Exelis deal part of larger Harris Corp. strategy
The acquisition of Exelis Inc. could be just one major step in a broader M&A strategy by Harris Corp. to compete more directly with the upper echelon of Pentagon companies.
That’s according to a new report from Moody’s Investors Service, which says tMelbourne-based Harris (NYSE: HRS) is likely to make more buys after the Exelis (NYSE: XLS) acquisition closes, likely in June.
Moody’s says the planned acquisition of Exelis— as well as prior deals for CapRock Communications and Schlumberger’s global connectivity services group — show that the management team is willing to take on more debt, and subsequently risk, to achieve a particular market position.
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As I reported earlier this month, the majority of the estimated $5 billion deal will be funded with $3.6 billion in debt. That reflects a pretty aggressive M& strategy, Moody’s argues, which will be reinforced if the integration of recent acquisitions into the larger company go smoothly.
Also factoring into future buys could be the M&A environment itself. While the defense industry saw a dry spell of deals beginning in 2010, thanks to federal budget woes and sequestration, program funding levels are more stable and “a defense spending trough,” as Moody’s put it, seems probable in the 2016-2017 period. Interest rates remain low and the debt capital markets are still receptive, reinforcing a more attractive M&A market. (Moody’s didn’t mention any specific targets for Harris.)
But more significant to the Harris M&A strategy might be the impact of the Exelis buy itself, as well as the company’s long-term aspirations. The acquisition increases bidding prospects for Harris, particularly for companies that would fall within the expanded electronics product group. And greater scale affords midsize defense contractors the ability to better spread cost out, Moody’s noted, and be more competitive in pricing on cost-based contracts.