Lockheed Martin is nearing an agreement to purchase the Sikorsky helicopter unit from United Technologies Corp. in a deal that could be worth $8 billion.
According to a Wall Street Journal report, talks are in an "advanced stage" for Lockheed to acquire Sikorsky, owned by United Technology Corp., for more than $8 billion. The same report says the discussions could still fall apart, but if not the deal will be completed shortly.
The deal would represent the largest acquisition for Lockheed since it purchased Martin Marietta in 1995, the Journal noted.
Lockheed Martin is a major supplier of parts for Sikorsky's systems, including the popular UH-60 Black Hawk utility helicopter and CH-53K heavy-lift vehicle. However, that should not create concerns over vertical integration, according to analysts contacted by Defense News late Friday.
Anita Antenucci, senior managing director at Houlihan Lokey international investment bank, said a possible Lockheed purchase of Sikorsky wouldn't necessarily trigger regulatory objections over vertical integration.
While Lockheed is one of a handful of primes that are too big to merge with each other, the acquisition of a "platform prime" like Sikorsky that is slightly lower on the food chain would probably be permissible, she said.
"We've allowed those higher level primes to acquire UAV companies, we've allowed them to own platform companies," she said. "Where vertical integration becomes an issue is where you take the higher level primes and they take control of the communications and electronics that tie all platforms together in a way that becomes anti-competitive."
The Defense Department cracked down on vertical integration in the 1990s, when a wave of consolidation among defense firms fueled concerns over too much concentration in certain businesses.
In 2000, in the wake of the Pentagon's new direction, Lockheed sold Sanders, a defense-electronics business. Antenucci speculated that in today's regulatory environment, LM would not have opted to divest itself of the company.
"Given a choice today, I bet they wouldn't sell it," she said.
Jeff Bialos, a lawyer specializing in mergers and acquisition at Sutherland Asbill & Brennan, said not to read into the procurement of Sikorsky as a precursor to a wild west, free-for-all when it comes to longstanding concerns about vertically integrated companies merging.
"I see no evidence that the core anti-trust standards being applied to defense and aerospace mergers have changed in recent years," Bialos said. "It continues to be a case-by-case review of whether the merger restricts horizontal competition, creates vertical effects that reverse the competition, or creates conflicts of interest."
Government regulators will do their due diligence, Bialos noted, and at the end of the day "the government will evaluate the facts in this situation and make a judgement."
"The kinds of questions the government will look at are questions like after the merger, would other providers of electronics for military helicopters be seriously disadvantaged? That's how you have to look at it."
Strategic Move for Lockheed?
Byron Callan, an analyst with Capital Alpha Partners, notes that the deal opens up questions about whether Lockheed, known more as an integrator than for investing in platforms in the rortocraft world, is now pursuing platforms.
If so, it could signal for Lockheed a change in the company's strategy – one where it simply goes out and purchases the winner of competitions it is knocked out of.
As an example, Callan brought up the idea Lockheed could pursue one of its competitors for the Army's Joint Light Tactical Vehicle, AM General or Oshkosh
"Could you spin the case if Lockheed ends up getting the business, does that mean they end up looking at Oshkosh," Callan said. "I see this as peculiar to Lockheed Martin, and not this is going to kick off a horse race for defense primes to start snapping up other platform companies, and there really aren't a lot out there ... I don't think this is one of those deals that kicks off a lot of reaction and counter-reaction."
Still, the deal would come in an active year for mergers and acquisitions, with 2015 at an all-time record in terms of dollar value for the numbers of deals that have been done, Callan said.
The timing of the news, on a Friday afternoon during active trading, Callan said, suggests the story was a leak to test how the stock market reacts to the deal. Because Lockheed had led shareholders to expect free cash flow to shareholders, they can be expected to question the deal.
The stock held essentially steady at $194 from the time the Journal story broke through the close of trading Friday.
"You guys were talking about, a couple of months ago, three years of cash flow to shareholders, why did you change – and you said that at a time when you knew this property is up for sale," Callan said. "Those are the kind of questions shareholders are going to have. They have the F-35 and missile defense and were going to give the next few years of cash flow to shareholders, so what changed now?"
UTC's decision to move on from the helicopter manufacturer before the end of the year was made official at this year's Paris Air Show, setting off a round of speculation about who may look to purchase the company.
In addition to Lockheed Martin, Textron and Airbus were seen as viable contenders. Reports emerged early this week that the competition was down to Lockheed or Textron, likely due to concerns about whether the sale of an American defense firm to a foreign entity could clear all the regulatory and political hurdles it would require.
When the news officially broke of Sikorsky's divestiture, analysts questioned whether any company would be willing to buy the firm given US tax provisions that say sales of a company results in a gain tax; a spinoff does not need to pay that tax. If the spinoff is bought by another company within a two-year period, the burden of proof is on the original company to prove this wasn't a tax avoidance scheme. After two years, the burden shifts to the IRS to prove anything is amiss.
However, the potential boost for Lockheed through a purchase of Sikorsky appears to outweigh the up-front financial cost.
Analyst Richard Aboulafia, of the Teal Group, said he was surprised by the prospective deal because a sale would trigger a tax bill, in the billions, and because Lockheed had been more interested in integrating other companies' rotorcraft than building its own. Its last effort was a prototype Army attack helicopter, the AH-56 Cheyenne, in the 1960s.
Multiple calls to spokespeople for Lockheed and Sikorsky were not immediately returned.