Back to news

October 15, 2018 | International, Aerospace, Naval, Land, C4ISR, Security

Harris and L3 CEOs talk merger, divestitures and why we all should have seen this coming

By:

If you ask Chris Kubasik, CEO of L3 Technologies, the company's pending merger with Harris Corp. should not come as a surprise to anyone. Such a move made sense on paper for years, even if the timing was never quite right.

Now it is: Both companies are on an upswing, and both companies are led by individuals with an inclination to get it done. The result will be a deal — the largest defense merger in history, if you look at market capitalization — to create the seventh largest defense prime in the world.

Defense News spoke to Kubasik and Bill Brown, the CEO of Harris, to find out more about the newly rechristened L3 Harris Technologies.

Chris, you called this an acquisition that many felt made sense. So what were the challenges to making it happen, and why is now the perfect time?

Chris Kubasik: I think in reality, people thought for years that this combination made sense. It was due to Bill and I working hard that we actually got it done.

I think that now is the perfect time because of the customer's needs and demands for innovation and solution. Like I said, with the upswing in both companies, and both companies being strong, I think that gives us the opportunity to put this together, generate the cash and the synergies and position us for long-term value creation for our shareholders.

The challenges of all these acquisitions [are so often] culture and leadership. Here, the cultures are aligned. Bill and I are completely aligned. We've known each other for years. We have a clear understanding of roles and responsibilities.

We're going to jointly chair the integration committee to make sure we get the best of the best — best people, best processes, best system. I'm sure I've never been more excited in my career than I am today, so it's going to be a lot of fun. The stakeholders are all going to benefit.

Bill, how much was the 2015 acquisition of Exelis a building block toward this deal? Not necessarily a merger with L3 specifically, but really big merger that would really transform the company? Did you see this coming?

Bill Brown: I've been here for seven years, so we really started early on in developing a culture of operational excellence. I think that has been pretty well embedded within the company. We've made some good progress here. We've leveraged a lot of those tools, effectively integrating Exelis. We reached the cost savings targets we thought we would deliver and we delivered it a year early.

So I think we built a little bit of a muscle on how to do an integration. I think this is a great potential combination for us. It does position us well within the defense industrial based hierarchy. We'll generate a lot of savings. But more importantly, the portfolio capabilities is going to allow us to do different things, to provide different capabilities to the war fighter and different things that are clearly laid out in the National Defense Strategy.

So as I look at this, it's the right transaction. It's the right time. It's the right environment to do this. A lot of this comes down to the leaders of the organization, and Chris and I [are] completely aligned in what to do and how to create value.

So much of this also involves combining and integrating in a smart and efficient way, so should we expect any more divestitures? I know L3 just did a couple recently. Any more to come?

Brown: I think if you look at what L3 has done recently, and what we've done over the last five or six years, we both have taken a critical eye to the business portfolio we had. If there's assets we think that are better owned by somebody other than [ourselves], we take a dispassionate view of that. And we transition those assets to a different owner.

I think Chris and I will take a look at that going forward. I think there will be [divestitures], given the diversity of the business mix we'll have together. It does create the optionality for additional portfolio shaping. Nothing to mention today, but something we'll be taking a close look at over the coming months and years.

Okay, so the couple of years before the transition, in terms of leadership — should I figure that those two years are going to be spent really establishing the integrated company?

Kubasik: Absolutely. The top two focuses of Bill and I and the team will be the integration, and continuing to execute on our existing programs and commitments. That is first and foremost. We're going to generate a lot of cash. It's going to take several hundred million dollars of investments to integrate these companies. Then the rest of the cash we're going to maintain a competitive dividend, consistent with what we've done. We're very similar in that regard. In the first year, we're going to use the excess cash to repurchase shares. So the likelihood of acquisition from those first two years are very low.

