Shortly after closing the $2.17-billion purchase of Grumman Aviation in mid-1994, Northrop Chairman Kent Kresa proclaimed the dawn of an "exciting" new era for the combined companies--"a winning situation for everybody involved."
For a while that seemed a reasonable boast. With about $8 billion in sales, the combined companies were roughly equal in size to Martin Marietta, then one of Northrop's principal rivals.
But within months Martin merged with Lockheed, creating a $23-billion powerhouse. Los Angeles-based Northrop Grumman Corp. soon ended up immured in fourth place--behind Lockheed Martin Corp., Boeing Co. and Raytheon Co.--in an industry where, many observers, believe there are only three seats at the table.
Although Northrop did make several important acquisitions after Grumman, including the $3-billion purchase of Westinghouse Electric Corp.'s defense electronics group, it lost some bigger game. It was outbid by Raytheon this year for the missile and defense business of Texas Instruments and for the defense business of General Motors Corp.'s Hughes Electronics unit.
"They lost a number of times in the competition to acquire large properties and large [defense] programs," said Paul H. Nisbet, president of JSA Research, an independent consulting firm in Newport, R.I.
Analysts say the problem was not necessarily that Northrop and Kresa have been insufficiently aggressive. Rather, the biggest acquisition targets made better economic and strategic fits with Northrop's competitors. That allowed the rivals to justify higher bids on the expectation that they would be able to gain more from subsequent cost-cutting and consolidation.
Kresa "was cursed with the position he had of bidding against truly natural owners" of the targets, said Robert Paulson, former head of the aerospace practice at McKinsey & Co. and now chief executive of the investment firm Aerostar Capital.
The company that will now become part of the largest aerospace firm in the world--assuming the merger takes place as planned--is one of Southern California's oldest companies, having been founded in 1939 by John "Jack" Northrop, a pioneering aircraft designer and investor.
