WASHINGTON — A reported merger between L3 and Harris would create the seventh-largest defense company in the world, one which could become a prohibitive favorite for military communication contracts coming from the Pentagon.
The potential deal, first reported Saturday by the Wall Street Journal, would be positioned as a merger of two equals as opposed to one buying the other outright. The Journal noted that the deal was being worked and could still fall apart.
According to the Defense News Top 100, the industry standard ranking of the largest defense firms in the world, in fiscal year 2017 L3 ranked 12th overall, with total revenues of $9.57 billion and total defense revenues of $7.75 billion. Harris, ranked 19th overall, had total revenue of just under $6 billion and $4.15 billion in defense revenues.
Combined, the two would have total revenues of $15.57 billion, and the defense revenue total of $11.9 billion would put the company at number seven of the rankings — ahead of notable defense firms like Airbus, Almaz-Antey, Thales and Leonardo. (Those numbers reflect FY17 figures, and are expected to have grown since then.)
Between lost revenue and massive growth is the story of industry surviving a tough fiscal environment
The Top 100 defense companies in the world had a second straight year of growth — and more of that is on its way, analysts predict.
Byron Callan, an analyst for Capitol Alpha Partners, says there is not a lot of overlap in current contracts for the two companies.
“One is night vision and another minor one may be data links,” Callan wrote in a note to investors. “Harris focuses on tactical communications, electronic warfare, space payloads and supports FAA air traffic control modernization. L3’s portfolio is a bit more diverse and includes electronic components, aircraft modernization, flight simulation, UAS/UUVs, airport security and C4ISR components and subsystems.”
Callan also doesn’t see any “immediate” moves from the rest of the defense industry in response to the potential merger, nor does he see one of the primes moving in to try and grab Harris instead.
“There just isn’t much left in terms of multi-billion defense electronic product focused stand-alone enterprises,” he wrote. “Unlike commercial aerospace where supplier consolidation has triggered moves by Boeing to offset the emerging power of its subcontractors, we don’t see Harris-L3 as spawning similar moves by Boeing, Lockheed Martin or other platform primes.”
In a May earnings call, new L3 CEO Chris Kubasik pledged he would create a “sixth prime” with his company, saying he would look to increase the volume of contracts won by L3. And in a June follow up interview with Defense News, the L3 CEO said that volume would come from contract firmly in L3s wheelhouse, not branching out into whole new sectors.
“I do not envision a scenario where we’re building multibillion-dollar satellites, airplanes and ships,” Kubasik said then. “But we can better connect those, we can have smaller offerings or platforms like a UUV, UAV, maybe a small satellite that works and complements the larger system. So that’s my definition of prime.”
The products Harris provides would seem to complement what L3 does, with their experience in areas such as tactical communications and avionics. The company subsumed competitor Exelis in 2015 and recently notched a surprise win with a major contract to provide computer processors for the F-35. It has also found recent success with its T7 EOD system.
In a 2017 interview with Defense News, Harris CEO Bill Brown said his firm would look to grow its electronic warfare segment, as well as its space systems business — something that would prove prescient given the push for more space spending from the Trump administration, and the subsequent refocusing on space by industry.
“Where we’ve seen growth is around what they call space superiority — the ability to protect the overhead architectural assets. And we have great positions in lots of different domains that support that,” Brown said. “That’s the biggest area, it’s well-funded, and you can read very much publicly around some of the concerns that happen to be out there.”
Any merger of major defense companies such as this one will be looked at by DoD for potential issues, including creating non-competitive markets. Such a review would be led by Ellen Lord, the undersecretary of defense for acquisition and sustainment, and Eric Chewning, the deputy assistant secretary of defense for industrial policy.
However, both Lord and Chewning have indicated they are more interested in a hands-off policy than one that would intercede on a merger.
“I think we have worked, actually, to make sure that we are communicating effectively within DOD about any potential mergers and acquisitions. We've started a new process where, as soon as we know about them, we go out a data call to all components, all services,” Lord said earlier this month. “We take a look at that, and if there are any concerns, we work closely with the FTC or DOJ, whoever might have them. And if there's a concern, then we have consent to please and deal with that.”
But, she added, “basically, we like market forces to play out. It's by exception, that we would intervene.”
The DoD has recently expressed concerned about the state of the industrial base in the high-end electronics and communications sectors, so the Pentagon will likely take a close look at how such a merger might influence that.
Requests for comment from L3 and Harris were not immediately returned.