Harris, L3 CEOs say merger will catapult company among prime contractor elite

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WASHINGTON — Harris Corp. and L3 Technologies expect their $34 billion merger, announced Sunday, will create the sixth largest defense contractor in the United States while saving $500 million in corporate costs by three years of closing.

The combined company, to be called L3 Harris Technologies, Inc., will employ roughly 48,000 people, including some 22,500 scientists and engineers, and will be headquartered in Melbourne, Florida.

In an Oct. 15 conference call with analysts, chief executives from L3 and Harris said the all-stock funded merger brings together two companies with little competitive overlap.

“This highly strategic combination creates a company with greater scale and a well-balanced portfolio of complementary businesses that will strengthen our capabilities across multiple domains: air, maritime, land, space and cyber,” said William Brown, Harris chairman, president and CEO. “Bringing together our two engineering- and technology-focused companies will accelerate our ability to innovate and create solutions to solve our customers’ toughest mission-critical challenges in a cost-competitive and affordable way.”

Harris and L3 expect the merger to close in mid-2019. The companies project revenue of $16 billion and an earnings before interest and taxes of $2.4 billion for the year.

Harris and L3 are both suppliers to large space programs in defense and commercial sectors. Harris provides unfurlable antennas for geosynchronous communications satellites, and after building more than 100 hosted payloads as part of the Iridium Next constellation, has recently pivoted to small satellites.

L3 is supplying avionics systems for Vulcan, United Launch Alliance’s next-generation rocket, and in July purchased space situational awareness company Applied Defense Solutions of Columbia, Maryland, for approximately $50 million.

Christopher Kubasik, L3 chairman and CEO, highlighted Harris’ “long legacy in national level space systems,” saying Harris and L3 each bring their own strengths to space and cyber.

“L3 brings abilities in optics, signal intelligence, and data links that can be leveraged to provide more integrated capabilities in this increasingly contested domain,” he said.

The merger is intended to position L3 Harris Technologies as the sixth largest defense contractor by revenue, following Lockheed Martin, Northrop Grumman, Boeing, Raytheon and General Dynamics.

The merger is also the latest in a string of tie-ups among aerospace and defense companies in the past two years.

MDA and DigitalGlobe combined for $2.4 billion to form Maxar Technologies last October, Northrop Grumman closed its $9.2 billion purchase of satellite and rocket builder Orbital ATK in June, and KBR completed the acquisition of Stinger Ghaffarian Technologies for $355 million in April.

More broad sector consolidation includes General Dynamics’ $9.7 billion purchase of government IT contractor CSRA, SAIC’s $2.5 billion purchase of Engility, and United Technologies’ ongoing $30 billion purchase of Rockwell Collins.

“As the primes get larger, the component manufacturers need to get larger as well to increase their leverage during negotiations,” William Ostrove, an aerospace and defense analyst at Forecast International, said in an email. “Specifically regarding the space market, the merger could be positive for both companies.”

Under the merger plan, Brown will assume the role of chairman and CEO for the first two years, with Kubasik working as vice chairman, president and chief operating officer. Kubasik will succeed Brown as CEO after two years and as chairman after three years. The company will have a board with 12 members, six from Harris and six from L3.

Brown said the $500 million in savings will come from lower spending, “rationalising the facility footprint,” a reduction in overhead costs and the elimination of duplicate corporate and segment costs. Functional efficiencies and shared services will also help reach this goal, he said.

Brown said L3 Harris Technologies will likely reorganize from six operating segments to three or four.

Kubasik said the majority of the cost savings will come from addressing the combined company’s supply chain. The reduction in facility space should be about equal between Harris and L3, he said, but the exact details have not been finalized.

“In the months ahead we are going to sit down and identify the targets,” he said.