Harris Corp.
Harris Corp. telescope

Harris, L3 to Merge in Latest Defense Industry Consolidation

Oct. 15, 2018
The newly formed L3 Harris Technologies Inc. will be the nation’s sixth-largest defense contractor.

Harris Corp. and L3 Technologies Inc. have agreed to merge, giving rise to a major U.S. defense contractor focused on communications and electronics with a current combined market value of about $33.5 billion.

The deal has been approved by both boards and will result in L3 holders getting 1.3 shares of Harris common stock, a small premium currently valued at about $201.33, for each share of L3, the companies said in a joint statement Sunday. After the deal is complete, Harris shareholders will own about 54% of the combined company.

The newly formed L3 Harris Technologies Inc. will be the nation’s sixth-largest defense contractor. New York-based L3 and Melbourne, Florida-based Harris describe the transaction as a merger of equals, with a 12-member board that includes six directors from each company. Each company is known for its capabilities in communications and electronics and gets more than two-thirds of its revenue from the U.S. government.

“This merger creates greater benefits and growth opportunities than either company could have achieved alone,” Christopher Kubasik, L3’s chairman, president and chief executive officer, said in the statement. Kubasik will serve as vice chairman while William Brown of Harris will be chairman and CEO. Kubasik will succeed Brown as CEO in the third year after the transaction. The headquarters will be in Melbourne.

Harris is paying about a 5% premium to L3, said Robert Stallard, an analyst at Vertical Research Partners. “As this merger effectively removes any remote chance of Harris being acquired, we think the initial reaction tomorrow could be modestly negative for Harris shares,” Stallard wrote in a note Sunday.

Adding to Earnings
The companies say the transaction will add to combined earnings per share in the first year after the close of the deal, and generate $500 million in annual pretax cost savings and $3 billion in free cash flow by the third year. For calendar 2018, the company would have about $16 billion in sales and earnings before interest and taxes of $2.4 billion.

“The significant increase in scale should help make L3 a much more formidable challenger against the larger defense primes, something they have struggled with for some time,” said Doug Rothacker, an analyst at Bloomberg Intelligence. “This will be key to their efforts in securing more high-margin prime contractor roles, versus their historical position as a subcontractor.”

The combination adds to a flurry of aerospace and defense deals amid increased military spending and a boom in jetliner sales. Aircraft-parts maker TransDigm Group Inc. agreed this week to buy Esterline Technologies Corp. for $3.6 billion. Boeing Co. closed its purchase of components distributor KLX Inc. a day before that. United Technologies Corp. is poised to complete its $23 billion acquisition of Rockwell Collins Inc.

Share Performance
L3, with a market value of $15.3 billion, slipped 1% this year through the close of trading on Friday to $195.78 compared with the 6.5% advance of a Standard & Poor’s index of aerospace and defense companies. Harris gained 9.3% over the same period, closing the week at $154.87 for a market value of $18.2 billion.

Vanguard Group is the largest shareholder of L3 and the second-largest for Harris, controlling more than 11% of each company, according to data compiled by Bloomberg.

Harris makes communications systems for battlefield management, as well as for civilian uses such as air-traffic control and wireless network transmission, and was recently selected by Lockheed Martin Corp. to develop a next-generation computer processor for its most advanced jet, the F-35 Lightning II fighter.

L3 provides communications equipment such as surveillance gear and cockpit electronics. It also makes night-vision devices, sensor systems and satellite communications. The Department of Defense may have some concern about overlap in night-vision systems, analyst Stallard said.

In separate news releases, both companies reported financial results for the most recent quarter. Harris reported fiscal first-quarter revenue of $1.54 billion, up about 9% from the prior-year quarter, thanks to growth in tactical communications, public safety and night vision. L3 said third-quarter sales rose about 10% to $2.52 billion.

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