KippsDeSanto & Co. Industry Week in Review – October 19, 2018
On the heels of the Esterline Technologies / TransDigm deal, L3 Technologies has entered into an agreement to combine with Harris Corporation to form another major player in the defense industry. In addition to an active M&A market, federal agencies are recognizing the need and benefit of updating legacy infrastructure and incorporating NextGen technologies to drive increased investment in IT over the next few years.
Aerospace & Defense Update
L3 Technologies and Harris Corporation have agreed to combine in an all-stock deal, which will be the largest-ever defense industry merger. The combination will form a sixth prime defense contractor focused primarily on defense electronics and communications. The newly formed entity, L3 Harris Technologies, will be based in Melbourne, Florida and will be approximately $33.5 billion in combined market value. The two companies are projecting approximately $16 billion in combined revenue this year, which will surpass Huntington Ingalls and BAE Systems. M&A activity continues to be highly active for the defense market, fueled by premium market valuations and favorable defense spending. This merger also represents a further hollowing out of the middle of the U.S. defense market, as larger players continue to seek scale through inorganic growth. This transaction is expected to close mid-way through 2019, pending a review by the Defense Department.
Shortly after midnight on October 17th, the Air Force’s fourth Advanced Extremely High Frequency (“AEHF”) satellite successfully launched aboard an Atlas 5 rocket from Cape Canaveral Air Force Base in Florida. The AEHF satellite provides highly protected communications for the Department of Defense, offering “survivable, global, secure, protected and jam-resistant communication for high-priority military ground, sea, and air assets,“ according to an Air Force statement. The fourth AEHF satellite significantly increases communication speed allowing the transmission of real-time video, battlefield maps, and targeting data to help combatant commanders make optimal tactical and strategic decisions. The prime contractor on this $15 billion Air Force program, Lockheed Martin, is under contract to deliver a total of six AEHF satellites. The launch of the next satellite, AEHF 5, is scheduled for July 2019.
Government Technology Solutions
This week, FedScoop released the results of a study that details shifting patterns in federal IT investment strategies. The report, underwritten by IBM, surveyed 169 federal agency IT and program management executives to assess which IT and cloud deployment models are in the highest demand in the technology solutions market. Agency efficiency has been a key priority for the federal government and the publishers of the survey hope to “break fresh ground in linking how IT investment strategies are helping, and to a certain extent hindering, agencies and their ability to capitalize on many of the benefits cloud computing services can offer,” according to Wyatt Kash, senior vice president of content strategy at Scoop News Group. Nearly 38% of those surveyed are still investing in on-site, government-run data centers, compared to 20% in government-only community clouds, 7% in public / commercial clouds, 16% in hybrid models, and 19% outsourced, privately managed government cloud / data centers. While the on-site approach is the least conducive to digital transformation compared to a hybrid approach, risk tolerance and data sensitivity remain areas of concern for many agencies. Nevertheless, the results of the study indicate a coming shift in investment towards the aforementioned, cloud-friendly approaches that would provide enhanced flexibility and greater scalability for government agencies seeking to retain autonomy over their data. The study indicates that agencies that devote a greater focus on enhancing cloud capabilities also demonstrate a greater propensity to pursue machine learning and AI to increase mission efficiency. Not surprising, cloud forerunners are also more apt to early technology adopters. Federal agency recognition of the need and benefit of updating legacy infrastructure and incorporating NextGen technologies should hopefully drive increased investment in IT over the next few years.
L3 Technologies (up 10.0%) and Harris Corporation (up 9.0%) – Share prices for both entities were among the biggest movers as news of a merger fueled an increase in stock price for both companies.
Harris Corporation and L3 Technologies, Inc. have agreed to merge, the combined entity will create a global defense technology leader, focused on developing differentiated and mission critical solutions. The deal is worth an estimated $18.7 billion.
Luna Innovations, Inc. has acquired Micron Optics, Inc., a provider of innovative optical components and laser-based measurement technologies. Terms of the transaction were not disclosed.
Sonardyne International Ltd has acquired Chelsea Technologies Group Ltd., a provider of underwater acoustic products to both civilian and defense customers. Terms of the transaction were not disclosed.