Any offer for TRW would focus on defence businesses, which could concern an administration wary of foreign takeovers

BAE Systems is in acquisition talks with TRW, but any takeover offer from the UK firm would test the US government's tolerance of foreign ownership of defence companies. BAE confirms it is interested in TRW, which has opened talks with several companies after receiving a $6.7 billion takeover offer from Northrop Grumman.

BAE is considered the only foreign company that could contemplate a bid for TRW's defence business, which includes nationally sensitive work on military satellites, signals intelligence and missile defence. The UK company's 2000 acquisition of Lockheed Martin's aerospace electronics division was approved by the US Department of Defense (DoD) despite the unit's involvement in electronic warfare systems.

The $2.2 billion acquisition of two Lockheed Martin units in 2000 boosted BAE North America annual sales to $3.7 billion, about 20% of BAE's total revenues, and made it a major supplier to the DoD. But the deal was approved by the Clinton administration. Most analysts - and Northrop Grumman - believe the Bush administration will look less kindly on foreign takeovers. Others believe the UK's support for the US war on terrorism could tip things in BAE's favour.

BAE is more interested in TRW's $5 billion US defence businesses than its $1 billion UK-headquartered Aeronautical Systems unit, saying the company "may offer an opportunity to extend BAE Systems' defence activities in North America". TRW is already moving ahead with plans to spin off its $10 billion automotive business and is looking for a buyer for its Aeronautical Systems unit.

Debt-laden TRW rejected Northrop Grumman's $6.7 billion hostile take-over bid as inadequate, but the two companies are now in talks and analysts expect the US defence giant to prevail with an improved offer. General Dynamics and L-3 Communications are also believed to have signed confidentiality agreements giving them access to TRW's books. L-3 has launched a debt and equity offering that will give the company a $1 billion "war chest" for further acquisitions, and may be interested in TRW's Aeronautical Systems.

Source: Flight International