Lockheed Is Latest in Industry’s Build-and-Break Surge: Real M&A

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Lockheed Martin Corp. is the latest industrial giant to grow and shrink in one shot.

The $65 billion defense contractor on Monday announced it was buying United Technologies Corp.’s Sikorsky helicopter unit. At the same time, Lockheed said it’s exploring a sale or spinoff of its information-systems business.

Acquisitions and divestitures are increasingly a package deal for industrial companies as they seek to expand faster-growing businesses and shed those that are holding them back. It’s a move that’s popular with shareholders: General Electric Co. and Danaher Corp. both announced big acquisitions and breakups, and they’re outpacing peers this year. Lockheed climbed about 2 percent on its deal news as investors cheered its tighter focus on defense hardware.

“Investors are asking for specialization,” said Walter Todd, who oversees about $1 billion including industrial stocks as chief investment officer for Greenwood Capital Associates. “The ball starts rolling and it picks up speed as more and more companies do it and they’re rewarded for it.”

For Lockheed, the prospect of a sale or spinoff of the services is “the icing on the cake” to the Sikorsky purchase, said Howard Rubel, an analyst at Jefferies Group.

Lockheed’s information-technology and services operations include air-traffic management and commercial cybersecurity. They account for about $6 billion, or a little less than 15 percent, of the company’s estimated 2015 sales. It’s unclear how much the unit might fetch in a sale, or whether it would be sold in one chunk or in pieces.

High Quality

While the division’s margins may be lower than the rest of Lockheed, they’re higher than the average for other providers of defense-related services, said Steven Cahall of Royal Bank of Canada.

“It’s a high-quality asset and the larger companies will all certainly take a serious look at it,” said Cahall, a New York-based analyst. “But it would certainly be a big acquisition for them.”

Booz Allen Hamilton Holding Corp. and CACI International Inc. are probably going to be sizing up the opportunity to expand their government information-technology businesses. Private-equity bidders may also emerge as suitors, said Joseph DeNardi, an analyst at Stifel Financial Corp.

Record Disposals

U.S. industrial companies have announced or proposed almost $100 billion of asset sales so far this year, led by GE’s disposal of most of its financial businesses. That’s already a record, according to data compiled by Bloomberg.

At least another seven have announced spinoffs. That doesn’t include companies still deciding how to handle divestitures such as Lockheed.

United Technologies and Emerson Electric Co. could be the next to strike large purchases after parting ways with underperforming businesses. Emerson announced last month that it would spin off its network power division and explore other divestitures. Possible targets for United Technologies include Allegion Plc or even Tyco International Plc. Emerson may pursue Flowserve Corp., Aspen Technology Inc. or Pentair Plc.

Acquisitions and breakups “do seem to be the flavor of the month,” Todd of Greenwood Capital said.

For Lockheed, funding the $9 billion purchase of Sikorsky without making any offsetting moves might have made it harder to stick to a commitment of returning 100 percent of free cash flow to shareholders. The divestitures will give it more flexibility to honor that, Stifel’s DeNardi said.

“They’re going into a potential sale or spin with that in mind and with that commitment still on the table,” said Keith Buchanan, an analyst at Lockheed shareholder Herndon Capital Management, which oversees about $8.1 billion. “That gives me comfort that they won’t do anything that’s reckless.”