Northrop: A Top Gun in the Defense Buildup

When the stock markets reopened on Sept. 17, Northrop Grumman Corp. (NOC ) turned in one of the best performances among the companies in the Standard & Poor's 500-stock index, rising nearly 16%, to $94. Sure, all of the defense stocks have rallied in the wake of the Sept. 11 terrorist attacks, but defense analysts say Northrop is among the best-positioned to capitalize on the uptick in Pentagon spending that may be in the making. "The most immediate hardware demand that this crisis will generate is for intelligence gathering and command and control," says Loren B. Thompson Jr., an analyst at the Lexington Institute, a think tank in Alexandria, Va. "Those are Northrop's strengths."

Such was not always the case. When Kent Kresa rose to CEO of Northrop in 1990, the company was in abysmal shape, rocked by cost overruns and charges of fraud. With half its revenue coming from the controversial--and short-lived--B-2 stealth bomber program, Northrop was widely considered takeover bait. Kresa got the company out of its tailspin with a high-tech buying spree, acquiring the electronics, information-technology, and small-scale-weapons companies whose products are suited to post-cold-war conflicts. "We looked where the future was going," Kresa says. "It was surveillance, information technology, and precision strikes. We didn't want to be Liquid Paper when word processors came along."

NET SAFETY. Northrop is a big supplier of radar and other components for the U.S. Air Force's forthcoming F-22 Raptor fighter and the existing carrier-based F/A-18E/F planes. Its info-tech unit protects Pentagon computers from Internet attacks. Analysts expect revenues of that $3.5 billion unit to climb 25% a year through 2005. Northrop also hopes to benefit from projects still in development, such as the U.S. Navy's DD-21 destroyer, the multiforce Joint Strike Fighter, and the unmanned Global Hawk reconnaissance plane. "That could be very valuable for gathering intelligence in places like Afghanistan," says Andrew F. Krepinevich, director of the Center for Strategic & Budgetary Assessments, a defense think tank.

Kresa's first big acquisition was Grumman Aerospace in 1994. With that came the U.S. Army contract for the Joint Stars air-to-ground surveillance planes. In 1996, he picked up Westinghouse's defense-electronics business, which included advanced radar systems. And in 1997, Northrop landed Logicon Inc., which designs and runs government computer systems. This April, Northrop added Litton Industries Inc., prized for its defense electronics and info-tech unit. With Litton came two sizable but troubled shipyards. Kresa says he can whip those into shape. JSA Research Inc, which provides analysis on the defense industry, says Northrop sales should double this year, to $13.5 billion, and grow about 22% a year through 2005, while earnings, up 28% to $608 million last year, should climb 12%.

Kresa is still looking to buy. In the past five months, he has been battling to win Newport News Shipbuilding Inc. Kresa has tried to convince the Pentagon and the Justice Dept. that a rival bid from General Dynamics, which would combine the only two U.S. nuclear submarine makers, would be costly and anticompetitive. He claims a Northrop takeover could save $2 billion over a decade. And it would let him bolster Litton's ship operations. So far, General Dynamics has the inside track, say analysts. But Wall Street has speculated that the Pentagon won't allow any merger, preferring separate suppliers if the terrorist attacks prompt a slew of new orders. The Pentagon says only that its review is proceeding.

Kresa is understandably reluctant to boast about Northrop's prospects these days. That those prospects are so strong, however, is recognition that the strategy he laid down a decade ago is paying off.

By Christopher Palmeri in Los Angeles, with Stan Crock in Washington

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