While analysts don't predict it will trigger a merger spree, or change the industry's underlying economics, it could make Harris a stronger competitor relative to the primes in some market segments. The Pentagon is expected to will examine any competitive overlaps.
"It's not going to trigger a land grab or a scramble by other companies," said Byron Callan, of Capital Alpha Partners.
There might not be stampede, but there is movement in mergers and acquisitions, evidenced by this merger and Orbital Sciences Corporation's announcement last month that shareholders approved its merger with Aerospace and Defense Groups of Alliant Techsystems Inc., known as ATK,
"The deal, on the back of the Orbital-ATK deal, suggests the first wave of mergers will feature horizontal mergers in the mid-tier," said Steven Grundman, a former Pentagon industrial policy chief now the principal of Grundman Advisors. "They seem to be an emerging theme of the next wave of corporate developments in the defense market."
William Brown, chairman, president and CEO of Harris, said the new entity would be "competitively stronger ... with significantly greater scale." The firm will be an $8 billion tech company with 23,000 employees, including 9,000 engineers and scientists.
Exelis, itself a 2011 spinoff from ITT, spun off its military and government services business focused on facilities management, logistics and network communications in 2013. The new, leaner Exelis focused on surveillance and intelligence solutions, and was billed as representing $3.4 billion in revenue.
"Exelis determined its scale and portfolio would not do well against flat defense spending," Grundman said.
While strategic for Exelis, the deal appears opportunistic for Harris, providing the company more scope, scale and capital for better bargaining leverage with the primes, Grundman said.
Regulators, who have yet to approve the deal, will be on the hunt for areas where there is direct overlap between the companies, which could stifle competition. In these matters, regulators tend to defer to Pentagon acquisition officials.
"There will be a bunch of program managers and program executives who are taking notice, and will be asked to weigh in on the competitive impacts," Grundman said.
Callan, too, said the merger appeared on its face as a positive for the Pentagon, which will see a stronger competitor relative to Raytheon, Northrop Grumman and Lockheed Martin.
"It's not quite clear that this would reduce or eliminate competition in some segments, so I think from the DoD's perspective — and I'm an outsider looking in — the benefits are fairly straightforward," Callan said.
The two companies say they expect to close the deal in June, subject to approvals from regulators and Exelis shareholders.
Advising Harris are Morgan Stanley & Co., and Sullivan & Cromwell. Advising Exelis are J.P. Morgan Securities and Jones Day.
Joe Gould is the senior Pentagon reporter for Defense News, covering the intersection of national security policy, politics and the defense industry. He served previously as Congress reporter.