Mega-deals emerge in 2020 M&A activity

2020 is just three-months old, but it might be remembered as the year of the mega-deal.

Any analysis of mergers and acquisitions in the government contracting market for 2019, plus what has happened so far in and what is to come in 2020 (and perhaps not until who knows) has to zero in again on the theme of the megadeal.

One of those may have surprised some observers at the time but perhaps should not have albeit in retrospect, plus two mergers among the biggest of the bigs that spawned more transactions after the fact.

Who does SAIC want to be?

Science Applications International Corp. gained more capacity and resources last year in its $2.5 billion acquisition of Engility Corp. This year saw SAIC’s M&A strategy focus more on skills and intellectual property in the $1.2 billion buy of Unisys Federal that closed in mid-March.

We were fortunate to have SAIC’s lead civilian executive Bob Genter as the last-minute keynote for our Feb. 7 M&A breakfast event the day after the Unisys Federal deal was announced.

Genter was frank in describing how SAIC wants to essentially become Unisys Federal: using a commercial model with everything-as-a-service embedded to deliver IT solutions to federal agencies. That’s a transformation worth watching.

Two blue chips become one

Harris Corp. and L3 Technologies joined forces last year in a rare merger-of-equals that at the time was the defense sector’s largest such transaction in history (at the time) and made a self-touted “non-traditional sixth prime.”

L3Harris Technologies has since looked to right-size itself since it opened for business in July of last year and divest business units not seen as in the core part of a portfolio. One sale was required to clear the antitrust regulatory process.

Other divestitures announced since then have been elective on the part of L3Harris, including the largest one so far that sees it selling the global airport security and automation product businesses for $1 billion in cash.

… And help Leidos get even bigger

Already government services’ largest company, Leidos within a week in February announced that deal to buy the L3Harris security product business and closed the $1.65 billion purchase of Dynetics.

Leidos increasingly used the word “product” as it began to turn outward with the integration of the Lockheed Martin IS&GS business in the rear view mirror. Leidos first made some deals of the tuck-in variety, then made its big bet that Dynetics helps position the buyer for fast growth in the military’s highest-priority technology areas.

The deal with L3Harris is slated to close in June and has a similar current to IS&GS: purchasing an asset the owner views as no longer strategic.

But the (biggest) Big One is almost here

Raytheon Technologies will officially open for business on Friday after the completion of the merger of Raytheon and United Technologies Corp., which can now likely be called the largest such deal in the history of aerospace-and-defense.

We will leave analysis of what that deal means for the commercial aerospace and the military weapons markets to others (here’s one recommendation). We do have our eyes on how the integration of these two Raytheon segments into a $15 billion one for the new company will go: intelligence, information and services plus space and airborne systems.

Why that one aspect? IIS is a little bit of hardware but a whole lot of software, often sourced from the commercial sector including Silicon Valley. SAS is a whole lot more of the hardware bent by comparison.

Outstanding items remain for “RTX”

Raytheon and UTC are selling two businesses -- one from each side -- to BAE Systems’ U.S. subsidiary for $2.2 billion in a move aimed at satisfying antitrust regulators concerned about excessive overlap.

Completions of M&A transactions among large defense primes can take anywhere from the nine months seen in Northrop Grumman-Orbital ATK to one full year that both the L3-Harris and Raytheon-UTC deals took to close.

That owes to the greater scrutiny antitrust regulators have on those deals given the small number of platform-companies versus the vast landscape of government services contractors, which typically close M&A transactions within three months of announcement.

UTC is also looking for a buyer of its space optics business to clear the regulatory hurdle and more divestitures over the next 12 months sound like a certainty, including perhaps the Forcepoint cybersecurity product business that Raytheon Technologies will have full control of.

BAE’s big electronics bet

In the previously-mentioned $2.2 billion in two deals, BAE Systems Inc. found the kind of needle-moving transaction that is often sought but rarely found given the sizes and unique nature of the businesses being bought.

BAE’s acquisition of the UTC military GPS business in particular has some fortunate timing as well given a congressional mandate to upgrade all of that equipment to a new encryption standard starting in October of this year onward.

Acquisition number two for BAE will see it purchase the Raytheon airborne military radio business, which will become part of the buyer’s electronic systems segment alongside the GPS unit.

Integrating both of those divisions will be a top priority for Tom Arseneault, who became BAE Systems Inc.’s CEO on Wednesday. He happens to be a former president of electronic systems.