Case 4: Project Titan at

Northrop Grumman
1. Would you recommend that Northrop Grumman divest its ship
building capabilities? Why or why not?

 There were serious discussion and deliberations about a spin-off focused on issues related to corporate structure,
management and capital structure
 The performance of NOC in general and the shipbuilding segment raised questions about its competitiveness
 In general the ship building was no longer an attractive business in its portfolio
 Many adverse scenario like low demand, natural disasters like cyclone Katrina and the internal procurement policy
changes by US Navy, the internal EBIT, EBIT margins and free cash flows were in a declining trend.
 Each year seemed to bring more challenges while old challenges did not reced. The growth and return profile of
the remaining businesses/assets was hugely impacted by unpredictable and unfavourable performance of ship
building business.
 As per exhibit 10, earnings volatility of NOC was primarily attributable to the ship building business.
 The forecast also showed declining margins and major event risks were associated with ship building business.
1b. What are the general guidelines that determine when a
divestiture makes sense?

 As the ship building business or if any business in general is not adding to the shareholder value and when there is
no expected growth potential for the business and considering the riskiness of the business the option could be
divestiture
 Wrong mix of businesses can also be corrected by divestiture. Stagnant portfolios should be divested, businesses
with high opportunity costs should be divested.
2. What are the advantages and disadvantages of divesting
through a sale or through spin off? Did Northrop Grumman make
the right choice?

 While the organization is a highly financially stressed situation a potential option is sell off and to encash the
liquidity. However it increases the tax liability to the shareholders.
 During spin off, generally there are no no tax liabilities as the transaction is through shares. The focus shall be to
build up an independent brand & profitability may increase. However there are large increased fixed costs,
contractual obligations revision, requires more support in managerial, financial and other key areas, identity
dilemma and insecurity to the employees. "
3. Was Huntingtion Ingalls Industries reasonably structured? Did
it have sufficient financial flexibility? Were its managers capable?

 As per the analyst reports of Deutshche Bank & Mller Tabak (Ex 10), HII is well structured and recommendable.
 It was generally mentioned that HII had good financial flexibility and without which preaviling obligations could not
be met.
 HII managers were mentioned as "inexperienced stewards" of a public company
4. Was the divestiture well managed? What might you have done
differently?

 The divestiture was well managed in the sense that it assured maximum value to the shareholders through a tax
free mode of divestiture being a spin off.
 There were enough pre discussions regarding the spin off and they were waiting for the apt time for divestiture. All
the key issues mentioned earlier such as increased fixed costs, contractual obligations revision, support in
managerial, financial and other key areas, identity dilemma and insecurity to the employees shall have been taken
care of.