
The defense contractor offered to pay $47 for each TRW share, a premium of about 18 percent over TRW's closing price Friday. With 126.3 million TRW common shares outstanding, the deal could be worth as much as $5.9 billion.
Northrop said it expects the combined companies would have revenue in 2003 of between $26 billion and $27 billion.
"We believe the strategic combination of Northrop Grumman and TRW will provide tremendous value to the shareholders of both companies," Northrop CEO Kent Kresa said. "Northrop Grumman's electronics and systems integration capabilities, combined with TRW's space and systems expertise, would create a strong contributor to the nation's satellite and missile defense requirements."
TRW, a Cleveland-based manufacturing conglomerate whose products include auto parts and equipment for airplanes and spacecraft, said it is considering the offer, but also said it is "regrettable" that Northrop chose this moment to make a bid, when its stock price has been hurt by the sudden resignation this week of CEO David Cote.
"TRW just lost its CEO and it has an interim CEO," JSA Research analyst Paul Nisbet told Reuters. "They (Northrop) have picked on (TRW) at a particularly vulnerable point, it would appear."
TRW (TRW: up $10.50 to $50.30, Research, Estimates) shares closed at $39.80 Thursday, but surged nearly 30 percent in trading Friday.
In a letter to TRW outlining Northrop's offer, CEO Kresa said Northrop was "prepared to consider in our offer any enhanced values" it discovered in its due-diligence review of TRW, a hint it could be willing to raise its price.
Los Angeles-based Northrop set a March 11 target date for drafting a purchase agreement and completing its review of TRW. It hopes to complete the deal by the third quarter of 2002.
Northrop (NOC: down $7.85 to $109.95, Research, Estimates) said it plans to spin off TRW's automotive business immediately after completing the purchase. Kresa told Reuters he'd already spoken to a potential buyer for the business, but offered no details.
Just three days ago, TRW CEO David Cote resigned to take the helm at a bigger defense contractor, Honeywell International Corp. (HON: up $1.04 to $35.09, Research, Estimates). TRW established an executive committee to run the company while it looks for a CEO.
In his two years as CEO, Cote had focused largely on cost-cutting measures, and his resignation led to a sharp drop in TRW's stock price. Several Wall Street analysts also downgraded the stock, in part because of fears that TRW management would be distracted by the hunt for a new CEO.
Moody's Investors Service said it may cut Northrop's senior unsecured from "Baa3," one step above junk, and may also cut TRW's senior debt from "Baa2."
Moody's said it will weigh such risks as the difficulties of integration and the financial burden on Northrop. 
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