Northrop goes hostile
TRW tells shareholders to take no action as it studies unsolicited $5.9 billion bid.
March 4, 2002: 6:45 p.m. ET
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NEW YORK (CNN/Money) - Northrop Grumman Corp. officially went hostile with its unsolicited $5.9 billion bid for TRW Corp. Monday, taking its offer to shareholders, after its offer was rebuffed.
Los Angeles-based Northrop commenced an exchange offer for all of TRW's company's outstanding shares which will expire March 29. Northrop also filed a lawsuit in Ohio challenging the state's anti-takeover laws which TRW might use to prevent Northrop's unsolicited bid.
For its part, Cleveland-based TRW told its shareholders to stand pat while it decides the best course of action and studies the details of the Northrop's bid.
TRW said will make a recommendation March 15 on the offer, but most industry observers do not believe the company will change its mind.
Late last month, Northrop offered to buy TRW, a diversified manufacturer of parts for automobiles, satellites and other machinery, for $47 a share, or about $5.9 billion.
TRW rejected that bid late Sunday, based on a unanimous vote of its board, saying Los Angeles-based Northrop was trying to take advantage of a temporary dip in TRW's stock price triggered by last month's resignation of CEO David Cote to become CEO of Honeywell International Inc. (HON: down $0.29 to $39.50, Research, Estimates).
"This is all about shareholder value, and the Northrop Grumman proposal does not begin to recognize the value of TRW's franchise," TRW Chairman Philip Odeen said in a statement.
Northrop's offer was an 18 percent premium over TRW's stock price when it was made on Feb. 21. Northrop would also have assumed about $5.5 billion of TRW debt under the deal.
"We continue to believe that such a transaction would be in the best interests of both companies' shareholders," Northrop CEO Ken Kresa said in a statement.
Most analysts had expected TRW to reject the $47 a share bid as too low and Northrop will likely have to offer somewhere around $55-to-$60 a share for TRW to become interested. Potential white knights could include Boeing, Lockheed Martin and General Dynamics. France's Thales could also trump Northrop's offer, analysts said.
According to Ohio state laws, TRW must hold a vote among its shareholders within 60 days of the launch of the tender offer and set the date for that vote within 10 days.
TRW (TRW: up $0.55 to $50.60, Research, Estimates) shares have skyrocketed since Northrop made its initial bid, hovering around $50. Northrop (NOC: down $4.25 to $103.50, Research, Estimates) shares shed nearly four percent Monday.
In a letter to Kresa, Odeen said Northrop's offer "grossly undervalues" TRW's business, especially its space and defense businesses, which "are in the 'sweet spot' of growth in national defense and homeland security."
A TRW buy would fill major gaps in Northrop's business since the company lacks exposure to missile defense and military space, analysts said. Northrop would benefit most from TRW's satellite production unit, which makes satellites used by the military to spy on enemies and coordinate troops, ships and airplanes.
Northrop makes sensors for satellites but is a relatively small player in the market for military products used in outer space.
And Northrop has said it hopes to sell or spin off TRW's auto-parts business, which had $10.1 billion in 2001 sales, comprising about 62 percent of TRW's total revenue for that year, analysts said.
Northrop said the deal would generate sales in 2003 of between $26 billion and $27 billion, putting the company slightly ahead of Lockheed Martin Corp. (LMT: down $0.07 to $57.00, Research, Estimates), the largest U.S. defense contractor, in terms of total sales.
Based on Pentagon contracts, the combined company would still lag behind Lockheed and Boeing Co. (BA: up $1.29 to $49.13, Research, Estimates), according to the Defense Department. 
-- from staff and wire reports
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