As Bill said, we'll look at the portfolio. We've clearly spent a lot of time together, but the next few months we'll get into it more and more and see what makes sense. The way I sum it up is, the merger creates better benefits and growth opportunities than either company could have achieved alone.

I know both companies are incredibly strong in terms of C4ISR and a lot of what you might call the future warfare capabilities. What kind of growth do you anticipate in that area?

Brown: When I look at the next several years, you're hitting on the right spot. When you look at C4ISR, it's a broad category. When you look at the pieces underneath that, I think Chris and I, our companies, bring great capabilities [that are] complementary.

When you think about what we do at Harris, we've got a very strong position in tactical radios — global leadership, U.S. leadership. A lot of it's ground, starting the movements to airborne tier, starting to provide systems. Chris's business is very strong in avionics. It's very strong in data links, very strong in satcom, very strong between the two of us in optical capability. When you look at all of that broad way of getting better ISR information, I think we bring the right capabilities to the fight.

Kubasik: We'll be spending about 4% of our revenues on R&D, which I think is aggressive. And we talk about the customers, just to clarify — we have two sets. We have the usual industry partners, who I think will benefit from this combination, the same way that our end-user DoD customer will as well.

Are there any programs that you both were competing on, where there's going to need to be some sort management to eliminate conflicts of interest?

Brown: Very, very small. It's almost negligible in terms of where we compete head to head. Again, it's a very complimentary set of businesses, so we don't see that as being a big concern.

What kind of layoffs are you all anticipating?

Brown: We expect half a billion dollars of cost savings, and half of it is going to come from supply chain and facility rationalization — consolidating our mutual footprint. About half of that other half, so 25 percent, is split from corporate and segment overhead reduction in functional efficiencies, shared services — things that we've done and Chris is now driving at all three.

But we're in a market today where the unemployment rate's very low. We both were out there hiring people, trying to hire talented engineers and scientists, get people through clearances. So fortunately, we're in an environment where we need more people, not fewer people.

Okay, so you think it'll be relatively modest, getting rid of where there might be overlap?

Brown: There's going to be some overlap. There'll be some movement of people, but we're not prepared to talk about any employment reduction today. But again, look, it's an environment today where we're looking for more people, especially in the STEM field.

The decision to make Melbourne, Florida the headquarters — will that be permanent?

Brown: Yeah, it'll be as soon as we close. It'll be the headquarters in Melbourne, and Chris is going to move to Melbourne. We have about 7,000 people in Brevard County. We've been there for 40 years, very deep, entrenched infrastructure.

If you know the area, a lot of the defense players, aerospace defense players, are moving now to the Space Coast. It's a very vibrant community. Again, we've been there for a while. We're deeply embedded into the community with a lot of infrastructure at Harris, so that's what we decided to do.

Bill, I was convinced you guys were going to move to Washington for a while, but you proved me wrong.

Brown: You know, it's interesting. Look, that came up for us, when we did Exelis, but Chris and I've talked about this. It just doesn't make sense for both companies to move headquarters at the same time. That provides an additional risk in a deal. We thought we need to move to one place or the other. We both thought that Melbourne was a better place for the headquarters of the company.

Chris, you get to move again.

Kubasik: You know, it's been a couple of years, time to move. I'm getting used to it, so if things slow down this week, maybe one night at 10:00 I'll log onto a real estate website and try to be a first mover before the prices increase down there. [laughter]

I know you said in the next couple years no acquisitions would be on the horizon, but do you anticipate even more areas of business that would meld with those that you already play well in?

Brown: Look, I would say you started out the question the way I'd answer it, which is: it's too soon to determine that. I think the next couple of years will be about integrating the companies. It'll be about divesting. If we see opportunities for portfolio shaping, making sure that happens, so we stay focused on the business where strategically it makes sense for us to be in longer term. But I think Chris and I both have talked very publicly, individually as companies, about M&A is a part of our long-term growth strategy.

