Northrop-Litton Deal: Best-Kept Secret in Town

Northrop Grumman Corp.’s bid to acquire cross-town rival Litton Industries Inc. stunned Wall Street and aerospace insiders who were left wondering Friday how such a blockbuster deal escaped notice and even rumors.

If not outright leaks, at least some kind of speculation often precedes such deals. But there was none for Northrop and Litton.

“There was no inkling at all,” said Jon B. Kutler, an aerospace investment banker whose office is less than a block from Northrop’s headquarters in Century City.

The $3.8-billion deal, if approved by regulators, would unite two storied Southern California aerospace companies into a top-tier defense contractor and a leading provider of defense electronics. According to executives involved in the talks, it was one of the better-kept secrets in a gossipy town because Northrop insisted on a simple rule: Only a handful of top executives would be involved and lawyers wouldn’t be pulled in until the last minute.

Ironically, being corporate neighbors also helped maintain secrecy. Northrop Chairman Kent Kresa and Litton Chairman Michael R. Brown were able to stroll the hallways of the Beverly Hilton Hotel in Beverly Hills--where the discussions took place--without raising any eyebrows because they are often seen together at many of L.A.’s social functions.

As such, Kresa said, it was easy to approach Brown about a possible merger about a year ago and continue informally talking about a deal “off and on” until last June when both sides agreed it was time to take it a step further.

With General Electric Co.’s $45-billion bid for Honeywell Inc. and BAE Systems’ acquisition of Lockheed Martin Corp.’s aerospace electronics business, Kresa feared Northrop would be relegated to a supporting role in government contracts unless it got bigger. Woodland Hills-based Litton seemed to fit the bill. With Litton, Northrop would be among the top defense contractors along with Lockheed Martin, Boeing Co. and Raytheon Co.

Shortly after Kresa and Brown signed a confidentiality agreement in June, both companies notified their financial advisors: Salomon Smith Barney for Northrop and Merrill Lynch & Co. for Litton.

But it wouldn’t be until a month ago that serious talks began as Litton decided to sell its defense electronics unit, prompting Northrop into action. Acquiring Litton without the unit would diminish the benefits of the deal, advisors warned.

“We made it clear that we’d be less interested in the company without that,” Kresa said during a news conference Thursday.

On Dec. 13, due diligence began in earnest as top executives and key advisors pored over the books and held discussions while holed up at the Beverly Hilton. There were no more than half a dozen people on each side involved in the talks.

Several code names were used, including Project Millennium, purposely chosen because it would draw little attention amid all the millennial events happening around town.

“Mike Brown and Kresa had a very collegial, strong relationship throughout the talks,” said a source who sat in on the meetings. “They’ve known each other for a long time so when they were together it didn’t raise any suspicions.”

Once the deal is completed, expected sometime in the first quarter of 2001, Litton’s Brown, 59, plans to retire. Litton’s president and chief operating officer, Ronald D. Sugar, also a familiar acquaintance of Kresa’s, would take over as president and CEO of the new unit. Sugar, a UCLA graduate, was recently chief executive of TRW Inc.’s Aerospace & Information Systems unit in Redondo Beach, and is a member of the board of governors of the Aerospace Industry Assn. with Kresa.

The deal’s announcement prompted a Litton buying spree Friday as the stock shot up $15.31, or nearly 25%, to close at $77.94 on the New York Stock Exchange. Conversely, Northrop shares fell $7.81, or nearly 10%, to close at $74.13.

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Ups and Downs

Shares of Litton Industries reached a 52-week high a day after Northrop Grumman announced it would acquire the defense contractor for $3.8 billion. The $80-per-share offer led to a selloff for Northrop stock, which fell nearly 10%.

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Litton Industries

Weekly closes and latest for LIT

Friday: $77.94, up $15.31

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Northrop Grumman

Weekly closes and latest for NOC

Friday: $74.13, down $7.81

Source: Bloomberg News