Mergers and acquisitions at Northrop Grumman: organizational change and performance

Organizational Change of Northrop Grumann Corporation

Analysis of Change

Northrop Grumman: Interview in relation to Program

Mergers & Acquisitions

Comparisons

Looking to the Future

Organizational Change of Northrop Grumann Corporation

Although acquisitions did not prove to improve the performance of firms the activities of acquisition persists and government policy toward the industry of defense has approved consolidation for the purpose of cost savings that are nominal at best. Mergers and acquisitions are events that greatly modify the dynamics of competition within the affected industries and merging firm's combination of additional capacity and resources make the position in the market and profitability of the firms remaining quite unstable.

Acquisition of technological advances may be often the motivating factor behind acquisitions. Diversification within the firms(s) involved in the acquisition or merger and particularly in terms of subsequent performance. The size of the firm attempting to assimilate a potential target firm may very well be relevant. Acquisition experience at the organizational level may lead to facilitation processes for identification and integration of target firm resources that in improving post acquisition performance may be required. (Haspelagh & Jamison, 1991, as cited by Driessnack, 2003) The form an acquisition is accomplished utilizing may be either through a tender offer or a merger. (Berkovitch & Khanna, 1991, as cited by Driessnack, 2003)

The Infrastructure of Northrop Grumman IT is one that provides delivery of professional and technical services in area of computing that are key as well as offering partner-specific and technology-specific pre-sales assistance. The Key technology disciplines are those of Enterprise storage systems, Mid-range and high-end servers, and Enterprise management applications. Services and solutions provided are listed as being that of architecture, asset discovery, design, staging and configuration, implementation, and end-user and administrator knowledge transfer. Partners of Northrop Grumman include: ActivCard, APC, BEA, BMC Software, Cisco, Citrix, Cognos, EMC, Enterasys, General Dynamics, Hewlett Packard, Hitachi, IBM, ISS, Marconi, Micromuse, Network Appliance, Network associates, Oracle, Peregrine, Quantum, Remedy, Sun Microsystems, StoratgeTek, Sybase, Synmantec, Tandberg, and Vertitas. Northrop Grumman has positioned itself to assist its customers in the implementation of RFID within their supply chains and for nearly two years has performed as a systems integrator of AIT, Automatic Information Technology including solutions of RFID implementations.

Northrop Grumman having achieved successful acquisitions and mergers has been awarded future contracts with Homeland Security and with the RFID Contracts for the Government Human Resources initiatives.

Organizational Change of Northrop Grumann Corporation

Objective

The objective of this work is to examine an example of organizational change derived from and supported by organizational theory, specifically the case of the mergers and acquisitions of the Company Northrop Grumman. A sound theoretical model of the change or 'mergers and acquisitions' will be developed as well as an interview format of objective and deductive questions as those to be posed to a manager or executive responsible for a recently completed or ongoing change program. The strategic, organizational design or process purposes that the organization is attempting to achieve through the organizational change process will be focused upon. This work seeks to explain current theoretical models, trends, applications and outcomes of the change program as to mergers and acquisitions explored during the interview phase and will compare the applications as implemented or conducted by the interviewed organization to the original literature findings. Therefore the model will be developed, tested in a 'real' organizational setting and the findings compared to the original theoretical model.

Introduction

The Information Technological sector of Northrop Grumman is a "Premier provider of advanced information technology solutions, engineering and business services for government and commercial clients." The IT sector supports information technology services in such things as "battle management, mission planning, modeling and simulation, information assurance, software engineering, intelligence, surveillance, space systems, base and range support. IT services are provided for government, commercial as well as international customers. This sector of the technology information market provides services to the Department of Defense (DOD) and is in fact the leading provider to the DOD.

Further stated is that:

"The sector is a top-tier integrator of large-scale information systems for customers such as the Internal Revenue Service, Department of Justice and the FAA. The Information Technology sector also provides technical services, such as operations and support services or government facilities including NASA's Kennedy Space Center, Cape Canaveral Air Station and Patrick Air Force Base, and is one of the largest suppliers of software enterprise licenses to the DOD. As a leader in hardware/software sales, solutions and services to government customers, the sector has earned a place on several major indefinite delivery/indefinite quantity contract vehicles such as ANSWER, Millennia, NIH CIO-SP2, Smart Access Common ID Card, Safeguard and I-Assure."

