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Funds News

UPDATE 2-Northtrop to sell Tasc unit-source

(Adds analyst comments, byline)

NEW YORK/WASHINGTON, Aug 19 (Reuters) - Northrop Grumman Corp NOC.N has hired two investment banks to sell a unit that advises government military agencies in a deal that could fetch up to $2 billion, a source familiar with the matter told Reuters.

The defense contractor has hired Goldman Sachs GS.N and Credit Suisse CSGN.VXCS.N to shop its TASC unit, said the source, who requested anonymity because the auction is not public yet.

The source also said that a sales prospectus for the business had not yet been sent out to potential buyers, but added that private equity firms are expected to bid for the business.

Goldman Sachs and Northrop declined comment. Credit Suisse was not immediately available for comment.

Bloomberg, which was first to report this story, mentioned Carlyle Group, Kohlberg Kravis Roberts & Co [KKR.UL] and Blackstone Group BX.N as potential buyers. Bloomberg cited unnamed sources for its information.

Northrop’s TASC business sells systems engineering and mission analysis services to the U.S. military, the intelligence community, federal and state governments and commercial industry.

Many defense companies, including Northrop, offer services that include advising government agencies on programs that they end up bidding for, creating a conflict of interest.

That conflict prompted the U.S. Congress to pass a law in May that requires the Department of Defense to tighten rules on potential conflicts at such companies.

Investment bankers expect more U.S. defense contractors to sell such units because of the new rules.

Northrop bought TASC in 2001, as part of its $5 billion acquisition of Litton Industries Inc. TASC was founded in 1966 by engineers from the Massachusetts Institute of Technology and has nearly 5,000 employees.

Industry executives have estimated the value of the business at around $1.4 billion.

GROWING CONCERN

Loren Thompson, analyst with the Virginia-based Lexington Institute, said Northrop’s move reflected growing concern among companies providing federal services that the Obama administration would shift more and more of that work back into the government.

Thompson noted that the public sector unions were an important core constituency for the Democratic Party, and many Democrats were convinced that the Republicans have outsourced far too much work that belonged in the government.

“Everyone who’s in federal services is worried about the Obama administration’s plans to pull more work into the government,” he said.

Thompson said the move also appeared to be part of a larger corporate streamlining and reshaping being undertaken by Northrop, which recently also merged its aircraft and space sectors into a larger aerospace sector.

Jim McAleese, a Virginia-based defense consultant, said the move by Northrop indicated its belief that the TASC unit no longer had much growth potential and was now facing diminishing operation margins.

He said it clearly reflected concerns about increased “insourcing” by the Obama administrations as well as its move to hire 50,000 more acquisition experts in coming years. (Editing by Carol Bishopric) (Reporting by Jui Chakravorty Das; 646-223-6000)

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