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L3 Technologies to Acquire 2 Cyber Security Firms for $200M

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In an attempt to expand its footprint in the cyber security market, L3 Technologies, Inc. recently signed an acquisition deal to purchase two information security firms — Azimuth Security and Linchpin Labs — for a total of $200 million. On completion of the takeovers, both the acquirees will combinedly operate as L3 Trenchant.

L3 Technologies expects the acquisitions to be completed by the second half of 2018. While Linchpin Labs focuses on developing custom software systems and applications, Azimuth Security operates as an independent information security consultancy.

Benefits of the Deal

The aforementioned deal is expected to significantly boost L3 Technologies’ existing C6ISR (Command, Control, Communications, Computers, Cyber-Defense and Combat Systems, and Intelligence, Surveillance and Reconnaissance) capabilities. In fact, management believes this deal to be a strategic one in bolstering L3 Technologies’ position as a C6ISR solutions provider.

On completion, positive synergies from this deal should drive the company’s future growth in cyber security market worldwide. Also, the acquired companies are expected to help L3 Technologies in delivering advanced capabilities integral to a variety of complex ISR and classified missions after the deal is closed.

Post closure of the deal, L3 Trenchant is expected to add approximately $65 million to L3 Technologies’ net sales, after amortization of acquired deferred revenues, in 2019. The deal will also be slightly earnings per share accretive in 2019, post adjustment of employee retention expenses and business combination purchase accounting, including intangible asset amortization expenses.

Our View

Cyber-attacks, data losses and compromised networks are constant threats, which in turn make cybersecurity essential to any given country’s national security. With the United States being the most technologically advanced country worldwide, it remains highly susceptible to cybersecurity attacks. Considering this and the fact that L3 Technologies is a prime contractor in Intelligence, Surveillance and Reconnaissance (ISR) systems, the company enjoys a dominant position in U.S. cybersecurity market.

In recent times, a handful of cyber-attack incidences have reflected the weaknesses of the information security space in the United States. For instance, the hacking of Equifax’s database in 2017 that compromised sensitive information of 143 million U.S. consumers and the latest Facebook data leak have highlighted the immense need to strengthen the nation’s cyber security measures.  These incidents must have prompted the U.S. administration to increase its focus on matters related to cyber security.

Evidently, the U.S. fiscal 2019 budget, including $15 billion of budget authority for cybersecurity-related activities, reflects a 4.1% increase from the fiscal 2018’s spending provision. Such promising spending plans should entice companies providing cyber security solutions like L3 Technologies to strengthen their portfolio. We believe the latest buyout will enable the company to secure more cyber security related contracts from the U.S. administration in days ahead.

Moreover, the cybersecurity market size is expected to grow from $137.9 billion in 2017 to $231.9 Billion by 2022, at a Compound Annual Growth Rate (CAGR) of 11% during the forecast period (according to Markets and Markets).  Thus, L3 Technologies boasts immense growth opportunities in the global cyber security market and the latest deal should allow it to capture larger shares in this expanding market, going ahead.

Price Movement

In a year’s time, shares of L3 Technologies have increased 19.6% compared with the industry’s 25.2% rally. The underperformance can be attributed to low contract orders for the company from international markets and weak performance in some of the product lines.

Zacks Rank & Key Picks

L3 Technologies currently carries a Zacks Rank #3 (Hold). A few better-ranked stocks in the same sector are Northrop Grumman (NOC - Free Report) , Engility Holdings and Wesco Aircraft Holdings . While Northrop Grumman sports a Zacks Rank #1 (Strong Buy), Engility Holdings and Wesco Aircraft Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Northrop Grumman delivered an average positive earnings surprise of 13.87% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings moved up 6.9% to $16.62 in the last 90 days.

Engility Holdings came up with an average positive earnings surprise of 15.08% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings inched up 0.5% to $1.91 in the last 90 days.

Wesco Aircraft Holdings’ long-term growth rate is pegged at 12%. The Zacks Consensus Estimate for 2018 earnings moved north 10% to 77 cents in the last 90 days.

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