M&A

Harris explores sale of night vision business

Divetiture would likely satisfy some anti-trust concerns over deal with L3

Harris Corp. is “moving proactively on the possible sale” of its night vision technology business as a condition for its merger with L3 Technologies to gain regulatory approval, CEO Bill Brown said Tuesday.

Brown’s announcement during Harris’ second quarter earnings call with investors comes nearly two-and-a-half weeks after the Justice Department sent both companies a second request for information about the transaction.

DOJ was one of several civilian agencies affected by the five-week partial government shutdown started Dec. 22 and ended Jan. 28, but essential employees were required to keep working.

The shutdown “has affected the team handling our merger filing, but we believe we have enough slack in the schedule to absorb a near-term delay without impacting” plans to close the deal this summer, Brown told analysts.

In announcing their megadeal in October of last year, Brown and L3 CEO Chris Kubasik touted “negligible overlap” between the businesses and greater scale as key rationale behind the deal amid increases in U.S. and international defense spending.

Brown did acknowledge at the time there were “less than $100 million of sales between us,” a small number in the context of what will be a roughly $16 billion-revenue sixth defense prime.

But based on Brown’s latest comments, night vision does appear to be that one market area of overlap they may have to address to satisfy antitrust concerns.

Harris’ night vision business generates almost $150 million-$160 million revenue and profit margins in the mid-teens, Brown said Tuesday. L3 by comparison generates $300 million in annual night vision sales, analysts at investment bank Cowen & Company noted in an October report on the merger for clients.

Mergers and acquisitions among and by defense primes typically take longer to work through the antitrust process than those in the government services market.

For example, Northrop Grumman waited nine months until June of last year to close on its acquisition of Orbital ATK. Whereas most of the major M&A deals among and IT professional services companies over the past two years took between one and three months.

Northrop agreed to firewall its bulked-up solid rocket motor business from the rest of the combined company as a condition to proceed, a rare instance of federal antitrust regulators using a “behavioral remedy” versus requiring or recommending a divestiture.

Consider also that the Defense Department has a say on major M&A deals in the market. DOD could very well have identified the night vision overlap as an issue, but Brown’s comments Tuesday so soon after DOJ’s second request leave an impression that the agencies and companies are all on the same page.

International regulatory approvals are also required for Harris and L3 to proceed, including clearance from the European Commission and U.K. government.

Brown said informal discussions are ongoing with the U.K. government regarding that process should a so-called “Hard Brexit” from the European Union occur at the end of March. Under that scenario, the U.K. would exit the EU with few or no agreements on trade or other major economic or diplomatic issues.

A separate filing for approval from the U.K. government could be required in the event of a Hard Brexit, he said.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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