In an all-stock merger, Harris and L-3 Technologies merged to create the sixth-largest defense contractor in the U.S. The new company will be known as L3 Harris Technologies.
The deal, with a value of approximately $34 billion, passes the Boeing merger with McDonnell Douglas as the largest in the history of the defense industry.
Once the deal is finalized by the middle of 2019, the merged companies will have an annual sales of $16 billion. It will push them into the top 10 of all government contractors in terms of revenue.
DISCUSS IN THE FORUM: What are your thoughts on this merger? Does this help improve acquisition for the DoD? Is this a smart move by both companies? Or is this something bad for the industry? And are there reasons why the government, specifically the DoD, would consider rejecting this merger? Click here to discuss.
Here is what you need to know:
By The Numbers: The merger means the combined company will be the sixth-largest defense contractor in the U.S., and a top 10 defense contractor in the world. The new company will have roughly 48,000 employees, and serve customers in over 100 countries. Of the 48,000 employees, the two companies combined have approximately 22,500 engineers and scientists.
L3 Harris Technologies, as the company will be known once the deal is completed, will have a net revenue of approximately $16 billion.
According to the news release from Harris, the merger is expected to generate “approximately $500 million of annual gross pre-tax cost synergies, or $300 million net of savings returned to customers, in year 3.” The companies are anticipating savings that will come from “reducing direct and indirect spend, rationalizing footprint, consolidating corporate and segment headquarters, establishing a common shared services platform for IT and finance and reducing other overhead costs. The company is expected to invest approximately $450 million cash to achieve the synergies over the next 3 years.”
Bigger Than All The Rest: There have been a few mergers and acquisitions in the defense industry, by defense contractors, and in the overall govcon sector over the past year (which gives us an idea for an article – so stay tuned).
For example, SOS International acquired STG Inc. for $83 million in an effort to expand its technology and cyber offerings in national security. Northrop Grumman closed its acquisition of Orbital ATK for $9.2 Billion this past summer. Boeing closed its acquisition of satellite producer Millennium Space Systems in September. And of course, up until yesterday, the big splash in govon M&A in 2018 was the decision by Science Applications International Corp (SAIC) to acquire competitor Engility in a $2.5 billion all-stock transaction.
However, this deal, valued at close to $34 billion, is bigger than all those. And as noted above, it is largest merger of defense contractors in history.
The deal also means that L3 Harris Technologies will be bigger than the shipbuilder Huntington Ingalls and Arlington, Va.-based BAE Systems.
Looking At The Big Picture: Following passage of the National Defense Authorization Act for 2018, an 18 percent increase in defense spending, and a deal that lifted caps on defense spending, the defense contracting space could see more mergers and acquisitions. What does this mean in the big picture? As we have seen with JEDI and the push by the DoD to use OTAs, the government is looking for ways to speed up the contracting process. This could mean that more middle tier corporations, fearing that they could lose future opportunities, look to merge with other similar sized companies to form larger corporations, or look to be acquired by bigger companies. This could create a situation where an even small number of big defense contractors exist, and the mid-sized corporations start to vanish more quickly. This could be great for the speed of contract delivery for the DoD. But could it negatively harm small to mid-sized businesses? And could it harm innovation? That remains to be seen.
Who Is Leading The New Company?: The new company, L3 Harris Technologies, will be headquartered in Melbourne, Florida, which is the corporate home of Harris. However, there is a lot of equity in terms of leadership.
Both companies are expected to share equally in the integration process, in terms of cost and management.
The new Board of Directors will have 12 members, which will consist of six directors from each company.
William M. Brown, Chairman, President and Chief Executive Officer of Harris, will serve as chairman and chief executive officer, and Christopher E. Kubasik, Chairman, President and Chief Executive Officer of L3, will serve as vice chairman, president and chief operating officer. This arrangement will exist for the first two years following the closing of the transaction. For the third year, Mr. Brown will transition to executive chairman and Mr. Kubasik to chief executive officer, after which Mr. Kubasik will become chairman and chief executive officer.
Background Information and Contacts: Harris Corporation and L3 Technologies will conduct a live conference call and webcast on October 15, 2018 at 8:00 a.m. (ET). Information about the webcast and other data will be shared on a “joint transaction website” which can be found at: www.l3harris.mergerannouncement.com.
Anurag Maheshwari, +1-321-727-9383
Jim Burke, +1-321-604-0067
John Kim, +1-212-805-5230
Jennifer Barton, +1-917-822-6763
Quotes of note:
“This transaction extends our position as a premier global defense technology company that unlocks additional growth opportunities and generates value for our customers, employees and shareholders. Combining our complementary franchises and extensive technology portfolios will enable us to accelerate innovation to better serve our customers, deliver significant operating synergies and produce strong free cash flow, which we will deploy to drive shareholder value. Integration planning is already underway, and from our extensive experience with integration, we are confident in our ability to realize $500 million of annual gross cost synergies and $3 billion of free cash flow by year 3.”
– William M. Brown, Chairman, President and Chief Executive Officer, Harris
“This merger creates greater benefits and growth opportunities than either company could have achieved alone. The companies were on similar growth trajectories and this combination accelerates the journey to becoming a more agile, integrated and innovative non-traditional 6th Prime focused on investing in important, next-generation technologies. L3 Harris Technologies will possess a wealth of technologies and a talented and engaged workforce. By unleashing this potential, we will strengthen our core franchises, expand into new and adjacent markets and enhance our global presence.”
– Christopher E. Kubasik, Chairman, President and Chief Executive Officer, L3
“I spoke with Harris Corp. CEO Bill Brown today, and received assurances that not one job would be cut in Rochester as a result of the company’s merger with L3 Technologies. In fact, I am optimistic that the merger could likely expand Harris’ world-class workforce in Rochester over the next several years. Harris Corp. has proven time and time again that they are committed to Rochester as their home base to make superior radios, geospatial, and intelligence systems for the U.S. military and our allies across the world, and I look forward to continue working hand-in-hand with this first-rate company to strengthen the Rochester economy.” – Senator Charles Schumer (D-NY)
“Harris has a tremendous representation here between engineering and manufacturing. So there is no doubt in my mind that this will be a net positive for Rochester employment. As this company grows and continues to expand into different areas they’re going to need more engineers, better engineers, they’re going to need more manufacturing they’re going to win deals and there. This is positive for Rochester in a net.”
– Doug Hendee, Brighton Securities.
“When Chris Kubasik was forced out as the prospective CEO of Lockheed Martin, many observers thought he would be back. This clearly demonstrates he is not done being a major player in the defense sector.”
– Loren Thompson, a defense analyst with the nonprofit Lexington Institute