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Updated from 10:38 a.m. EST




Northrop Grumman

(NOC) - Get Northrop Grumman Corporation Report

is trying to lowball it with a $5.9 billion takeover offer. The market appears to agree.

Northrop Grumman publicized intentions Friday morning to acquire TRW for stock worth $47 a share, an 18% premium over TRW's closing price on Thursday. But in the hours since the bid was disclosed, TRW's shares have easily eclipsed the implied value of the deal, vaulting better than 26% to $50.23 as arbitragers evidently bet more offers would surface.


"This was an opportunistic attempt to take advantage of a drop in share price," said Efraim Levy, a research analyst at Standard & Poor's. "I think TRW would have been receptive to a higher bid."

TRW asked shareholders not to take any immediate action while it reviews the proposal, saying the offer was an attempt to buy its stock on the cheap following the departure of a top executive. Based on 126.3 million common shares outstanding, the deal values TRW at $5.9 billion.

"TRW finds it regrettable that Northrop Grumman has chosen to make this proposal immediately following the unexpected departure of its former chief executive officer, David Cote, and the aberrationally low stock price that resulted," the company said in a written statement.

Cote is leaving to become head of


(HON) - Get Honeywell International Inc. Report

. TRW disclosed Cote's departure Tuesday; its stock fell 7% the next day. Based on the share price before Cote's plans were made public, Northrop's offer represents just a 4.3% premium.

Northrop was down $9.80, or 8.3%, to $108.

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"The deal price would have to be in the low to mid-50s," Levy said. Using a

price-to-earnings ratio of 16 -- which is at the high end of TRW's historical PE range -- and 2003 earnings estimates of $3.30 a share, Levy considers $53 a share to be a more reasonable offer.

Fearing a Bid

Among other defense stocks,

General Dynamics

(GD) - Get General Dynamics Corporation Report

was having the biggest reaction on Friday to news of the possible takeover battle -- it was recently lower $4.73, or 5.1%, to $87.44.

"The market seems to think GD would be an interesting buyer," said Paul Nesbit, an analyst at JSA Research, an aerospace research firm. "Maybe they're looking for retribution for Newport News."

Last November, Northrop Grumman won a hostile to bid for Newport News Shipbuilding, which had previously agreed in April of 2001 to be acquired by General Dynamics.

"As quiet as Kent Kresa

Northrop Grumman's chief executive is, he's extremely aggressive and adept at pulling this kind of thing off," said Nesbit. "I wouldn't be surprised if he did it again."

But he added that TRW would be an appealing acquisition for many defense contractors. "Any aerospace firm would be interested in TRW's very sophisticated military and IT business," said Nesbit. "Whether or not they want the auto business is a different story."

Shedding Iron

Most companies in the aerospace business have gotten out of the auto business, according to Nesbit. That includes

United Technologies

(UTX) - Get n.a. Report



(TXT) - Get Textron Inc. Report


Despite rumors, TRW -- which is highly leveraged -- has said in the past it has no intention of spinning off its automotive business. But Northrop said it would plan to separate it, should the deal go through.

Northrop Grumman hopes to close the deal in the third quarter, pending approval of TRW's board.

"We believe the strategic combination of Northrop Grumman and TRW will provide tremendous value to the shareholders of both companies," said Kresa.

The transaction is expected to be neutral to Northrop Grumman's earnings. Including the impact of this deal, the company predicts it will have a debt-to-capitalization ratio below 40% by the end of 2002.