Northrop Grumman (NYSE:NOC) Drops Out of Air Force Tanker Bidding Process

Citing risks over the long term of the contract, Northrop Grumman (NYSE:NOC) decided to drop out of the bidding process against chief competitor Boeing Co. (NYSE:BA).

The last time the bidding took place, with Northrup and EADS versus Boeing, auditors form the U.S. government upheld a protest from Boeing which cancelled the deal. That particular deal had a value of about $35 billion.

A couple of factors played into the decision by Northrup this time around. First, there had to be changes in draft rules by the Air Force, which Northrup claims made the 767 aircraft from Boeing more conducive to what the Air Force supposedly was looking for, and probably most important, the terms of the deal are very low profit, making pursuing the contract not in the interest of Northrup any longer.

One final element of making the decision was the terms and length of the contract, where the fixed prices would have resulted in minuscule adjustments for inflation over a period of close to 20 years. That was pretty much a deal-killer for Northrup, making you wonder why Boeing would want to enter the business, other than boasting rights to generating revenue, even though profits would be very small.

While the stakes sound high, this time worth about $50 billion, the risk, as mentioned could be far higher, and the company winning the bid cold rapidly be sorry they did, something Northrup is evidently wisely protecting itself from.

There is a little breath left in the deal for Northrup, as a spokesman said there will be a final request by the Air force for proposals for bids. At that time they'll see if anything has changed and if the company reverses course.

But even the process of bidding is expensive, and going forward for no other reason than making it look like there was competition for bids on a government contract is a poor business decision.

If I was Northrup, I would stick to this decision, especially after what happened to them last time.