WASHINGTON — As aerospace and defense firms began reporting their third-quarter results last week, mergers and acquisitions – past, present and potential future deals – loomed large.

Lockheed Martin, Boeing and Raytheon all reported stronger-than-expected 3Q results, bumping up their earnings per share slightly.

Marillyn Hewson, Lockheed’s chairman, president and CEO, said during an Oct. 20 call with analysts that regulatory reviews of LM’s the company's $9 billion acquisition of Sikorsky Aircraft have been completed in seven jurisdictions, with only China remaining. The companyLockheed expects that review to proceed quickly, paving the way for a quick completion of the deal.

"With the progress of the regulatory reviews, we now expect to close in the fourth quarter," she said.

Lockheed also is continuing with plans to divest or spin off $6 billion of government information technology, infrastructure services and technical services businesses, and expects to make a decision by the end of the year.

Hewson added that said she disagreed with Pentagon acquisition chief Frank Kendall’s recent assertion that too much consolidation could reduce competition in the defense industrial base.

"There's really no evidence to support that. There's no evidence to support that with our Sikorsky acquisition that we reduce competition or inhibit innovation in any way," she said.

In an analysis for investors, Bank of America's Ron Epstein compared the strategy underlying the Sikorsky deal to Lockheed's acquisition of General Dynamics' military aircraft business in 1992.

"This acquisition was the foundation of Lockheed's dominance in fighter jets and improved the company's competitive advantage for the F-35 program, the only US fifth-generation fighter jet in production," he said. "With Sikorsky, [Lockheed Martin] is now the premier manufacturer of military fixed-wing and rotary-wing aircraft. In the long-term, we would not be surprised if [Lockheed Martin] is able to extract value from the Sikorsky acquisition as it had done with GD's military aircraft business."

Raytheon’s results were bolstered in part by a strong performance by Raytheon|Websense, the cyber business created after Raytheon acquired Websense in May. But Raytheon CEO Tom Kennedy and CFOhief Financial Officer Anthony O’Brien suggested that no more big deals are on the horizon.

"We don't have sitting here today any $1 billion-plus deals that we're contemplating for any part of the portfolio, including our commercial cyber venture," O'Brien said. "It would be the more niche, targeted type of acquisitions that fill technology gaps or product gaps or customer gaps."

In a research note, Robert Stallard of RBC Capital Markets said Raytheon's capital deployment strategy appears to have shifted back toward share buybacks and dividends for investors.

"We think there has been concern that Raytheon is [on] an acquisition binge following Blackbird and Websense, but we think management made it clear on the call that the big deals ($1bn+) are done," he wrote. "We may see some bolt-ons, but 80-90 percent of free cash looks set to be returned to shareholders as buybacks and dividends going forward."

Boeing’s strong quarter was driven largely by strong the performance by of its defense, space and security division.

"The strength of our defense and space business stems from our investments in technology and innovation that have established a portfolio of reliable, proven, and affordable products and services," said Dennis Muilenburg, Boeing's president and CEO. "We continue to invest in organic growth areas that are priorities for our customers such as commercial derivatives, space, unmanned systems, intelligence, surveillance and reconnaissance, and the critical few future franchise programs like Long Range Strike and the T-X trainer."

All three firms continued to spend heavily on share buybacks and dividends, Lockheed and Boeing especially. Lockheed's board recently authorized the company to spend up to $4.3 billion on future share buybacks, and the company spent almost $1.3 billion on share buybacks and dividends in the third quarter of 2015. Boeing spent $1.5 billion on share buybacks and $600 million on dividends over the same period.

Raytheon is on track to spend $1 billion on share buybacks in 2015, Kennedy said during the earnings call.

Byron Callan, an analyst with Alpha Capital, said Raytheon now enjoys the top consensus sell-side rating for US large-cap defense stocks. If this signals that Wall Street is beginning to find organic growth stories more compelling than share buybacks and dividends, this could signal a strategic shift toward more M&A merger and acquisition activity.

"If the sell-side is becoming more favorably disposed to defense growth stories among primes/large caps, it may reshape strategies of some companies that seem to heavily rest on static capital deployment, particularly as the returns on buybacks are inversely proportional to valuations," he wrote in a note to investors, noting that companies with fiscal years ending in December are in the process of firming up their future strategies. "If growth will command a premium in defense and outshine static capital deployment, at least it should be debated and reviewed in the 2016 and outyear plans."

Email: aclevenger@defensenews.com

Twitter: @andclev

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