WASHINGTON — L3 and Harris intend to merge into a new company, called L3 Harris Technologies, which would become the seventh largest defense firm in the world, the companies announced Oct. 14.

The merger, which has been approved by the boards of both companies and would be the largest deal the defense industry has ever seen in terms of market capitalization, is a stock-based agreement. Per an announcement of the deal, L3 shareholders will receive a fixed exchange ratio of 1.30 shares of Harris common stock for each share of L3 common stock. Once the merger is complete, Harris shareholders will own approximately 54 percent and L3 shareholders will own approximately 46 percent of the combined company.

For the first two years, Harris CEO Bill Brown will serve as chairman and CEO, with L3 CEO Chris Kubasik serving as vice-chairman, president and COO. Afterward, Brown will become executive chairman and Kubasik will become chairman and CEO. The headquarters will be in Melbourne, Florida.

In an interview with Defense News the day of the announcement, both men expressed a belief that the merger will succeed, in part because the companies compliment one other well. But Brown would not rule out divesting business units if they no longer make sense for the combined company.

“If you look at what L3 has done recently and what we’ve done in last five to six years, we’ve both taken a critical eye to the business portfolios we have, and if there are assets better owned by someone other than ourselves we take a dispassionate view and transition those to different owners,” Brown said.

“Chris and I will take a look at that going forward; I think given the diversity of the business mix we have together, it creates the optionality of portfolio shaping," he added. "Nothing to mention today, but it’s something we’ll take a look at over the next couple months and years.”

The announcement of the potential merger follows a flurry of other M&A activity for both companies. In May 2015, Harris merged with Exelis — a company that itself had formed after a split of ITT Corp. The company spun off its information technology business in January 2017.

And since Kubasik took the helm of L3, the company has made a number of acquisitions to strengthen its unmanned maritime capabilities, as well as its C4ISR, cyber defense and combat systems businesses. L3 divested its Vertex Aerospace business for $540 million.

The combined firm will have approximately 48,000 employees and customers in over 100 countries, with an expected net revenue of $16 billion in calendar year 2018, according to the company announcement. Combined defense revenue for 2017 for the two companies was $11.91 billion, according to the Defense News Top 100, which would rank the combined company seven on the list — sixth among U.S. companies.

In general, the next two years will be focused on integrating the two companies and executing on existing programs, Kubasik said during the interview.

“We’re going to generate [a] lot of cash; it’s going to take several hundred million dollars of investments to integrate these companies, and the rest of the cash we’ll use to maintain competitive dividends... to repurchase shares,” he added. “The likelihood of [further] acquisition in those first two years are very low.”

Neither CEO would comment on potential employee reductions, beyond confirming that areas of overlap would be examined. Brown described potential conflict of interest in terms of head-to-head competition as almost negligible.

The merger is expected to close midway through calendar 2019.

In a May earnings call, Kubasik pledged he would create a “sixth prime” with his company. With the Harris merger, his vision may have come true.

While the Pentagon and other government offices will need to review the merger, it is unlikely that objections will scuttle the deal. There are only a few areas of overlap between the two firms, and Ellen Lord, the Pentagon’s top acquisition official, recently said “basically, we like market forces to play out. It’s by exception, that we would intervene.”

Harris builds the main payload on the Air Force’s next-generation GPS III satellites and is a major supplier of the Army’s Manpack radios for battle field communications. L3 is a major supplier of ISR, secure communications and electronic systems.

Check back tomorrow for the full interview with Harris CEO Bill Brown and L3 CEO Chris Kubasik.

Aaron Mehta was deputy editor and senior Pentagon correspondent for Defense News, covering policy, strategy and acquisition at the highest levels of the Defense Department and its international partners.

Jill Aitoro is editor of Defense News. She is also executive editor of Sightline Media's Business-to-Government group, including Defense News, C4ISRNET, Federal Times and Fifth Domain. She brings over 15 years’ experience in editing and reporting on defense and federal programs, policy, procurement, and technology.

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