Defense contractor L-3 Communications Holdings Inc. said yesterday it will buy San Diego technology provider Titan Corp. for just under $2 billion in cash, creating a union of two mid-size companies that hope to provide more competition for the goliaths of the industry.
The deal comes a year after Titan's planned merger with the Pentagon's largest contractor, Bethesda-based Lockheed Martin Corp., fell apart during a foreign bribery investigation.
The addition of Titan gives L-3 a much stronger presence in the information technology services market, particularly when it comes to work for the intelligence agencies.
Titan "is very, very complementary as an asset for L-3," said L-3 chief executive Frank C. Lanza in a conference call yesterday.
Lanza particularly cited Titan's high proportion of employees who possess security clearances: About 9,000 of its 12,000 employees are cleared, and 5,000 of those have special clearances of top secret or above. "That's an asset you can't price," he said, noting those clearances can take years to obtain.
New York-based L-3, which had more than $6 billion in revenue in 2004, has about 5,000 employees in the Washington area, compared with about 2,500 local employees for Titan, which had $2.4 billion in revenue.
If yesterday's deal is approved by Titan shareholders, they will receive $23.10 a share. L-3 also agreed to assume $680 million of Titan debt.
Standard & Poor's said after the deal announcement that it may cut L-3's debt rating to junk-bond status because of concern about the company taking on too much debt.
For L-3, the addition of Titan is the latest move in an eight-year history marked by frequent acquisitions. L-3 began as a collection of castoff Lockheed Martin units, but it has expanded rapidly, with its portfolio now including major government contracts for air and marine communications.
Philip Finnegan, director of corporate analysis at the Teal Group, a Fairfax-based research firm, said the major challenge for L-3 will be integrating the two companies at a time of such rapid growth on both sides.
"Strategically, it's a good acquisition. It makes a lot of sense," Finnegan said, noting that Titan has traditionally been focused on services while L-3's emphasis has been on equipment. "But this is by far the largest acquisition that L-3 has done. . . . The fact that it is the largest adds to the risks."
Last year, L-3 was the 11th-largest Pentagon contractor, ringing up $2.26 billion in business, compared with $933.6 million for Titan, which was the 29th-largest contractor. The merger would vault L-3 into the Pentagon's top 10.
Titan had agreed to merge with Lockheed Martin last year. But that deal unraveled in the wake of foreign bribery allegations against Titan, including charges that the company had funneled millions of dollars to the president of Benin. In March, Titan pleaded guilty to three felony charges and agreed to pay $28.5 million, the largest penalty for violations of the Foreign Corrupt Practices Act. The company also consented to a three-year period of supervised probation.
Titan said yesterday that it had agreed in principle to settle several suits connected to the bribery allegations, which were expected to cost L-3 $67.4 million, according to a regulatory filing. The merger is contingent on those agreements being accepted by judges.
Titan came under scrutiny again last year when Army investigations cited Titan interpreters as among those who had either participated in or failed to disclose the abuses at Abu Ghraib prison in Iraq. That matter was referred to the U.S. attorney's office in Alexandria, where the investigation is ongoing.
Jon B. Kutler, chairman and chief executive of the investment banking firm Jefferies Quarterdeck LLC, said yesterday's deal in part reflects the different strategies of the two chief executives: Lanza at L-3 and Gene W. Ray at Titan.
Ray, who founded the firm in 1981 and has been its chief executive ever since, preferred to sell his company to a bigger player rather than turn the reins over to a successor, Kutler said. Lanza, by contrast, is set on growing L-3 as quickly as possible and ultimately challenging the supremacy of Lockheed and the handful of other companies that dominate the defense industry.
"This is the act that will give them the size and the capability to move up to the next tier," Kutler said.
Shares of L-3 climbed on yesterday's news, up $3.12 to $74.15. Titan stock dropped 32 cents to $22.47.
Staff writer Renae Merle contributed to this report.