Will It Buy or Sell? TRW the Subject of Wall Street Rumors

More corporate fireworks are coming from TRW Inc.

Or so it’s widely believed on Wall Street. Speculation is rampant that the maker of automotive parts and space and defense gear is preparing to make big changes that could involve TRW’s either buying more companies--including possibly Northrop Grumman or Litton Industries--or splitting up its existing operations.

The rumors intensified this month when TRW agreed to acquire British auto parts maker LucasVarity for $6.6 billion. That deal would nearly double the size of TRW’s auto parts business, and it could be the spark that sets off a much larger reshaping of the company, analysts said.

“LucasVarity is only Act I” to a strategic shift that “promises to be an elaborate and ambitious production,” analyst Jennifer Murphy of Morgan Stanley, Dean Witter & Co. said in a recent report.

But since TRW isn’t disclosing its plans in detail, all sorts of scenarios are being predicted for the Cleveland-based company, whose space and defense group is headquartered in Redondo Beach.

One has TRW dividing its auto parts and space lines into separate companies now that it’s bolstering its auto parts operation with LucasVarity. But another has TRW keeping both and buying another aerospace company to build up that side of its business too.

“They would like to buy Northrop Grumman and, to a lesser extent, Litton Industries, or perhaps both,” said analyst Jack Blackstock of Donaldson, Lufkin & Jenrette Inc. in New York, referring to the two Southern California-based defense contractors. Northrop Grumman and Litton declined to comment on the speculation.

Another scenario has TRW building up both sides of its business and then splitting them into two companies. Tenneco Inc.’s automotive line, which includes Monroe shock absorbers, is thought to be on TRW’s radar scope. United Technologies Corp. recently said it’s talking to several potential bidders for its auto parts unit as well, and TRW might be among them.

And still another scenario has TRW shedding only small pieces of its auto parts and space divisions in order to fine-tune the company.

But TRW Chairman Joseph Gorman, in response to questions for this article, issued a statement indicating that the company is indeed poised to make a big acquisition in the aerospace field, though he didn’t identify any target by name.

The space group is “a solid contributor to the corporation and we are committed to its growth,” and TRW has undertaken an “aggressive search for defining acquisitions in the defense contracting arena,” Gorman said. Also, “in the near term, it is in the company’s best interests to continue as a diversified business,” he said, casting doubt on any immediate plans to split the company apart.

TRW was born in the early 1950s in a former Los Angeles barbershop, where two Caltech graduates, Simon Ramo and Dean Wooldridge, opened a firm to design a new ballistic-missile system. The pair, featured on the cover of Time magazine in April 1957, later merged their operation with auto parts maker Thompson Products Inc. to create TRW.

TRW today is a leading maker of auto air-bag restraints and steering and suspension systems. LucasVarity would make TRW a major producer of automotive braking systems as well.

LucasVarity also has an aerospace unit that makes aircraft fuel systems and other equipment, but it has little in common with TRW’s space group, which employs 11,000 people in Redondo Beach and its other Southern California sites.

TRW’s space division has long been a premier builder of military and commercial satellites, complex systems for warfare communications, aircraft avionics and high-energy laser systems.

The group, which also provides technology and consulting services, posted sales last year of $4.7 billion, or 39% of TRW’s $11.9 billion in total revenue. The other 61% of sales came from its auto parts operations.

In some ways, the speculation about changes at TRW’s space group isn’t new. TRW for years has faced questions about whether it might divest the business, in good part because the post-Cold War era led to smaller defense budgets and a flurry of mergers in the aerospace industry.

Gorman, though, steadfastly refused to shed the space group or otherwise take part in the industry’s consolidation. Even when TRW’s space operations were being hammered by the drop in Pentagon contracts in the mid-1990s, Gorman promised to expand the business with the help of more commercial work, which is what happened.

But Gorman is under pressure to somehow boost TRW’s stock price and mediocre earnings growth of late. The stock has badly lagged the general market over the last two years, falling 7% in price while the benchmark Standard & Poor’s 500 index has surged 53%. TRW closed Thursday at $49.56 a share, up 94 cents, in New York Stock Exchange composite trading.

“Management, frankly, is looking for any opportunity to improve the performance of this stock,” said Andrew Casey, an analyst at Midwest Research in Cleveland.

But even though a split-up now might immediately “unlock” some additional value in TRW’s stock, Blackstock said Gorman doesn’t want to break up the company yet for two main reasons: At their current size, the separate pieces might not be able to survive as independent companies, and Gorman still wants to run a major defense company.

“For instance, if he spun off its space and defense group as it is now, it would be takeover bait,” Blackstock said.

Casey agreed, saying TRW “has clearly indicated” that it wants to beef up its space group with another takeover “before considering a value-creating separation” of its automotive and space divisions.

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Making Moves

Wall Street expects more big restrucing moves by TRW, in good part to bolster the company’s lackluster stock. Monthly closes since March 1997 and latest:

Thursday: $49.65

Source: Bridge