Lockheed Martin, the Pentagon’s largest weapons-maker, announced a $9 billion deal to buy helicopter manufacturer Sikorsky on Monday, pushing further into the world of military hardware despite a recent slowdown in defense spending.
The deal reflects an industry-wide rethinking about the future of defense spending. After years of hedging bets and straying from traditional government contracting into civilian-focused information technology work, the defense industry is doubling down on military hardware investments.
“Nothing makes money for a defense contractor like manufacturing defense platforms,” said Richard Aboulafia, vice president of analysis with Teal Group. “With a budget environment like this, you’re not going to do that organically. You’re going to do that through acquisitions.”
The news of the deal came as Bethesda-based Lockheed reported better-than-expected revenue and profits during its second quarter. Lockheed’s revenue increased 3 percent and its profits rose more than 4 percent during the quarter compared to the same period last year. The company also lifted its profit expectations for the year.
The deal would broaden the company’s reach into a new piece of military equipment — and internationally. Lockheed already manufactures the F-35 fighter, unmanned drones and missiles. But Lockheed didn’t make helicopters, until now.
Sikorsky, a division of United Technologies, makes some of the government’s most widely used helicopters, including the Black Hawk. In 2014, it won a contract to manufacture the new Marine One, the president’s official helicopter.
As part of the deal, Lockheed will take on the manufacturing — and the lucrative maintenance work — on the more than 4,000 Black Hawks in use worldwide.
In a conference call with investors Monday morning, Lockheed executives said the company would also use Sikorsky as a gateway into more international markets. In 2014, nearly half of Sikorsky’s sales were to international customers. The Saudi Arabian Navy, for example, ordered 10 Sea Hawk helicopters in May. Sikorsky sold a modified Black Hawk to the Jordanian royal family in May for $21 million.
Foreign sales comprised 20 percent of Lockheed’s revenue in 2014, though company officials have said it could reach 25 percent in the coming years.
Lockheed also said Monday that it was reviewing the future of its $6 billion civilian information technology business, which includes about 17,000 employees.
“All that commercial stuff, that IT stuff, that’s always been a difficult story to tell and generally has lower margins,” Aboulafia said. “Manufacturing new defense platforms, that’s an easy story to tell.
Added Sam Pearlstein, co-head of equity research at Wells Fargo, “I think the competitive dynamics for the IT business have been challenged for some time. It hasn’t been a high margin segment for this company for quite a while.”
The IT businesses, including civilian cybersecurity and big data analysis, could be sold or spun off into its own company, Lockheed said.
“There’s a lot more competitors coming into the marketplace and our customers’ needs are changing,” Lockheed chief executive Marillyn Hewson said in a call with analysts Monday. “We think what we have is a premier asset, and if we can stand it up as a standalone company or if we can find a buyer and get a good price for it, that’s the best thing for that business.”
Lockheed executives said they expect the merger, which must be approved by regulators, to be completed by the end of the year. Lockheed will avoid paying nearly $2 billion in taxes because of the way it structured the deal with United Technologies.
“Sikorsky is a natural fit for Lockheed Martin and complements our broad portfolio of world-class aerospace and defense products and technologies,” said Hewson. “I’m confident this acquisition will help us extend our core business into the growing areas of helicopter production and sustainment.”
After news of the announcement, Lockheed’s stock rose nearly 2 percent, trading at $205 a share, Monday. United Technologies was flat, closing down slightly at $110 a share.