Harris-L3 deal would bolster company's role as prime, allow company to invest in key areas

By Marjorie Censer / October 15, 2018

The chief executives of Harris and L3 Technologies said today their proposed merger would bolster the company's role as a prime contractor and ensure the majority of its work is on fixed-price contracts.

Speaking to analysts one day after announcing the deal, which would create a combined company with $16 billion in annual sales, Bill Brown and Chris Kubasik touted the transaction's benefits.

The newly formed contractor would be the sixth-largest defense contractor in the United States, they said, and serve as the prime on 67 percent of its contracts, according to provided slides. Seventy-two percent of its contracts would be fixed-price.

The company's work would be well distributed among multiple customers; the largest chunk, or 26 percent, would be with the U.S. Air Force, the slides indicate. Another 17 percent of sales would be with international governments, while 13 percent would be with the Navy, 13 percent with commercial and 13 percent with other U.S. government agencies. The Army would provide about 10 percent of the company's sales, while other DOD agencies would make up the remaining 8 percent.

Kubasik pointed to the new company's strengths in communications; intelligence, surveillance and reconnaissance; and space.

"We will improve affordability" through the deal, he told analysts.

Harris and L3 have also said the company will be able to focus on innovation in new areas. According to the slides, Harris invests 5 percent of sales in research and development, while L3 spends 3 percent. The merged company would invest 4 percent in areas including protected communications, electronic warfare and unmanned systems.

Kubasik said the company is not planning significant acquisitions in its early years as it focuses on execution and integration, but Brown acknowledged the transaction will provide "opportunity for portfolio shaping."

The executives said they had started talking about the deal over the last eight to 10 months.

"Most people have always believed for a long time that this combination made sense, and Bill and I just worked hard to make it happen," Kubasik said. "We both pride ourselves on being rather agile and innovative, and I think people will be impressed how quickly we're able to pull this off."

He noted that he and Brown contacted representatives of government customers, Congress and industry over the weekend to discuss the deal.

Both Brown and Kubasik said they don't expect regulatory issues to slow the transaction.