L3 and Harris decide to merge to create a $ 33.5 billion military technology giant

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

The merged company will call L3 Harris Technologies and will be based in Melbourne, Florida, headquarters of Harris Corporation. Its 12-member board of directors will consist of six members from each company. The agreement is expected to be concluded next year, pending a review by the Department of Defense.

"L3 Harris Technologies will have a wealth of technology and a talented and committed workforce," said Chris Kubasik, General Manager of L3, in a press release. "By unlocking this potential, we will strengthen our core franchises, expand into new adjacent markets and strengthen our global presence."

Both companies have built military communications empires focused on network and surveillance capabilities that are integrated with broader defense systems.

Harris Corporation manages complex military communications networks for battlefield management and military aircraft. He is also known for a brand of Stingray cell phone trackers used by US law enforcement. And he made a breakthrough in the space industry through a recent classified contract, leaders said in a recent call for investors.

The most visible products of L3 Technologies, based in New York, are the 360-degree scanners encountered by travelers when they pass through airport security, which is part of a $ 170 million industry with the Department of Homeland Security. It also manufactures night vision equipment and sensor systems used in military aircraft. Under the leadership of Kubasik, a former Lockheed Martin operations chief who had taken the reins of L3 last year, the company has established new functional units around next-generation military technologies such as UAVs. -marins.

As part of a succession plan agreed upon in the transaction, Harris Chief Executive William Brown will assume the role of Chief Executive Officer of the Combined Company for two years from the closing of the transaction. fusion. Then, Kubasik, of L3, will become general manager after the third year in a row, according to the announcement made by the two companies.

"When Chris Kubasik was forced to leave his position as potential CEO of Lockheed Martin, many observers thought he'd be back," said Loren Thompson, defense analyst for the Lexington Institute, an organization with non-profit. "This clearly shows that he has not finished being a major player in the defense business."

In an announcement on Sunday, Kubasik said the deal was to create a sixth main government contractor. The five largest defense contractors – Lockheed Martin, Boeing, Raytheon, Northrop Grumman and General Dynamics – have dominated the US defense market for years, each of which receives more than $ 10 billion per year. year of the federal government.

Last year, L3 Technologies and Harris Corporation received $ 8.3 billion from the federal government, making the combined company the seventh largest contract recipient in 2017 in the United States, behind the big five defense contractors and the pharmaceutical company McKesson Corporation.

With a forecast business turnover of $ 16 billion in 2018 and some 48,000 employees, the new L3 Harris Technologies company can boast of being the sixth largest US defense company. He is now bigger than shipbuilders Huntington Ingalls and BAE Systems, based in Arlington, Virginia.

The merger is the latest in a wave of mergers and acquisitions of government entrepreneurs, taking advantage of a sparkling stock market and favorable defense spending to seize new opportunities.

Last year, Northrop Grumman bought Orbital ATK, a contractor based in Dulles, Va. Focused on the space industry, for $ 7.8 billion in cash. In addition, last year, United Technologies Corporation agreed to buy the aircraft parts maker Rockwell Collins for $ 30 billion.

Negotiations accelerated early in 2018, after a defense budget in 2019 allowed for a sharp increase in spending and Congress lifted the boundaries of "sequestration" that was blocking the industry. since 2013.

In February, On Assignment, a California-based recruitment firm, purchased $ 775 million for a small government-backed provider, ECS Federal, in the rare case of a commercial-technology company entering the government market. Last spring, General Dynamics bought a medium-sized computer contractor called CSRA for $ 7.2 billion. And last month, US-based Science Applications International Corp., a Reston, Virginia-based contractor, purchased the IT outsourcing contractor Engility in a deal valued at $ 2.5 billion.

The merger of L3 and Harris is also another step in the weakening of the US defense market, as large and medium-sized governments strive to climb the ladder faster by joining forces.

"This merger creates greater benefits and growth opportunities than those that one or the other of the companies could have achieved on its own," said Kubasik, of L3, in the release. "The companies were following similar growth paths and this combination is accelerating the process to become a more agile, integrated and innovative 6th non-traditional Premium, focused on investing in next-generation key technologies."

Supply experts have worried for years that a constant wave of mergers in the Pentagon's supply chain could give the government fewer competitive options to turn to. A White House report dating back one year revealed 300 cases in which critical parts are being handled by a single vendor considered potentially too weak to meet the needs of the military or by a foreign supplier.

The defense ministry could block the merger of L3 and Harris based on the results of its review, although it has taken a non-interventionist approach to recent mergers.