UPDATED: Insights From Steve Grundman, Former DUSD Industrial Affairs
WASHINGTON: For several years, senior Pentagon officials have said they don’t expect or encourage mergers of the giant defense companies, but mergers and acquisitions of smaller entities might well make sense. The first example we saw was the merger of ATK and Orbital Sciences. Today, Harris announced the purchase of ITT spinoff Exelis for $4.7 billion.
Is this the beginning of a series of mergers as the purported defense drawdown –which hasn’t really happened yet — gets underway?
“The Harris-Exelis deal is plainly a second instance of consolidation among companies in the mid-tier of the A&D industry (Orbital-ATK being the first), and viewed from that perspective, it’s a veritable trend. I would not, on the other hand, regard it as any sort of leading indicator of a new ‘wave’. It will no doubt have the effect of generating conversation on the boards of all the companies, but from an economic or competitive perspective, I don’t see the combination itself motivating any other players,” Stephen Grudnman, former deputy undersecretary for industrial affairs and installations who is now at the Atlantic Council.
The two companies are an interesting mix. Harris is a major player in the market for secure military communications, some sensors, networks and it does work on avionics and air traffic control technologies. Exelis does a great deal of black sensor work for the intelligence community, builds electronic warfare equipment and is involved in GPS and other geospatial work, among other things. Both companies engage in highly classified signals intelligence work.
“Acquiring Exelis is transformational for Harris,” William Brown, Harris CEO, said in a statement. “The combination of the two companies’ highly complementary core franchises creates a competitively stronger company with significantly greater scale.”
Harris claims it will eventually save upwards of $100 million a year once the two companies meld. Together, they boast annual sales of $8 billion.