Harris Corporation’s $4.75 billion acquisition of defense firm Exelis Inc., the largest defense deal in nearly two decades, may be just the beginning of further consolidation among middle tier defense companies.
Harris Corp. indicated the new company formed by the purchase will have more than $8 billion in revenue and about 23,000 employees globally, including 9,000 engineers and scientists.
“The combination represents the reemergence of a stronger mid-tier defense sector and may entail more competition for primes in some defense segments,” said Byron Callan, an analyst with Capital Alpha Partners said in a note to investors.
Headquartered in Mclean, Virginia, Exelis is a global aerospace, defense, information and services company. The company, which was spun out of ITT Corp. in 2011, employs approximately 10,000 people and generated 2014 sales of approximately $3.25 billion.
Harris Corp., an international communications and information technology company, is headquartered in Melbourne, Florida. The company has approximately $5 billion of annual revenue and about 13,000 employees — including 6,000 engineers and scientists. It serves government and commercial markets in more than 125 countries.
"The combination of the two companies’ highly complementary core franchises creates a competitively stronger company with significantly greater scale,” said William M. Brown, chairman, president and chief executive officer of Harris. “We are expanding in a market, where we have decades of success and a workforce dedicated to providing our customers with innovative and cost-effective solutions for some of their most complex challenges."
The two companies expect the deal to close in June 2015, subject to approvals from regulators and Exelis shareholders. According to a statement by Harris Corp., the agreement has been unanimously approved by the boards of directors of both companies.
"This agreement to become part of Harris Corporation represents an exciting new chapter for Exelis," said David F. Melcher, chief executive officer and president of Exelis. "Combining the companies not only creates shareholder value, but the commitment to excellence and innovation that both companies share will significantly benefit customers and provide new opportunities for employees."
Harris’s acquisition of Exelis follows on the heels of Orbital Sciences Corporation’s announcement last month that shareholders approved its merger with Aerospace and Defense Groups of Alliant Techsystems Inc., which will create a $4.5 billion aerospace and defense company with 13,000 employees.
As federal budgets decline, analysts believe these mergers may be evidence of a movement towards more mergers and acquisitions among mid-level defense companies.
Nick Nayak, president and CEO of Green Light Acquisition Consulting and DHS’s chief procurement officer, believes mergers will increase as long as federal budgets remain flat or shrink.
“When I was at DHS, we contracted with more than 15,000 contractors each year,” Nayak told Homeland Security Today. “The number of government contractors grew over the last decade based on increased government spending. Naturally, now that spending has somewhat declined, mergers and acquisitions would increase. Companies can grow revenue and decrease overhead.”
In an era of ever-shrinking budgets,the Pentagon is likely to continue to welcome defense industry mergers and acquisitions among small and mid-level firms, although it continues to oppose consolidation among top tier firms, such as Northrup Grumman and Lockheed Martin.
After high levels of spending during the wars in Afghanistan and Iraq, analysts and Pentagon officials predicted that it was only a matter of time before the budgets cuts spurred more consolidation among the defense industry.
“As long as federal spending is flat or declining, I do expect more mergers and acquisitions,” Nayak said.
Editor’s note: Read Nick Nayak and former DHS procurement ombudsman Jose Arrieta’s Homeland Security Today report, Partnering with Industry is Key to Improving Acquisition Outcomes.