So over time, we do anticipate, under Chris's leadership, that there'll be other M&As that will happen over time. But I think in the next couple of years, unless it's something exceptional, must have, we're going to stand down on M&A and really focus on integrating the portfolios that we have.

Kubasik: Now the organic growth opportunities, and the beauty of having two leaders at the top, will allow us to focus on our customers, not only in D.C., but globally. And you know how much I love to travel internationally — we're going to have customers in over 100 countries. I still look at that in amazement. We'll be able to deepen those relationships. We both work in a lot of the same countries, but when you have a larger combined content, I think we'll be able to advance internationally maybe further, quicker than we would have individually. So I think one of my focus areas is going to be to help grow the business and meet with those customers around the globe.

Chris I've spoken to you a couple of times on the big plans and aspirations to be a non-traditional six prime. You got there way faster than I thought you would.

Kubasik: Oh, thank you, I'm an impatient person.

I know you also said to me that you didn't envision, and I quote, “building multi-billion-dollar satellites, airplanes and ships.” Does that vision of what the company is, and will be, as a six prime remain intact with this merger?

Kubasik: We don't really have any major platforms, [but] when I look at the different domains that we're going to be able to serve, whether it's air, space, land or sea or cyber, that's the exciting part. On the air side, as an example, on a combined basis we have some pretty exciting capabilities with avionics and electronic warfare, as an example. So we'll be able to be on the legacy programs, like the F-16 and F-18, which we already are, and we'll have more content on the next-gen platforms like an F-35.

So if we go domain by domain, you see the ability to better connect the different platforms to focus on the secured communication. I think we're well positioned for the multi-domain, command and control and communication systems.

I'm excited about the small satellite business that Harris had. I think that's great. You know about our UUVs, our UAVs. I think it's going to work well in conjunction with the industry prime. It'll be a collaborative, cooperative relationship.

Brown: I think we're not a company that does or will do a lot of these big, major platforms that the big primes are doing today. The way we look at it, 72 percent of the combined business will be prime, meaning sales to and customers. I think that's an important point to make.

Bill you've talked to me about space superiority. How key is space to the combined business?

Brown: We have a pretty broad business in space in terms of space superiority. A lot of it, it's ground-based capabilities that provide offensive and defensive capabilities to that space architecture. We've developed a lot of exquisite systems and components that have now moved into end-to-end mission solutions for small satellites. We've got a lot of capabilities on our end, in optics. Chris's business, L3, is also strong in small optics, and they've got really good signal intelligence capabilities that I think can augment the things that we do with some of the space architecture. So I see that as helping us continue to broaden that set of mission solutions in the space domain, that I think we spent the last several decades, actually, developing.

What does this merger mean to the top primes?

Brown: We have at Harris a great relationship with all of the primes. [We] do a lot of work particularly with Boeing and Lockheed. We do quite a bit now with Raytheon as well, so I think we have great partnerships, and I think if anything [this] is going to be additive to that partnership. I think it'll be favorably received by those guys.

Kubasik: I agree a 100 percent. I think they're going to be equally excited as the DoD customer for the same reasons. We'll have the money to innovate the R&D, maybe bundle some solutions. They'll also share over time in the affordability of this synergy. I think it's a win-win for the industry and the DoD customers.

Bill, in two years you hand the CEO spot to Chris. I'm asking you to look at a couple years down the road, and I know you're remaining on the board, but any other big plans?