I. Background and History

A 1996 report stated that, "Since 1989, real-dollar Pentagon purchases from the private sector have shrunk more than 30%." This is illustrated in the 1-million private-sector defense jobs that disappeared between 1989 and 1996. The report states that there has been "remarkable diversity in conversion performance among both large and small firms." Rockwell International, Hughes Aircraft and TRW, all large prime contractors have committed both earnings and organization resources to shift aerospace and communications technologies toward the civilian product sector while lowering the military sales dependence to less than forty percent. However, Lockheed Martin, Northrop Grumman and other are nudging for positioning in military markets that are shrinking by using cash reserves in gaining competitors through mergers and acquisitions. With investment bankers maneuvering mergers companies such as Rockwell and TRW are forced to "divest their defense divisions for the short-term profits that pure play defense firms provide." Markusen & Oiden (1996).

II. Analysis of Change

The partnership of Lockheed Martin and Northrop Grumman are on many defense-related contracts with Lockheed building the military fighter aircraft said to the state-of-the-art and Northrop Grumman providing highly sophisticated radars and electronics for the Lockheed fighter planes. Both companies search relentlessly for innovation in cost reduction and value addition to their products with many smaller companies involved by contributions to the finished products. Cultural change was key to success in this initiative and an extremely knowledgeable team of educators and facilitators were brought together for assisting the resolution of differences in approaches in manufacturing among the companies and in establishing common processes and working vocabularies.. Some stated keys to the success of the joint projects of Lockheed and Northrop are:

Team members left respective company badges at the door to focus on needs of the aircraft program instead of benefits to their specific company.

Adoption of an "open kimono" and "no-blame information exchange approach" ensured openness and sharing of information

Corporate egos were dropped and it was agreed upon to develop implementation plans, to implement those plans and project results to "multiple aircraft programs."

Involved was dealing with those department that were distanced from engineering and manufacturing

Required within the process was negotiation and executive involvement. Lean Manufacturing Collaboration (2003)

Stated as lessons learned were the following:

Executive leadership, support and buy-in are crucial.

Clear, open and honest communications are required

Careful coordination is required with organizations outside the project team in effecting change.

Changing a strategy for a new product is far easier than to change a product's strategy that is already in production

Drawing ownership is a factor

Cultural changes are slow

Knowledgeable outside educators/facilitators and not consultants are vital. (Lean Manufacturing Collaboration, 2003)

VIII. Resulting Success of Northrop Grumann: Interviews

The company's objectives and phased approach are being replicated effectively for each new project. A target of $250 million in annual value creation from the 2001 $5.1 billion acquisition on Industries with a major portion being integrated into the Information Technology sector of the company. Northrop Grumann achieved the target ahead of schedule in spite of the forecast of Deloitte research. McGovern, et al. (2004)

In a separate report published in Financial Executives International states "a consolidation-oriented environment is also a reality for Northrop Grumman Corporation global aerospace and defense company headquartered in Los Angeles." Holliday (2001) According to Richard B. Waugh, Jr. CFO since 1993, "Our industry has gone through considerable consolidation ... Ultimately, if you're not growing shareholder value, you're not growing a healthy corporation." "Our style is to amalgamate our colleagues into Northrop and I think that over the years, we've brought the best of various culture together to make the company what it is today" states Waugh. Holliday (2001) According to the report by Holliday (2001) stated is that, "To say technology is constantly changing is an understatement." Waugh stated in the report that "we believe it's important to hire self-starters giving the opportunity to work on real challenges with strong internal processes and applying oversight and developing good people ....we also believe it's important to hire people who exemplify integrity and intelligence in addressing challenges by making key judgments." Holliday (2001)

When Herb Anderson, Corporate Vice-President for Special Projects, Northrop Grumman Corporation was asked the question by Washington Technology Publication: "Why has Northrop Grumman been successful at acquisition? Anderson answered by stating: "We've always had a process for integration, and we've honed it over time. The process includes every functional area of the company. Another important thing is our attitude. When we bought something we wanted to put together the best company we possibly could. The process isn't based on imposing Northrop Grumman's ways on you. We took the best processes from [our organization and the companies we acquired to create a new company. We always looked at five cultural attributes:

Program management

Speed

Taking the best of both

Communication / and Focus on the customer"

When Anderson was asked how the unit's growth had changed his job, Anderson replied by stating that: "When we were $500 million, I knew every single aspect of the business. I knew everybody, I knew everything. At nearly $5 billion, I've had to learn to be much better at delegating. I had to adjust to looking at the financials from a higher-level .I had to make sure that we had a strategic plan in place and that we communicated that plan. (Washington Technology, 2004)

