Harris Corp. Buying Exelis in Deal Worth $4.75 Billion

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WASHINGTON — Harris Corp.’s planned $4.75 billion acquisition of Exelis Corp., announced Feb. 6, will combine a host of related space capabilities that appear largely complementary, with some possible overlaps.

The acquisition, expected to close in June assuming approval by U.S. antitrust authorities, will create an $8 billion defense technology firm with some 23,000 employees, including roughly 9,000 engineers and scientists.

In a conference call with analysts held shortly after the acquisition announcement, Harris Chief Executive William M. Brown said the companies have complementary capabilities across a variety of market segments including space. The “highly strategic and compelling” deal will position Harris for future growth by increasing its scale, market reach, including international customers, and overall competitiveness.

Harris’ space business includes satellite ground control systems, information technology, radio frequency-based communications systems, and space- and ground-based antennas, including the large unfurlable mesh reflectors that it supplies to both government and commercial customers. Most of this work is housed within Harris Government Communications. The company also provides satellite-based telecom solutions to government and commercial customers through its Harris Caprock division.

Excelis’ space related work is divided into two main areas: satellite instruments and ground-based electronics, communications and technical support. Exelis Geospatial Systems of Rochester, New York, builds GPS payloads, environmental sensors and high-precision satellite imaging cameras, while Exelis Information Systems of Herndon, Virginia, supports the U.S. Air Force’s launch ranges, some of the service’s ground-based space surveillance sensors and communications networks for NASA.

Much of this work is complementary rather than overlapping. For example, Exelis is supplying the main sensors for the newest generation of U.S. geostationary weather satellites while Harris is responsible for the program ground segment.

But there also appear to be some overlaps, particularly on the ground systems side where both companies provide technical support to the Defense Department and intelligence community in areas like imagery analysis. The companies are on competing bidding teams for an Air Force contract to consolidate work on its satellite control network. Harris also supports space surveillance activities, having recently won a $23 million classified contract in that area, Williams noted in discussion of the company’s quarterly financial results.

A satellite imagery workstation. Credit: Exelis
A satellite imagery workstation. Credit: Exelis

Thomas Spangler, a Washington-based defense expert and investor, said the merger likely would draw scrutiny from antitrust regulators “in such areas as GPS, tactical communications, and government technical services given the potential consolidation of capability within one entity.” While Exelis does GPS payloads and Harris’ expertise is on the ground side, regulators might look into the possibility that the combined company’s space-segment products could incorporate features that favor its ground-segment products, or vice versa, he said. “Not a huge concern but tight budgets force companies to look at all angles and bring as much work in house as possible,” he said.

On the other hand, the combination could be beneficial to the Pentagon if Harris is able to squeeze savings out of the deal and pass along a portion of those savings to its customers, Spangler said.

The companies said they expect the transaction to cut $100 million to $120 million in annual overhead costs starting in about three years through a consolation of the corporate headquarters and other efficiencies.

Jim Burke, a spokesman for Harris, did not respond by press time to a request for comment on a number of questions, including consolidation plans — if any — on the space side of the business.

Williams said historically low-interest rates, a stabilizing defense budget outlook and earlier belt-tightening measures at Harris made the timing ideal for the acquisition, which would create the Pentagon’s eighth largest contractor by revenue.

The purchase price will be paid 70 percent in cash and 30 percent in equity in the form of Harris stock. Harris said it has raised $3.4 billion in bridge financing for the deal from Morgan Stanley Senior Funding and intends to put  permanent debt financing in place.

In a note to investors, Chris Quilty, senior vice president of Raymond James, said the deal is a winner for Harris. “We suspect management has understated the potential synergies of the deal and believe the combination will significantly enhance Harris’ competitiveness for major defense programs,” he said.