Brown: Look, that's three and a half years down the road. If I look at six months between sign and close – that's a lifetime year, as you can imagine. I've been CEO here for seven years. That puts me 10 years at the company. I think with Chris, we'll put the company together on the right track. Look, I'll find something productive to do with my life at that point.

https://www.defensenews.com/interviews/2018/10/15/harris-and-l3-ceos-talk-merger-divestitures-and-why-we-all-should-have-seen-this-coming

On the same subject

  • 'Excellent New Year's gift': Putin boasts after testing 'invulnerable' Russian hypersonic missile

    December 27, 2018 | International, Aerospace, C4ISR

    'Excellent New Year's gift': Putin boasts after testing 'invulnerable' Russian hypersonic missile

    The Kremlin said the Avangard missile successfully hit a designated practice target 6,000 kilometres away from its launch site The Associated Press , Vladimir Isachenkov MOSCOW — Russian President Vladimir Putin oversaw a test Wednesday of a new hypersonic glide vehicle, declaring that the weapon is impossible to intercept and will ensure Russia's security for decades to come. Speaking to Russia's top military brass after watching the live feed of the launch of the Avangard vehicle from the Defence Ministry's control room, Putin said the successful test was a “great success” and an “excellent New Year's gift to the nation.” The test comes amid bitter tensions in Russia-U.S. relations, which have sunk to their lowest level since the Cold War times over the conflict in Ukraine, the war in Syria and the allegations of Russian meddling in the 2016 U.S. presidential election. Putin's hopes for repairing ties with Washington under President Donald Trump have fizzled amid investigations into allegations of Trump's campaign ties with Russia, and tensions have escalated as the U.S. administration slapped Russia with new waves of sanctions. The Avangard was among the array of new nuclear weapons that Putin presented in March, saying that Russia had to develop them in response to the development of the U.S. missile defence system that could erode Russia's nuclear deterrent. In Wednesday's test, the weapon was launched from the Dombarovskiy missile base in the southern Ural Mountains. The Kremlin said it successfully hit a designated practice target on the Kura shooting range on Kamchatka, 6,000 kilometres away. “The Avangard is invulnerable to intercept by any existing and prospective missile defence means of the potential adversary,” Putin said after the test, adding that the new weapon will enter service next year with the military's Strategic Missile Forces. When first presenting the Avangard in March, the Russian leader said the new system has an intercontinental range and can fly in the atmosphere at 20 times the speed of sound, bypassing the enemy's missile defence. He emphasized that no other country currently has hypersonic weapons. Putin has said that Avangard is designed using new composite materials to withstand temperatures of up to 2,000 degrees Celsius (3,632 degrees Fahrenheit) that come from a flight through the atmosphere at hypersonic speeds. https://nationalpost.com/news/world/russias-putin-oversees-test-of-hypersonic-weapon

  • Marines Want Missiles To Sink Ships From Shores, And They Want Them Fast

    January 18, 2019 | International, Naval, Land

    Marines Want Missiles To Sink Ships From Shores, And They Want Them Fast

    By PAUL MCLEARY WASHINGTON The Marine Corps has kicked off a rapid development program to begin firing long-range anti-ship missiles from shore-based ground vehicles in an effort to add more punch to the Navy's growing anti-ship capabilities, which are aimed squarely at Chinese and Russian advances. Dubbed the Navy-Marine Expeditionary Ship Interdiction System — that's NEMSIS to you — the program has completed its design phase. For the missile itself, Marines are looking at Lockheed Martin's new Long-Range Anti-Ship Missile (LRASM), with stealthy features to penetrate enemy missile defenses, a 1,000-pound warhead, and a range disclosed only as “over 200 miles”; Raytheon's Naval Strike Missile (NSM) already chosen as an upgrade for Navy Littoral Combat Ships, with a 264-lb warhead and a 115-mile range; and Boeing's venerable Harpoon, whose variants have a 500-lb warhead and ranges between 70 and 150 miles. The program kicked off last year with a request for information (RFI), after which companies signed OTA agreements with the service in September. Final proposals were submitted in December. Full article: https://breakingdefense.com/2019/01/marines-want-missiles-to-sink-ships-from-shores-and-they-want-them-fast/

  • Wing installation at Turkish drone maker signals progress on indigenous unmanned tech

    October 26, 2018 | International, Aerospace

    Wing installation at Turkish drone maker signals progress on indigenous unmanned tech

