WASHINGTON — Northrop Grumman has reached a deal to purchase Orbital ATK for more than $9.2 billion, a move that will greatly expand Northrop’s portfolio in space and missiles.
The companies announced the transaction Monday morning, a day after the Wall Street Journal revealed the oncoming deal.
After absorbing Orbital ATK into a fourth business unit, Northrop expects sales to grow from its 2016 total of about $25 billion to $30 billion.
“The acquisition of Orbital ATK is an exciting strategic step as we continue to invest for profitable growth,” Wes Bush, Northrop‘s president and CEO, stated in a news release. “Through our combination, customers will benefit from expanded capabilities, accelerated innovation and greater competition in critical global security domains.”
David Thompson, president and CEO of Orbital ATK, added that, “the unique alignment in culture and mission offered by this transaction will allow us to maintain strong operational performance on existing programs while we pursue new opportunities that require the enhanced technical and financial resources of a larger organization.”
Northrop’s acquisition of Orbital ATK would provide some obvious benefits to the company, said Byron Callan, a director at Capital Alpha Partners. Orbital has long had a niche in electro-optical countermeasures, which could help expand Northrop’s expertise in electronic warfare. Northrop has also struggled in the missile market, a thriving business segment for Orbital.
Other parts of the company make less sense for Northrop to pick up, like its ammunition portfolio. It’s possible that Northrop could sell that part of the business off, Callan said, but there are no signs right now that Northrop will do so.
Callan said that Northrop’s decision to purchase Orbital ATK was “kind of a surprise on both sides.
“Orbital ATK was one of these companies that seemed very comfortable with the idea of investing to grow,” he said.
Northrop Grumman was “the opposite of that,” with more of a focus of returning cash to shareholders and a conservative research and development portfolio.
“Maybe Northrop had underinvested in R&D and they’re going to pay a premium for that now — that they really needed to get some more growth back in their portfolio, and this is the way they hope to do it,” he said.
If both companies reach a deal, it would be the second announcement of a merger of two major defense firms in a matter of weeks. On Sept. 4, United Technologies Corp. announced that it intends to purchase Rockwell Collins for $30 billion.
It’s probable that Northrop had floated its plan to acquire Orbital past top Defense Department leaders, said Callan, who believes it’s unlikely that the department raises serious concerns about the deal.
However, other big defense primes could pose a barrier to the sale moving forward, much as Boeing has rung alarm bells about the recently announced acquisition of Rockwell by United Technologies, he said.
One potential flash point is the Air Force’s Ground Based Strategic Deterrent competition, or GBSD, which will replace the Minuteman III intercontinental ballistic missiles. Orbital ATK is one of two firms working on propulsion systems for the two prime contractors competing for the contract: Boeing and Northrop.
It’s possible that Boeing could raise concerns about one of the key motor providers being owned by its direct competitor, said Callan.
“If I were relying on Orbital ATK for motors for Ground Based Strategic Deterrent, I’d want to make sure that it’s highly firewalled from Northrop Grumman and their bid, if I were Boeing,” he said.
However there is precedent for a company to be involved in its competitors’ proposals. For instance, on the JSTARS recap program, all three prime contractors — Boeing, Northrop and Lockheed — submitted proposals featuring radar from Raytheon and Northrop.
Updated on 9/18/2017 at 7:35 a.m. EST with details of the deal.
Valerie Insinna is Defense News' air warfare reporter. She previously worked the Navy/congressional beats for Defense Daily, which followed almost three years as a staff writer for National Defense Magazine. Prior to that, she worked as an editorial assistant for the Tokyo Shimbun’s Washington bureau.