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Northrop Grumman to sell government advisory business for $1.65 billion

The defense contractor is unloading TASC to comply with a new conflict-of-interest law, which regulates firms that advise the government on weapons systems while also building them.

November 09, 2009|W.J. Hennigan

Defense contractor Northrop Grumman Corp. on Sunday agreed to sell its government advisory business for $1.65 billion to a group of private equity investors led by General Atlantic and Kohlberg Kravis Roberts & Co.

The decision to sell TASC Inc. is part of Century City-based Northrop's efforts to comply with a new federal conflict-of-interest law, which regulates companies that advise the government on weapons systems while also building them.

The deal also shows that private equity investors are back in the game after many slow months during the recession and credit crunch.

"TASC is a remarkable organization with a proud 43-year heritage of supporting critical national security missions," Northrop Chief Executive Ronald D. Sugar said in a statement. The transaction, he said, "reflects Northrop Grumman's desire to align quickly with the government's new organizational conflict-of-interest standards."

Loren Thompson, a defense policy analyst for the Lexington Institute in Virginia, said the sale showed that Northrop was focusing on its future under the Obama administration.

"The company made the decision to be building weapons systems rather than evaluating them," he said.

The choice to sell was a relatively easy one to make, Thompson said, because building military hardware is Northrop's foundation. The company develops and makes a variety of military weapons including unmanned aircraft, satellites and nuclear submarines. It is one of the largest private employers in Southern California, with 27,000 workers.

"Northrop knows that it can't expand in its core business and also go forward with TASC," Thompson said. "So the sale was the only logical outcome."

Based in Chantilly, Va., TASC has 5,000 employees and expects revenue of about $1.6 billion in fiscal year 2009, Northrop said.

TASC consults with government agencies on weapons systems, creating a potential conflict of interest with Northrop's role as a defense contractor under the new law signed by President Obama in June. The Pentagon is still developing specific guidelines for compliance with the law. But analysts said that holding on to the consulting business could limit Northrop's ability to win defense contracts.

The cash deal to sell TASC will probably generate about $1.1 billion after taxes, Northrop said. That money will be used to repurchase shares, the company said. Northrop stock closed up 62 cents at $52.37 on Friday, two days before the deal was announced.

Northrop expects the deal, which must gain regulatory approval, to close by the end of the year.

Jon B. Kutler, president of Admiralty Partners, a private aerospace investment firm in Century City, said the sale came at a time when many private equity firms have been under pressure to get a deal done.

"Many firms haven't made a deal in the last 18 months, and there's anxiety out there to get something completed," he said. "This is a natural sale to extend on, even with such a large price attached."

The TASC deal is the latest sign that financing markets may be starting to thaw after the economic meltdown. Last week, the biggest leveraged buyout of the year took place when private equity firm TPG and Canada Pension Plan bought IMS Health Inc. for $4 billion in cash.

TASC was attractive to private equity investors because many perceive the defense industry -- which is expected to account for $680 billion in government spending next year -- as less risky than other sectors, Kutler said.

TASC was founded in 1966 by engineers from the Massachusetts Institute of Technology. It became part of Northrop when the company acquired Litton Industries in 2001. Sugar joined Northrop in that acquisition and became chief executive in 2003.

In September, Sugar announced that he would step down at the end of the year. Wes Bush, Northrop president and chief operating officer, has been named as his successor.

Sugar sold many businesses during his tenure at Northrop, but this is one of his biggest deals, Kutler said.

"Sugar was good at pruning off the businesses that didn't fit into Northrop," he said. "I don't think that's the case here. The company probably would have liked to keep TASC. They just couldn't jeopardize the biggest part of their business to do it."


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