NEW YORK -- U.S. defense giant Northrop Grumman Corp. on Monday agreed to buy defense and auto parts group TRW Inc. for $7.8 billion, creating one of the world's largest military and satellite contractors.
The deal catapults Northrop into the top ranks of the global defense industry at a time when the U.S. government and its allies are sharply increasing military spending following the Sept. 11 attacks on the United States.
It also marks a significant payoff for TRW, which resisted earlier, lower takeover offers from Northrop and ultimately won a much richer price. The deal ends a four-month standoff between the companies.
"With the significant programs wins Northrop Grumman has achieved in the last year, plus the significant growth expected in space and missile defense, plus homeland security, the outlook for this company is very bright indeed," said Kent Kresa, Northrop's chairman and chief executive officer.
He said he expects no significant objections to the deal from the government regulatory agencies that must review it, including the Defense Department. Most industry analysts agreed.
TRW shares rose 24 cents to $57.22 in early afternoon trade on the New York Stock Exchange. Northrop shares, which also trade on the NYSE, shed $4.85, or nearly 4 percent, to $120.15.
DEFENSE SPENDING ON THE RISE
The deal is one of the largest in the defense field since the industry consolidated in the 1990s. It will significantly strengthen Northrop's position in satellite communications and missile systems, giving it the firepower to challenge Boeing Co. , Lockheed Martin Corp. and Britain's BAE Systems Plc in bidding for big defense contracts.
In many respects, the timing of the deal could not be better. U.S. President George W. Bush has submitted a $379 billion defense budget to Congress for fiscal 2003 -- a $48 billion increase and the largest since President Ronald Reagan was in the White House.
The deal comes less than four years after Los Angeles-based Northrop itself was a takeover target of Lockheed. Washington authorities effectively blocked such a deal amid Pentagon concern that it would hurt competition in the U.S. defense electronics industry.
A SWEETENED OFFER
Northrop and TRW, in a joint statement, said each TRW share will be exchanged for $60 in Northrop stock, or between 0.4348 and 0.5357 Northrop share, depending on Northrop's stock price.
That is up from Northrop's original offer in late February of $47 per share, or about $6 billion, as well as a later offer of $53 per share. Last week Northrop informally raised its bid to about $7.25 billion.
"It's a good deal," said Paul Nisbet, aerospace analyst at JSA Research Inc. "If (TRW's) stock price hadn't gone up considerably, (Northrop) probably wouldn't have bid anywhere near as high."
The deal carries a $275 million break-up fee should either party walk away from the transaction.
Northrop also will assume more than $5 billion of TRW debt, stamping an enterprise value of about $12.6 billion on the whole transaction.
TRW's debt will be reduced by about $1 billion after the Cleveland-based company receives proceeds of $1.5 billion from the agreed sale of its aeronautics unit to Goodrich Corp. .
BAE OFFERED $6.75 BILLION
Northrop said it plans to either spin off or sell TRW's automotive parts business. More than one bidder has offered to buy up to a 20 percent of the unit, but no party has bid for the entire business, sources familiar with the situation said.
Northrop said its acquisition of TRW is expected to close by year-end and will help it show earnings growth next year in the double digits in percentage terms.
The deal is expected to be scrutinized by the Pentagon, but few industry analysts expect it to be held up.
"At least on paper, this deal would raise the least political questions," said a defense industry investment banker in New York.
However, some observers say the Pentagon may ask Northrop to shed some defense electronic assets acquired from TRW.
Northrop and TRW reached agreement after rival offers for TRW from BAE, General Dynamics Corp. and Raytheon Corp. failed to match TRW's expectations.
BAE offered $6.75 billion cash for TRW's defense assets, while General Dynamics offered $6.5 billion cash, according to a source familiar with the situation.
BAE and General Dynamics have declined to comment on their offers, which have never been made public. Raytheon's offer was not known.
BAE shares rallied in London on relief that the British company was no longer in the race for TRW, analysts said. The shares closed 3.7 percent higher at 347 pence on the London Stock Exchange.
"This has been a missed opportunity for BAE but it was never a high-probability one," said J.P. Morgan analyst Chris Avery in London.
"There is a little bit of relief that BAE is not now going to play an active part in what could have been an auction for TRW," Avery said.
Salomon Smith Barney, the investment banking arm of Citicorp, advised Northrop, while Goldman Sachs and Credit Suisse First Boston, a unit of Credit Suisse, the Swiss bank, advised TRW.