Lockheed IT Business To Merge With Leidos, Creating $10B Federal Superpower

Lockheed Martin plans to merge its $4.7 billion government IT business with $5 billion powerhouse Leidos, creating the world’s largest pure-play U.S. government solution provider.

The $5 billion deal will create a 33,000-employee public sector partner with $10 billion of annual sales and capabilities across the intelligence, defense and civil spaces, according to the companies. Lockheed Martin shareholders will own 50.5 percent of the combined company, which will retain the Leidos name, while Leidos shareholders will retain the remaining 49.5 percent.

"We believe this is the best strategic fit to position for growth while unlocking tremendous value for the shareholders of both corporations," Marilyn Hewson, president and CEO of Bethesda, Md.-based Lockheed Martin, said during an investors’ call Tuesday morning. "This transaction is really a win-win."

[Related: Reported Potential Deal For Lockheed Could Vault CACI To Top Of Government SP Space]

Investors, though, might see it differently, with Lockheed's stock price falling 2.3 percent, to $206.65 per share, since the deal was announced and Leidos' stock price tumbling 7.2 percent, to $49.78 per share. Leidos is financing the entire transaction, making a $1.8 billion, one-time payment to Lockheed Martin and issuing $3.2 billion worth of company stock to Lockheed shareholders.

Leidos CEO Roger Krone and CFO Jim Reagan will keep their current roles after the merger closes in the second half of 2016, with members of Lockheed’s senior IT staff joining the Leidos leadership team. The combined company will be headquartered in Reston, Va., currently home to Leidos.

’This transaction is the type of event that is often sought after but rarely found,’ Krone said during the call Tuesday.

Leidos did not respond to a CRN request for additional comment, while Lockheed Martin declined to comment further.

The deal comes just two months after CSRA claimed the mantle as the largest U.S. government partner, thanks to the merger of CSC’s $4.1 billion government business and $1.4 billion federal solution provider SRA. The combined Leidos-Lockheed IT business will dwarf CSRA, posting nearly twice as much revenue each year.

Both companies have been struggling to grow top-line results on their own. Lockheed's Information Systems & Global Solutions (IS&GS) business unit saw calendar year 2015 sales tumble 1 percent, because of increased competition and lower customer funding levels, while Leidos' revenue for its most recent fiscal year -- which ended Jan. 30, 2015 -- fell 12 percent.

Before the merger announcement, Leidos was projecting mid-single-digit sales growth for 2016.

The companies expect the merger will allow them to slash $120 million of annual expenses by the end of 2018, with $60 million coming from merging similar businesses and consolidation operating units, $50 million coming from gains in labor base scale and $10 million coming from real estate and supply chain synergies.

In terms of scale, Reagan said Leidos post-merger should be better positioned to win network modernization deals, thanks to Lockheed's high-end cybersecurity work with a number of Department of Defense customers.

The combined success is also expected to have success competing for aviation modernization contracts, thanks to Leidos' airport engineering and security systems and Lockheed's experience around airport modernization and traffic management.

From a consolidation standpoint, Krone said, Leidos intends to combine like capabilities, but doesn't have any more detail at this juncture. The merger is expected to have a negligible impact on profitability in the first year after closing, but to boost profitability in the second year and thereafter.

The combined company will do 45 percent of its business in the civil and commercial space -- Lockheed’s leading sector -- 35 percent of its business in defense -- Leidos' strongest sector -- and 20 percent of its business around intelligence, where Leidos has a more significant presence.

Lockheed's strong presence in Europe and Australia will also double Leidos' international presence from 3 percent of overall sales to 6 percent of overall sales.