According to a report dated June 30, 2004 "The Department of Homeland Security has awarded Northrop Grumman blanket purchase agreement (BPA) to implement and maintain a new human management system, known as MAXHR, which will help build a high performance workforce, and improve recruitment and retention efforts." The BPA amount to $2 million was awarded to Northrop Grumman Information Technology (IT) has a maximum potential over the coming three years of about $175 million. Stating that, "We have significant expertise in human capital management" as well as a history of being both "on schedule" and "on budget" enterprise resource programs," stated Wood Parker, Northrop Grumman's President of IT Federal Solutions Business Unit. Further stated by Parker was that, "Our strong proficiency in these areas give us an understanding of the human resources issues facing the Department of Security."

The contract has Northrop Grumman providing overhead and program management for the new system, in-depth functional expert performance, classification, labor relations, adverse actions and appeals of communication, training, and organizational change management; and an enterprise-wide information technology system in line with President Government initiative."

Provision for a seamless system is the goal of Northrop Grumman managing the integration of the 22 agencies in the Department, according to David Zolet, vice president of Homeland Security Grumman Corporation. Zolet claims that, "This new system will speed international operations, allowing the Department to maintain their focus on tasks that are critical in fulfillment of their mission.

Northrop Grumman Information Technology implemented a new enterprise wide set of business process systems that simplifies assimilation of business units already in existence as well as merging and acquiring companies into the parent company all on a single database which has reduced costs, eliminated redundant processes and has lead to organizing growth in the business." Northrop Grumman Corporation is a leading information technology solutions provider and has seven sectors one of which is Northrop Grumann Information Technology with heritage spanning half a century. Areas of technology of Northrop Grumann include information systems integration intelligence as well as specialized scientific engineering and technical services. Northrop Grumann Corporation has global operations totaling 300 locations across 47 states as well as 8 foreign countries and employees 23,000 individuals. Armed force branches, federal civilian agencies, national intelligence communities, state and local government and commercial and international clients are all part of those served by Northrop Grumann.

Comparisons

Prior to the event of September 11, 2001 there were 55 prime government contractors for arms. Presently there exist only five. Lockheed Martin, Boeing, Northrop Grumman, General Dynamics and Raytheon had not felt the effects until mid-2002. According to Northrop Grumman Vice President and CFO, "it is a matter of managing the businesses as businesses rather than seeing themselves mainly as equipment providers for the military." Some of the acquirers took on excessive debt with the government funding less of the research and development, which heated up the competition for corporate capital. The message was clear that defense contractors needed to find new and cheaper ways of producing high-tech arms and there were needed more efficient ways in which the merge. "The most dramatic early divesture drive was by General Dynamics Corporation, which disposed of its huge fighter-plane missile and space-launch businesses" Morrow, et al. (2004) and seemed almost ready for complete liquidation at one point in time. Boeing Company's defense programs assisted in improving the corporate profit margin in 1998 with the help of Debby Hopkins during the 17 months of Hoskins time as CFO. Lockheed Martin underwent one of the "most complete finance reinventions ....which used M & A to become both the industry's largest company with sales at $26 billion in 2002. However for a little while Lockheed was the most indebted of those in the industry with troublesome acquisitions soaking of profits. Northrop has made cost reduction its' mantra with the approach reshaping finance departments and as well at the acquired companies of Litton Industries which was purchased in 2001." Morrow, et al. (2004)

"Northrop has an ability to integrate its targets quickly and efficiently and has redesigned the business around ships, space systems, electronics, and unmanned surveillance aircraft." Morrow et al. (2004) L-3 has used a system, which has built into a company totally $4 billion in annual sales which is eight time the amount in 1997. Lockheed Martin's program is in an international arrangement that is a break from policy of the past calling for warplanes to be designed first in the U.S. And then marketed out of the country. Boeing won a contract for production of Transportation Security Administration equipment of bomb-detection machinery. Lockheed Martin and Northrop Grumman Corporation will assist on passenger-screening systems and will manage the Coast Guards modernization of $11 billion. Raytheon is developing the "first responder" vehicle for emergency command and communication. Morrow, et al. (2004) Quite clearly there is enough work to go around in an industry that was awakened from a long and deep sleep by the event that took place in New York City on the 11th day of September, 2001.