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https://www.washingtonpost.com/business/2018/10/14/l-harris-agree-merge-creating-billion-military-technology-giant/?noredirect=on&utm_term=.0280e3e699ce

The Pentagon relies on five major defense contractors. The newly formed L3 Harris Technologies hopes to be a sixth. (Charles Dharapak/AP)

By Aaron Gregg October 14 at 4:46 PM

L3 Technologies and Harris Corporation have agreed to merge in an all-stock deal, the two companies announced Sunday, creating a $33.5 billion military technology company.

The combined company will be called L3 Harris Technologies and will be based in Melbourne, Fla., the home of Harris Corporation. Its 12-member board of directors will consist of six members from each company. The deal is expected to close next year, pending a review by the Defense Department.

“L3 Harris Technologies will possess a wealth of technologies and a talented and engaged workforce,” L3 chief executive Chris Kubasik said in a news release. “By unleashing this potential, we will strengthen our core franchises, expand into new and adjacent markets and enhance our global presence.”

Both companies have built military communications empires focused on networking and surveillance capabilities that are built into larger defense systems.

Harris Corporation handles complex military communications networks for battlefield management and in military aircraft. It is also known for a brand of Stingray cellphone trackers used by U.S. law enforcement. And it has made inroads in the space industry thanks to a recent classified contract, executives said in a recent call with investors.

New York-based L3 Technologies’ most visible products are the 360-degree scanners that travelers encounter when they go through airport security, part of a $170 million line of business with the Department of Homeland Security. It also makes night-vision equipment and sensor systems used in military aircraft. Under the stewardship of Kubasik, a former Lockheed Martin chief operating officer who took the helm at L3 last year, the company has established new business units around next-generation military technologies such as undersea drones.

Under a succession plan agreed to as part of the deal, Harris chief executive William Brown will serve as chief executive of the combined company for two years following the close of the merger. Then, L3′s Kubasik is to become chief executive after the combined company’s third year, according to an announcement from both companies.

“When Chris Kubasik was forced out as the prospective CEO of Lockheed Martin, many observers thought he would be back,” said Loren Thompson, a defense analyst with the nonprofit Lexington Institute. “This clearly demonstrates he is not done being a major player in the defense sector.”

In a Sunday announcement, Kubasik said the transaction is intended to create a sixth prime government contractor. The five largest defense contractors — Lockheed Martin, Boeing, Raytheon, Northrop Grumman and General Dynamics — have dominated the U.S. defense market for years, each of them taking in more than $10 billion a year from the federal government.

L3 Technologies and Harris Corporation took in a combined $8.3 billion from the federal government last year, making the combined company the seventh-largest recipient of 2017 U.S. contract dollars behind the five major defense contractors and McKesson Corporation, a drug company.

At $16 billion in projected 2018 revenue and some 48,000 employees, the new L3 Harris Technologies can boast that it is the sixth-largest U.S. defense company. It is now bigger than the shipbuilder Huntington Ingalls and Arlington, Va.-based BAE Systems.

The combination is the latest in a flurry of mergers and acquisitions among government contractors, which are taking advantage of a frothy stock market and favorable defense spending to pursue new opportunities.

Last year, Northrop Grumman bought Orbital ATK, a Dulles, Va.-based contractor focused on the space industry, for $7.8 billion cash. Also last year United Technologies Corporation agreed to buy aircraft parts manufacturer Rockwell Collins for $30 billion.

Dealmaking accelerated at the beginning of 2018, after a 2019 defense budget facilitated a healthy jump in spending and Congress lifted the “sequestration” caps that have hobbled the industry since 2013.

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In February, a small government contractor called ECS Federal was bought for $775 million by On Assignment, a California-based recruiting firm, in a rare instance of a commercially oriented technology company entering the government market. This past spring, General Dynamics bought a midsize IT contractor called CSRA for $7.2 billion. And last month, Reston, Va.-based government contractor Science Applications International Corp. bought IT contractor Engility in a deal valued at $2.5 billion.

The merger of L3 and Harris also represents a further step in hollowing out the middle of the U.S. defense market, as large and middle-tier government contractors are finding they can climb the ladder more quickly by joining forces.

“This merger creates greater benefits and growth opportunities than either company could have achieved alone,” L3’s Kubasik said in the release. “The companies were on similar growth trajectories and this combination accelerates the journey to becoming a more agile, integrated and innovative non-traditional 6th Prime focused on investing in important, next-generation technologies.”

Procurement experts have worried for years that a steady wave of mergers in the Pentagon’s supply chain could give the government fewer competitive options to turn to. A year-long report from the White House found 300 instances in which critical parts are handled by a single supplier seen as potentially too weak to meet the military’s needs, or a foreign supplier.

The Defense Department could block the merger of L3 and Harris depending on the results of its review, though it has taken a hands-off approach to recent mergers.

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