Aronson Capital Partners Cited – Harris makes $4.75B deal for Exelis

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Harris Corp. is buying Exelis in a $4.75 billion cash and stock deal that the company is calling mandatransformational.

The deal will significantly increase the size of Harris, adding $3.25 billion in revenue to Harris’ $5 billion in revenue. Headcount will grow to 13,000 to 23,000. The transaction is expected to close by June.

Adding scale was definitely one of the factors the drove the deal, according to Harris executives and industry analysts.

“The combination of the two companies’ highly complementary core franchises creates a competitively stronger company with significantly greater scale,” said Harris CEO and chairman William Brown.

Much of that scale will come in the defense market, where Harris adds Exelis’ strong position to its own. Sixty-one percent of Exelis customer base comes from defense customers. About 75 percent of Harris’ revenue is DOD and intell related.

Exelis and Harris also both have significant international and commercial sectors. Pre-acquisition, the international market accounted for 32 percent of Harris’ revenue and 23 percent for Exelis, according to Harris’ investor presentation.

“This is a fantastic combination of two C4ISR companies that have some overlap but mostly complementary capabilities,” said Michael Misantone, with the investment bank KippsDeSanto.

The overlap is primarily with radios, but the complementary capabilities are in areas such as air traffic management, advanced sensing and communications, he said.

Exelis’ defense customers include the Air Force, Navy and Marines, Army and other defense and intelligence agencies. Its core offerings include information systems, electronic systems geospatial and night vision and communications.

In its investor presentation, Harris lists several of what it calls “core franchises,” including weather, space and intelligence, air traffic management and tactical communications. The addition of Exelis will allow the company to bring greater scale and efficiency, optimize its research and development portfolio and deepen customer relationships.

The company pointed to several factors that made now the best time to make such a large deal, including historically low interest rates. The company secured bridge financing of $3.4 billion from Morgan Stanley Senior Funding.

Another factor is that defense budgets are expected to start growing again in fiscal 2016, so the deal will position Harris to take advantage of increased defense budgets.

“There is growing optimism that the DOD market has bottomed out, and we are now re-entering a growth phase,” said Kevin MacCormack with the investment bank Raymond James.

That aspect of the deal – the bottoming out of the defense market – was shared many of the analysts I talked to. Many believe this will set the stage for more consolidation.

Timothy Schmitt with the investment bank Aronson Capital Partners said the recent TASC acquisition by Engility is another example of this kind of consolidation. Cost savings are one driver behind these mergers.

Continue reading this Washington Technology article HERE.

About Timothy Schmitt

Timothy Schmitt has written 12 post in this blog.

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