L3 Technologies, Inc. (LLL - Free Report) recently entered a strategic merger agreement with electronics and communication systems provider Harris Corp. (HRS - Free Report) . Unanimously approved by both the companies’ management, the combined company is all set to become a global defense technology leader.
Details of the Agreement
For fiscal year 2018, the combined company is expected to generate net revenues of approximately $16 billion, Earnings before Interest and Taxes (EBIT) of $2.4 billion and free cash flows of $1.9 billion. Moreover, the merged entity projects to realize $500 million of annual gross cost synergies and $3 billion of free cash flow in three years’ time, post the completion of the deal.
Benefits to Be Reaped Post-Merger
The merger, upon completion, will enable the company to accelerate investments in select technologies to expand leadership in key strategic domains, including national security. Also, an increased scale of well-balanced franchise portfolio will also help the company form a leading platform-agnostic supplier and integrator. Furthermore, the merger is expected to create a robust balance sheet and significantly drive operating margin and cash-flow generation.
Rationale Behind the Deal
Since President Trump took the throne of America’s chief-of-command, growth prospects of U.S. defense contractors have expanded. To this end, it is imperative to mention the fiscal 2019 defense budget worth $717 billion that was sanctioned by the U.S. Senate’s in August. Notably, of the total budget, $686.1 billion will be kept as funds for the Pentagon, reflecting a 5% real growth from the initial FY 2018 President’s budget and 10% real growth from the current Continuing Resolution (CR).
Such budgetary expansions under Trump’s leadership along with other policy reforms made by the current U.S. administration prompted defense companies to merge with companies hailing from the same or cross industry to enhance product portfolio. Such mergers and budgetary expansions will aid companies to bag more contracts from the Pentagon.
On top of this, global unrest has triggered emerging countries like India and Poland along with developed ones like Sweden to effectively increase their defense spending. As a result, when two big companies with extensive customer base join hands, like Harris Corp and L3 Technologies, the merged company can easily cater to international customers compared to those restricted to the domestic base.
Influenced by the aforementioned factors, the U.S. aerospace and defense space witnessed a handful of notable mergers and acquisitions, in recent times. In June 2018, Northrop Grumman (NOC - Free Report) acquired defense and space contractor Orbital ATK for $9.2 billion. Also, a prospective acquisition is around the corner as United Technologies is on track to close its $30-billion acquisition of aviation manufacturer Rockwell Collins (COL - Free Report) .
In a year’s time, shares of L3 Technologies have increased 5.1% compared with the industry’s 12.7% growth. The underperformance can be attributed to weak performance the company has been witnessing lately in some of its product lines.
L3 Technologies currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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