How Lockheed thinks about scale in light of Raytheon-UTC mega deal

“Scale” is a buzzword that comes up time and time again in our conversations with executives in the government technology and professional services market given the constant churn of mergers and acquisitions there.

But evidently questions about scale and resources now extend to the largest of the defense primes given the megamerger Raytheon announced in June with United Technologies Corp. to create an aerospace-and-defense behemoth.

If Lockheed Martin’s second quarter earnings call with investors Tuesday is any indication, this conversation might carry on to when General Dynamics and Northrop Grumman speak with Wall Street Wednesday morning to report their second quarter results. Raytheon talks Thursday morning: we kind of know what they will talk about.

Specifically on the Lockheed call, the question put to Lockheed CEO Marillyn Hewson by one analyst centered around research-and-development and if the company has to do anything differently around the notion of scale for the sake of beefing up R&D resources.

Hewson acknowledged that Lockheed is examining the implications of what Raytheon and UTC are creating but she also touted what her company does.

“Our scale is an advantage for us because it gives us the opportunity to invest more in research-and-development, I think that’s true when you look across our industry, it allows us to reach out to small-and medium-sized businesses,” Hewson told analysts.

Independent R&D spending by Lockheed totaled $1.3 billion last year, according to its most recent annual report. That is a step up from $1.2 billion in 2017 and $988 million in 2016.

A second tool Lockheed has at their disposal is the Lockheed Martin Ventures fund, through which the defense company invests in emerging technology businesses.

Lockheed doubled the size of the fund from $100 million to $200 million last year to ramp up their search for technologies they view as not just disruptive for the customer sets, but also for the industry and sometimes Lockheed itself.

“We have been able to invest in things that we’re looking at beyond today, not just on what we need to invest in to keep our current portfolio relevant,” Hewson added.

When Raytheon and UTC announced their megadeal, some analysts speculated one reason behind the move was to create more heft for independent R&D in the event that the current cycle of defense spending growth starts to reverse.

There is a framework for a budget deal now in place that would keep the growth going, however that does not necessarily mean government R&D spending will in turn go up. The pyramid of R&D spending has flipped from being driven by the government to mostly from the commercial sector instead.

Raytheon and UTC executives are touting an $8 billion R&D budget for their combined company, which would be around 11 percent of their projected $69 billion revenue. That $8 billion figure includes both independent funding and contributions from customers.