Lockheed Declines as IT Spinoff Profit Boost Trails Forecast

Updated on
  • Defense contractor repurchased fewer shares than expected
  • Stock falls by most since Jan. 2014 as transaction completed

Lockheed Martin Corp. tumbled the most in more than two years after disclosing that a $4.6 billion spinoff of its information-technology division to Leidos Holdings Inc. would provide less of an earnings boost than investors expected.

The world’s largest defense contractor fell 3.7 percent to $256.77 at the close in New York, the largest decline since Jan. 2014. Lockheed was the fifth-worst performer on the S&P 500 Index.

Lockheed repurchased 9.4 million shares, about 3 percent of its common stock outstanding, through the tax-free transaction, known as a Reverse Morris Trust, the Bethesda, Maryland-based company said in a statement Tuesday. 

That was less than the 10 million that investors had expected the company to retire, meaning the deal will provide less of a lift to Lockheed’s earnings on a per-share basis, said Joseph Denardi, an analyst at Stifel Nicolaus & Co. Inc.

The merger, which closed Tuesday, enables Lockheed to shed slower growing IT businesses that face more competition from Silicon Valley and other new market entrants. Leidos paid $1.8 billion in cash and $2.8 billion of its common stock to Lockheed shareholders, through the transaction merging the unit with a Leidos subsidiary.

Lockheed investors who participated received 8.2136 shares of Leidos common stock for each Lockheed share accepted for the exchange. The offer was oversubscribed by about 86.7 million shares, Lockheed said, resulting in preliminary proration factor of 8 percent.

The low measure of shares accepted meant some investors were left holding more Lockheed stock than they’d anticipated. That may have also factored into the decline as some investors sold Lockheed shares they’d expected to exchange, said Chris Higgins, an analyst at Morningstar Inc.

“The offer was oversubscribed and they had to prorate,” he said by e-mail.