The Pentagon increasingly views space as the next great battle front. North Korea is flexing its muscle by firing test missiles and developing its nuclear arsenal. And NASA has seeded the private sector with billions of dollars in contracts, as the industry focuses more on small satellite technology.
All which helps explain why Northrop Grumman, one of the nation's largest defense contractors, announced on Monday that it planned to acquire Dulles-based Orbital ATK, by paying $7.8 billion in cash while assuming $1.4 billion in debt.
The surprise move gives Falls Church-based Northrop some sought-after capabilities — from missile defense, to small satellites and even a rocket — allowing it to enter new markets at a time of increased tension globally.
There is “very little overlap” between the two companies, Northrop chief executive Wes Bush said Monday during a conference call with analysts. “Through our combination, customers will benefit from expanded capabilities, accelerated innovation and greater competition in critical global security domains.”
Northrop has long been a leader in the defense industry and is currently developing the B-21 Raider, the long-range stealth bomber, for the Air Force, after beating out a Boeing-Lockheed Martin team for the contract. It manages a large cyber division and works to develop the technology behind autonomous systems and radars, while also building large satellites.
The acquisition, should it be approved by regulators and Orbital ATK’s shareholders, would give Northrop access to Orbital ATK’s small satellite division at a time when the Pentagon, and others, are seeking to put up constellations of small satellites that could beam Internet to remote areas and provide Earth observation capabilities. Orbital also has been developing the technology to service satellites in space, allowing them to operate much longer.
One of Orbital's key areas of expertise is robust missile and missile defense division, an important asset at a time when North Korea recently fired a missile over Japan and is developing its nuclear arsenal.
In the conference call with analysts Monday, Bush said that the acquisition would bolster Northrop Grumman's ability to compete at a time when defense technologies are advancing rapidly, and other nations are catching up to the United States.
“Our nation and our allies are also having to address our missile and missile defense capabilities in news ways, as the technological capacity of our potential adversaries continue to advance,” Bush said.
While North Korea has strengthened its nuclear and ballistic missile capabilities, national security experts are also increasingly worried over China and Russia's ability to challenge the United States' dominance in space.
In recent years, the Air Force has pledged to move more forcefully to defend its assets in space — the communication, GPS and spy satellites that act as its “eyes and ears” above ground. Some in Congress, however, feel that the Pentagon is not moving aggressively enough and has called for the creation of a dedicated Space Corps, a new military branch that would focus exclusively on space.
Whatever happens, Orbital’s expertise building small satellites would better position Northrop.
“We can no longer treat space as a permissive environment,” Bush said in the conference call.
Bush balked at providing a definitive answer when asked what new opportunities the merger would position the company for. One analyst took that to mean the company is eyeing classified opportunities, possibly related to government intelligence satellites.
“It was pretty clear that was part of what motivated this deal because of the changes that are looming in military space architecture," said Byron Callan, director at Capital Alpha Partners investment bank. "We’re going from these big bus-sized satellites to smaller distributed systems, so that’s what Orbital ATK is bringing to the party."
Along with Elon Musk’s SpaceX, Orbital ATK also has a contract to supply the International Space Station with cargo. Its Antares rocket and Cygnus spacecraft launch from Wallops Island on Virginia’s eastern shore.
For years, NASA flew its space shuttle to the orbiting station. But has more recently hired private sector companies to ferry cargo there in contracts worth hundreds of millions of dollars.
Orbital ATK also developed the Pegasus rocket, a small rocket that is tethered to the belly of a jet, then “air-launched” to space. It is capable of deploying small satellites, weighing up to 1,000 pounds, to low Earth orbit.
The deal comes on the heel of another major aerospace merger, between United Technologies Corp. and Rockwell Collins. While that was viewed as an effort to strengthen the firms’ position in the commercial market, Monday’s deal would better position Northrop to sell to the Pentagon, NASA and other government agencies.
Still, both mergers suggest that corporations are comfortable making big, risky moves at a time when stock prices are soaring and a business-friendly administration is unlikely to block big mergers, said Richard Aboulafia, an analyst with aerospace-defense consultancy Teal Group.
“Corporations have a lot of cash right now, and we have an administration that is probably going to have a favorable attitude toward these types of deals,” he said. “That's the common thread.”
Orbital ATK has 13,000 employees and a backlog of more than $15 billion in contracts. It was formed in 2015 after the merger of Orbital Sciences and ATK.
Under the deal, Northrop would pay $134.50 a share, a significant premium. On Friday the stock closed at just over $110 a share.
The deal is slated to close in the first half of 2018.