The deal is the latest by acquisition-hungry L-3, which has grown into one of the U.S.'s leading defense technology companies with dozens of deals since its formation in 1997.
L-3, which makes secure communications systems, chiefly for the U.S. military, hopes the deal will capitalize on the Pentagon's increased emphasis on networks and information technology rather than traditional military hardware.
"Titan's defense technology, intelligence and communications programs complement and expand L-3's presence in these markets," said Merrill Lynch analyst Byron Callan, in a research note. "L-3 intends to continue growth by acquisition and there could be another $1 billion or more in deals in 2005."
The deal follows Britain's BAE Systems Plc's (search) $4 billion purchase of United Defense Industries (search) Inc. in March, as the defense industry continues consolidating in the face of slowing growth in U.S. military spending.
As a condition of the deal, Titan agreed to settle shareholder suits in California and Delaware relating to a foreign bribery probe. In March, Titan pleaded guilty to making illegal payments to officials in Benin, paying $28.5 million to the federal government to settle the matter.
Titan's failure to settle that investigation led to defense giant Lockheed Martin Corp. (LMT) scrapping its $20-a-share offer to buy Titan in June last year.
Titan, which provides translators and interrogators used by the U.S. Army in Iraq, has also come into the spotlight for work at Iraq's Abu Ghraib (search) prison, which became notorious for abuse of prisoners.
L-3 is also subject of a U.S. federal investigation after one of its units supplied defective parts for emergency radios to locate downed military pilots.
Under the terms of the deal, Titan shareholders will receive $23.10 per share in cash, a modest 1.4 percent premium to the stock's closing price of $22.79 on Thursday on the New York Stock Exchange. The stock had run up in recent weeks in anticipation of a transaction.
L-3 will also take on Titan debt, making the deal worth about $2.65 billion overall. The deal is scheduled to close in the second half of 2005.
Titan shares fell 36 cents, or 1.6 percent, to $22.43 in early trade on the NYSE. L-3 shares rose $1.43, or 2 percent, to $72.45.
L-3 said it expected the takeover to add about $2.7 billion in sales and 25 cents to earnings per share in 2006.
New York-based L-3 said it planned to finance the deal with a combination of cash, borrowings under its existing credit facility, and the sale of new bonds. It has won commitments for $2 billion in interim financing pending the bond sale.
Titan also postponed its annual shareholder meeting, which had been scheduled for next Tuesday, pending shareholder consideration of the deal with L-3.