    By: Burak Ege Bekdil ANKARA, Turkey — A privately owned Turkish drone specialist has installed the wings on its unmanned fighter jet currently in development. Selçuk Bayraktar, the chief technology officer at Baykar Makina, announced the progress on the Uçan Balık/Akıncı program (Flying Fish/Raider in Turkish). Bayraktar shared photos of the Akıncı on social media after the assembly of the aircraft's wings. “It [the program] is progressing as scheduled,” Bayraktar said. Turkey's vice president, Fuat Oktay, visited the Baykar Makina production unit to inspect the Akıncı. Bayraktar believes the platform's development foreshadows a more advanced version of itself down the road. “We are hoping to have our first unmanned fighter aircraft by 2023. We are also hoping to fly our first unmanned aerial vehicle that can carry up to 1.5 tons of payload for strategic missions in 2019,” Bayraktar said. Baykar is Turkey's leading privately owned drone specialist. It has supplied 58 unarmed and armed drones to the Turkish military that are mainly deployed in areas (southeastern Turkey, northern Syria and northern Iraq) where the country is fighting Kurdish militants. Fifteen Baykar drones are simultaneously on duty for counterterror missions. The company wants to raise that number to 50. Baykar's TB-2, a drone that comes in both armed and unarmed versions, is mainly deployed in Turkey's southeast to combat Kurdish militants. The armed version uses the MAM-L and MAM-C, two miniature smart munitions developed and produced by state-controlled missile-maker Roketsan. Industry sources say Turkey's industry also is developing BSI-101, a signals intelligence system, for the TB-2 to end the country's dependence on American-made SIGINT systems for drones. The TB-2 can fly at a maximum altitude of 24,000 feet for up to 30 hours. Its communications range is 150 kilometers. The aircraft can carry up to 55 kilograms of payload. “We (the world) are decades away from fully unmanned fighter aircraft. But for countries like Turkey that fight asymmetrical warfare, the gear built between full unmanned fighters and today's armed drones will be crucial,” a senior defense procurement official said. Increasing asymmetrical threats on both sides of Turkey's Syrian and Iraqi borders have urged the country's military and procurement and industry officials to boost existing drone programs and launch new ones. The Akıncı is the latest version of a family of drones Turkey thinks could best fight insurgency at home and abroad. In June, Turkish officials said a contract had been signed for the development and production of the 4.5-ton Akıncı. The first deliveries are scheduled for 2020. The Akıncı features an altitude of 40,000 feet and a payload capacity of 1,350 kilograms, which it can carry for up to 24 hours. The aircraft is powered by two turboprop engines, each generating 550 horsepower. The engine is under development by Tusas Engine Industries, or TEI, a state-controlled engine maker of the PD170. TEI has been working on the PD170 since December 2012 when it signed a development contract with SSM (now SSB), the country's procurement agency,. The 2.1-liter, turbo-diesel PD170 can produce 170 horsepower at 20,000 feet, and 130 horsepower at 30,000 feet. It can generate power at a maximum altitude of 40,000 feet. The PD170 was designed for the Anka, Turkey's first indigenous medium-altitude, long-endurance drone. The Akıncı has a 20 meter wingspan, and is 12.5 meters long and 4.1 meters high. It can be equipped with indigenously developed satellite communications technology; a common aperture targeting system FLIR; a wide area surveillance system; electronic and signals intelligence systems; an electronic support measure pod; a collision avoidance system; a multirole active electronically scanned array air radar; and a synthetic aperture/ground moving target indicator radar. The Akıncı can be armed with a wide range of air-to-ground munitions including MAM-L, MAM-C, CIRIT, Mk81 and Mk82 general-purpose bombs, smart munitions (such as HGK, KGK and LGK) with various guidance kits, and SOM air-launched cruise missiles. https://www.defensenews.com/unmanned/2018/10/25/wing-installation-at-turkish-drone-maker-signals-progress-on-indigenous-unmanned-tech

All news