Harris Corp. is buying Exelis in a $4.75 billion cash and stock deal that the company is calling transformational.
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
A nonpublic report received by The Washington Post late last month has identified over two dozen major U.S. defense and weapons systems that were compromised by an extended cyber exploitation mission. The report was compiled in January 2013 by the Defense Science Board (“DSB”) Task Force on Resilient Military Systems, a senior advisory group to the Department of Defense (“DoD”). A public version of the report is available, though it does not include the specific systems and technologies targeted in the breach. The public version also does not directly accuse China of perpetrating the breach, though The Washington Post has reported that “senior military and industry officials with knowledge of the breaches said the vast majority were part of a widening Chinese campaign of espionage against U.S. defense contractors and government agencies.”
Click here to continue reading this article, located in Aronson Capital Partners’ May Market update.
Over the last five years, the Government Services industry has seen continuous interest from financial sponsors. Private equity firms have acquired publicly-traded services providers (e.g., Providence/SRA; Ares/GTEC), divestitures of large systems integrators (e.g., Veritas/The SI; General Atlantic & KKR/TASC), and both middle and small market contractors (e.g., Arlington/White Oak Technologies; LLR/Paragon). In 2012, private equity firms and their platforms accounted for one-third of the acquisition activity within Government Services. Financial sponsors are expected to continue to play a significant role in the Government Services M&A market as contractors (public and private) seek new opportunities to grow in an environment of sequesters, budget cuts, and funding uncertainty.
The Draw of Government Contracting
Financial sponsors like predictable cash flows and large addressable markets. Compared to the commercial sector, federal contractors have relatively high revenue visibility and backlog and enjoy greater confidence in their ability to collect pending customer payments. In addition, the sector is highly fragmented with opportunities for industry consolidation to either enhance an established contractor’s capabilities/customer base via bolt-on acquisitions (e.g., Camber/Novonics), or to roll-up several small companies and form a more competitive contractor with greater scale and ability to meet customer needs (e.g., Arlington/Novetta).
The Need for Financial Sponsors
As the market environment continues to evolve, opportunities become available for those with capital. After being acquired by Ares Management in 2011, Sotera Defense Solutions (formerly GTEC) President and CEO John Hillen said, “Being a part of that investor group gives us access to a lot of capital to do more and bigger deals than we could as a public company.” Within a year of the change in ownership, Sotera outbid its competitors to acquire Software Process Technologies and Potomac Fusion. With flattening growth and shrinking market sub segments, several contractors are leaning towards a more active M&A strategy as a key avenue to grow revenue streams in priority markets.
Deal Mechanics of Financial Sponsors
Borrowing capacity and cash balances have increased for many public contractors since last year, but M&A deals in 2013 have been sparse. Sequestration, budgetary concerns, the debt ceiling, and other topics on the Hill have increased uncertainty in today’s market. As a consequence, the gap between buyer and seller valuation expectations has widened. In this environment, financial sponsors have an important role to play through structuring instruments like earnouts, equity rollovers, and seller notes. These instruments are typically less likely to be included in a strategic buyer’s consideration, or at least to a lesser degree. Forms of consideration that provide paths for additional value through structure may be the only way to bridge the gap between buyer and seller expectations in the current environment.
This article is contained in ACP’s April Market Update.
While federally-focused service providers have been hit hard in recent times, weapons systems integrators have not been immediately impacted. Large weapons systems programs are more difficult to cut than IT and training contracts. This has allowed weapons manufacturers to focus on longer-term margin expansion strategies as service providers downsize and restructure.
Click here to read the entire article from Forbes.
In recent years, the National Security Agency (“NSA”) market has been an acquisition hot spot, as large contractors attempt to re- position their contract portfolio into the faster growing segments of federal spending. The pace of acquisitions accelerated in early 2010 following the creation of the U.S. Cyber Command (USCYBERCOM), especially once it was confirmed that the sub-unified command would be co-located with both the NSA and recently relocated Defense Information Systems Agency (“DISA”) at Ft. Meade. Well-positioned NSA contractors not only offer an acquirer access to the largest U.S intelligence agency, but an entrée into USCYBERCOM, which is commanded by General Keith Alexander, the Director of the NSA.
On January 27, 2013, the Washington Post published an article stating that in late 2012, the Pentagon approved a major expansion of USCYBERCOM, from 900 personnel to approximately 4,900. In the midst of sequestration risk, a continuing resolution, and debt ceiling headlines, such a significant increase in personnel only highlights the significance of the cyber threat to our nation.
According to the Washington Post, the increased personnel at USCYBERCOM will fall into one of three categories:
Because USCYBERCOM is so intertwined with the NSA, we expect this increase to further validate a buyer’s investment thesis on the Fort Meade market. When government personnel increase, contractor dollars typically follow. In the past four years, there have been 26 acquisitions of companies whose primary customer was the NSA. This number peaked in 2011 when there were nine transactions closed, as shown in the below graphic. In 2013 & 2014, we expect that targets focused on the NSA market will
continue to stay at the forefront of strategic buyers’ acquisition criteria.