Northrop seeks bids for TRW unit
TRW given Wednesday deadline to decide on $5.9B bid, but most expect it will reject.
February 25, 2002: 4:17 p.m. ET
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NEW YORK (CNN/Money) - Northrop Grumman Corp., which made an unsolicited $5.9 billion bid to acquire TRW Inc., is looking for buyers for TRW's auto business but could also spin it off, a source familiar with the situation told CNN/Money Monday.
Northrop Grumman Chairman and CEO Kent Kresa said Friday that the Los Angeles-based defense contractor has had discussions with potential acquirers, a spokesman confirmed.
But those talks are just preliminary. Northrop, if successful in its $47-a-share offer for TRW, will look to promptly separate the automotive business, a spokesman said. The company could choose to either sell it or spin the unit off to shareholders, a source said.
Last Friday, Northrop made an unsolicited $5.9 billion offer for TRW in an attempt to gain control of TRW's space and electronics division. Northrop's offer caused TRW's (TRW: up $0.01 to $50.31, Research, Estimates) shares to soar 26 percent to $50.30 Friday. The stock dropped nominally on Monday, while Northrop (NOC: down $1.51 to $108.44, Research, Estimates) remained unaffected.
Northrop has given TRW, a Cleveland-based manufacturing conglomerate whose products include auto parts and equipment for airplanes and spacecraft, a Wednesday deadline to respond to its offer.
Rejection likely
TRW will likely reject the $47-a-share bid as too low, said analyst Andy Casey of Prudential Securities Inc. Northrop would likely have to offer somewhere around $55 to $60 a share for TRW to become interested.
TRW, which had $16.4 billion in 2001 sales, declined to comment. "Our board will respond in due course," a spokeswoman said.
TRW is searching for a CEO since David Cote resigned last week to head Honeywell International Corp. The loss of Cote spurred Northrop to make its offer, analysts said.
"Northrop came in with a pretty opportunistic bid," Casey said.
A rejection from TRW could cause a possible white knight to emerge. Likely candidates that could possibly trump Northrop's bid include Boeing, Lockheed Martin and General Dynamics, analysts said.
The TRW purchase would fill a major hole in Northrop's portfolio, since the company lacks exposure to missile defense and military space, analyst Nick Fothergill of Banc of America Securities said in a research note Monday.
Finding a buyer
The auto unit, which had $10.1 billion in 2001 sales, comprised about 62 percent of TRW's total revenue for that year, analysts said.
Analysts downplayed Northrop's chances of finding a buyer, given the slumping state of the auto industry.
"We believe that Northrop may not find the disposal of the automotive business a simple operation," said Banc of America's Fothergill.
If successful in its TRW offer, the defense contractor could be forced to sell the auto unit in parts. "Even on a parts basis it is difficult to see who has the adequate cash flow and balance sheet leverage to acquire one of the businesses," said Casey of Prudential Securities.
Salomon Smith Barney is advising Northrop while Goldman Sachs is serving as advisor to TRW. 
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