Defense Firm L-3 to Pay $1.97 Billion for Titan

San Diego-based defense contractor Titan Corp. said Friday that it had agreed to be acquired by military electronics maker L-3 Communications Holdings Inc. for $1.97 billion in cash.

The deal has been rumored for weeks and comes nearly a year after Lockheed Martin Corp. abandoned a $1.66-billion takeover of the company because Titan was then under federal investigation over a foreign bribery scandal.

New York-based L-3 would pay $23.10 per Titan share and assume about $680 million in debt. It is L-3’s largest deal, which has been on a spending spree and has acquired 27 defense and electronic companies since being formed in 1997.

The deal also marks the latest move by defense contractors to acquire companies loaded with employees that have lucrative “top secret” security clearances.

With the step-up in intelligence-related defense spending, contractors have been expanding their workforces. Getting security clearances for employees has been costly and prolonged, sometimes taking as many as two years. Of Titan’s 12,000 employees, about 5,000 have special or top secret security clearances to work on U.S. government projects.

L-3 Chairman Frank Lanza said Friday that those Titan employees were “an asset you can’t price.”

Titan, which provides translators and interrogators to the military, is also a major supplier of secure computer networks. The acquisition would give L-3 the chance to bid on classified programs and to compete with major players in the defense industry as a prime contractor, Lanza said.

Many large multibillion-dollar Pentagon contracts are awarded to larger defense contractors, such as Lockheed and Boeing Co., which act as prime contractors and then dole out subcontracts to smaller firms. Analysts said prime contractors typically had higher profit margins.

L-3, with 44,000 employees, had revenue of $6.8 billion last year.

For Titan, the acquisition would culminate a long effort by co-founder Gene W. Ray, 67, to sell the company he built and cash out his holdings.

Ray formed the company in 1981 after leaving San Diego-based Science Applications International Corp. after an argument with his boss. Titan now has employees scattered among 300 facilities in 13 countries and generated $2 billion in revenue last year.

Lanza said that although both companies focused on developing and making communication systems and intelligence-gathering equipment, there was little overlap.

“We’ve only been in one competition in seven years,” Lanza said.

As such, any job cuts are likely to be small and are most likely to occur at Titan’s headquarters in San Diego.

The announcement helped bolster L-3 shares, which rose $3.12 to $74.15.

L-3 would finance the deal by issuing debt rather than shares. That would boost its year-end earnings per share by 5%.

“I think it’s a good deal for L-3. They didn’t pay too much,” said Richard Phillips, aerospace analyst at Houlihan Lokey Howard & Zukin.

Lanza said the deal, which is contingent on Titan settling shareholder lawsuits in California and Delaware over the bribery investigation, could be completed by fall.

In March, Titan pleaded guilty to making illegal payments to officials in Benin and paid a $28.5-million fine to the federal government, the largest fine ever for a U.S. company in a foreign bribery case.

Revelations about the bribery probe prompted Lockheed to lower its offer to buy Titan to $1.66 billion from $1.8 billion, before calling off the deal in June 2004.

Titan’s stock tumbled to a low of $11.15 in July before it began to climb back up and has surged in the last month amid the merger rumors. On Friday, Titan shares fell 32 cents to $22.47.

The sale would represent a reversal of fortune for Titan, which in addition to the bribery scandal has been the focus of a probe into the mistreatment of Iraqi prisoners. Titan provides translators and interrogators used by the U.S. military in Iraq. Several Titan translators also have been killed in Iraq.

L-3 is also the subject of a federal probe, which is investigating allegations that one of its Anaheim-based units supplied defective parts for hand-held radios used by downed military pilots.

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Times wire services were used in compiling this report.