LE BOURGET, France — The combined entity of L3 Harris Technologies will divest a significant piece of business, likely in the first six months after the merger closes, CEOs from both companies said during an interview with Defense News ahead of the Paris Air Show.
The merger, which is expected to close within weeks, will create a company with about $18 billion in revenue.
“Anytime you put two companies with two portfolios together and you rethink what strategy you want to accomplish, there’s going to be some pieces of the portfolio at the back end of the bus,” Harris CEO Bill Brown said. “We have to look at where we want to put our management time, capital, and [research and development] investment. We can’t put it on pieces that might not be as strategic."
“We’ll spin some things off or sell some things without a doubt," he added. "We haven’t decided what that is, but it’s going to be an important step in the first six months post close. It will be pretty significant,” with business divested either in small pieces or grouped together as a larger sale or spinoff.
Both L3 Technologies and Harris Corp. divested businesses prior to the merger announcement last fall. The former closed the sale of a trio of businesses — aviation logistics and supply chain management company Vertex; rotary aircraft component provider Crestview Aerospace; and engineering services and logistics company TCS — in the middle of 2018 for $540 million in cash.
And in a $350 million deal, Harris agreed to sell to Israel’s Elbit Systems its night vision business — the one area of overlap between Harris and L3 that could have raised eyebrows from a competitive standpoint. The transaction is conditioned on the merger. Harris also sold its information technology services unit for $690 million in 2017.
“Both of us having divested our services businesses well before this was signed gives us a head start,” L3 CEO Chris Kubasik said. “If we had our old portfolio and [Harris] had its old portfolio, the first year and a half would’ve been spent getting rid of [those assets]. That made this more attractive.”
However, both executives also pointed to synergies that could make the combined company — what Brown described as a C4ISR powerhouse — more competitive. L3’s capability in multifunction phased array can mean development of a single, open architecture to support radar, communications and electronic warfare. Signals intelligence experience from L3 can also enhance Harris’ work in the space domain with small satellites, increasing onboard processing capabilities. And with the acquisition of Exelis, Harris was able to develop a small-footprint EW platform — the size of a deck of cards — which can function well on the decoys and unmanned vehicles that L3 develops.
At the same time, the newly merged company plans to invest 4 percent of revenue in independent research and development, or IRAD, focusing on three areas: actionable intelligence, war-fighter effectiveness and spectrum superiority.
Of course, plans to divest does mean even more mergers and acquisitions in a market that has seen a recent surge in deals. Beyond the L3-Harris merger, United Technologies completed the acquisition of Rockwell Collins in November, only to announce earlier this month plans to merge with Raytheon to form a company with an estimated $74 billion in revenue. That deal will presumably lead to more M&A activity among defense companies as UTC and Raytheon begin their own portfolio-shaping post merger.
The two mega deals have some similarities.
“You’ve got [in L3 Harris Technologies] a technology-based company that can spend a lot of money on IRAD, focus on bigger bets, bring our rates down,” Brown said. “It makes these system more affordable. That’s behind what we’re trying to do; and if I listen to what UTC and Raytheon are talking about, it has the same thread.”
Brown expressed limited concern about the combined Raytheon-UTC creating a new, more direct competitor, saying there are pieces of both companies that L3 and Harris have partnered with and competed against, “but they’re not our biggest competitors.”
“It’s going to shift. Things are going to change,” he added. “Will there be places where we’ll be competing more often? It’s possible. But it also opens opportunities.”
Harris’ fiscal year closes at the end of June, and Brown hopes to see the merger completed soon after. Final negotiations with the U.S. departments of Justice and Defense have involved assurances of firewalls between teams competing for the Navy’s Next Generation Jammer program, he said, which counts L3 as a prime and Harris as a subcontractor to Northrop Grumman.