UPDATE 2-Raytheon,L-3,Cobham bid for Applied Signal-sources

* Cybersecurity firm attracts heavy strategic interest

* Initial suitors include Raytheon, L-3, Cobham--sources

* Boeing is not in the auction process--source

* Management meetings completed, new round soon--sources (Adds details about multiples)

By Soyoung Kim

NEW YORK, Dec 3 (Reuters) - Cybersecurity firm Applied Signal Technology Inc APSG.O has attracted heavy initial interest from large defense contractors, including Raytheon Co (RTN.N), L-3 Communications Holdings Inc (LLL.N) and Cobham Plc (COB.L), people familiar with the matter said.

Applied Signal, which hired Bank of America Merrill Lynch (BAC.N) to consider strategic options, received the first round of bids in November from several top defense contractors, three sources told Reuters on Friday.

Applied Signal has completed management meetings with the interested parties and expects to whittle down the group in the next few weeks, the sources said.

Boeing Co (BA.N), which bought Applied Signal's bigger rival, Argon ST, earlier this year, is not involved in the auction process, one of the sources said. The sources declined to be named because details of the auction are not public.

Representatives for Raytheon and Boeing declined to comment. Applied Signal, Cobham and L-3 could not be immediately reached for comment.

People familiar with the matter told Reuters previously that Applied Signal was also likely to draw interest from BAE Systems Plc (BAES.L), Lockheed Martin Corp (LMT.N) and Northrop Grumman Corp (NOC.N).

It could not be learned on Friday if those firms are also among the initial suitors. But sources said on Friday that several other strategic parties, in addition to Raytheon, L-3 and Cobham, have submitted bids.

A fourth source familiar with the situation said Science Applications International Corp (SAI.N) is also interested in Applied Signal.

Applied Signal shares closed up 0.95 percent at $34.13, giving it a market value of $457 million. The stock earlier rose 3 percent to a high of $34.87.

PRICE MAIN QUESTION

Sunnyvale, California-based Applied Signal collects, analyzes and intercepts communication and electromagnetic signals. Its cybersecurity expertise also includes network monitoring, intrusion detection and processing information to detect abnormalities and increase situational awareness.

Top weapons suppliers are looking to acquire smaller rivals in high-demand technologies such as cybersecurity, intelligence, reconnaissance and surveillance as they brace for tightening budgets on traditional arms platforms.

But Applied Signal shares have gained 23 percent since Reuters first reported news of the auction on Oct. 22, leaving some bidders skittish and raising questions as to how much of a premium the company might fetch over the current market price.

"Because of the scarcity effect, that (Applied Signal) clearly is a hot property, the only concern is valuation," one source familiar with the situation said.

The company, whose products are used by U.S. defense and homeland security agencies to intercept cellphone, microwave and military communication signals, is the last remaining pure cyber defense company with scale that has not been snapped up by a major defense contractor.

The auction comes months after Boeing bought Argon for $775 million -- a price that represented 14 times Argon's forward earnings before interest, taxes, depreciation and amortization (EBITDA), above the average deal multiple of 7 to 9 in the sector.

Applied Signal's current market value of near $460 million already implies a multiple of 14 times, based on its estimated forward EBITDA of $33 million projected by Thomson Reuters data.

"There is no doubt every major defense contractor will take a hard look, but price is the main question. They are trying to figure out: 'Do I really want to pay up for this or not?'" another source familiar with the situation said. (Reporting by Soyoung Kim; editing by Andre Grenon)