WASHINGTON — The announcement late Tuesday that services giant Leidos will procure defense technology firm Dynetics for $1.65 billion gives Leidos a boost in a number of future technologies sought by the Pentagon, and it could help it stand out among competitors.
Leidos, ranked as the 21st largest defense contractor in the world according to the Defense News Top 100 list, grew its business in recent years by focusing on core competencies in the government services area. In contrast, Dynetics is a product-focused company. But Byron Callan, an analyst with Capitol Alpha Partners, said in a note to investors that the deal “continues a trend of blurring of business lines by services-focused defense contractors who are moving more into product segments."
“Leidos is not a stranger here, given its work on the DARPA Sea Hunter autonomous naval vessel on simulation products,” Callan wrote, referring to the Pentagon’s Defense Advanced Research Projects Agency. “While Leidos is still going to be dominated by services, the Dynetics deal adds it as a competitor to Lockheed Martin, L3Harris, Northrop Grumman, and Raytheon Technologies.”
Leidos plans to keep Dynetics as a wholly owned subsidiary, which should both smooth the transition and make sure current programs and partnerships are not interrupted.
In a statement, Leidos Chairman and CEO Roger Krone called Dynetics an “ innovative company” that “will significantly increase our capabilities for rapid prototyping and agile system integration and production, enhancing our overall offerings and services to customers.” He specifically called out hypersonics, space solutions, autonomy and advanced sensors as four areas where Dynetics will enhance Leidos’ portfolio.
In recent years, Dynetics carved out a strong niche as a developer of future defense technologies, particularly with the U.S. Army. The service selected the firm in August to be the first to manufacture hypersonic glide body prototypes for the department, in a team-up with Lockheed. Earlier this year, a team-up of the two firms also was awarded an Army contract to build a 100-kilowatt laser weapon.
In November 2018, Dynetics was awarded a contract to produce two experimental satellites under the Army’s Gunsmoke program. And in April 2018, the firm was awarded a contract through DARPA for the Gremlins recoverable unmanned systems project.
That Dynetics is located in Huntsville, Alabama, one of the major hubs for space-related military efforts, may also help Leidos grow its practice in the space and missile systems sector, or at least help attract top talent, wrote Callan, who noted that the overall deal is “more about future sales growth opportunities and posture rather than cost synergies.”