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BAE SYSTEMS CONSIDERS BID FOR TRW

9 Jun 02. BAE SYSTEMS Plc (London:BA.L – News) is considering a bid for TRW (NYSE:TRW – News). BAE started seriously looking at TRW after it put itself up for sale a few weeks ago, and is currently going through its books, a London-based source said. “The level of interest so far is quite strong,” he said.

The company is also in informal talks with officials at the Pentagon to seek their view on a proposed BAE-TRW deal. One source said the Pentagon has been “receptive” to the idea.

However, authorities in Washington are unlikely to officially say anything on the deal before it is formally submitted for approval.

If BAE decides to bid for TRW it is likely to formally approach TRW’s board in the next few days, he said. BAE declined to comment and TRW could not be reached immediately.

Northrop has already bid $53 for each TRW share, valuing the Cleveland company at $6.7bn. The offer closes on Friday. Northrop is currently going through more details in TRW’s books to assess whether it could raise that offer.

TRW shares have mostly traded above Northrop’s all-share offer in recent days and closed at $53.97 on Friday.

If BAE outbids Northrop to buy TRW it would boost its already strong presence in electronics and information systems in the United States.

BAE Systems North America is one of 10 suppliers of combat systems, information and electronics warfare systems, avionics and navigation products to the Pentagon.

The company has annualized sales of $3.7bn in the United States, where it employs about 22,000 people.

Some defense analysts and other industry observers have said that BAE Systems, being a foreign company, would find it tough to get the Pentagon’s nod on a takeover.

But BAE will argue that it is already involved in several sensitive programs for the Pentagon. “Many in Washington consider BAE Systems North America as an American operation,” one industry observer said.

The company has been deepening its ties with the U.S. defense industry in recent years. In 2000 it bought Lockheed Martin’s (NYSE:LMT – News) control unit for $510m, In the same year it paid $1.67bn for a clutch of Lockheed’s defense electronics units including Sanders.

Apart from studies by the Pentagon, a BAE-TRW deal would also face the scrutiny of the Committee on Foreign Investment in the United States (CFIUS).

TRW virtually put itself up for sale after it received a hostile offer from Northrop earlier this year. The company has said it has signed confidentiality agreements with more than one potential buyer for the company, apart from Northrop.

Industry observers say that General Dynamics (NYSE:GD – News) and L-3
Communications (NYSE:LLL – News) have shown interest in select businesses of TRW. It wasn’t immediately known whether these two companies have signed pacts with TRW.

TRW is also pursuing a parallel plan of breaking itself up if it cannot fetch a good price from a buyer. The company is in talks with multiple parties to sell its aeronautics business and has sought permission to list its auto parts business on the New York Stock Exchange.

Comment: The Washington Post, on Saturday, quoted sources familiar with the situation, said BAE officials have already met with the Pentagon’s undersecretary for acquisition and technology, Pete Aldridge.

This is a smart move by BAE which is becoming more and more disenchanted with its label as the pariah of the UK defence business. It seems to have escaped a number of high ranking officials within the MoD that BAE has a duty to its shareholders and does not chase business for business sake because there is a UK requirement; at the end of the day the outcome must be profitable for the company. The recent hard-hitting Times interview with Procurement supremo, CDP Sir Robert Walmsley (We will report this in detail in our next issue) suggested that the big stick will be waived again and again to get contractors to bring prices down. What may have

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