Harris and L3 agree merger to become sixth-largest U.S. defense contractor

(Reuters) - Military communication equipment providers Harris Corp HRS.N and L3 Technologies Inc LLL.N announced on Sunday an all-stock merger that will create the United States' sixth-largest defense contractor with a market value of $34 billion.

Increased defense spending under U.S. President Donald Trump and the Republican-led Congress is driving contractors to pursue mergers so they have more scale to bid on bigger projects, spanning everything from upgrading computer systems to space exploration.

In August, Trump signed a defense policy bill that authorized $639 billion in military spending such as buying weapons, ships, aircraft and paying troops.

“We are in an environment where the economy is pretty strong, we know defense spending is coming up, the 2019 (federal) budget is up 3 percent over 2018, 2018 was up 9 to 10 percent over the prior year,” Harris Chief Executive William Brown said in an interview.

“I think there is an increasing need for more investment, more end-to-end solutions,” Brown added.

The transaction values L3 at $15.7 billion, slightly above its market capitalization at the end of trading on Friday of $15.3 billion. Harris has a market capitalization of $18.2 billion.

L3 shareholders will receive 1.3 shares of Harris common stock for each of their shares. As a result, Harris shareholders will own about 54 percent of the combined company, with the remainder owned by L3 shareholders.

The combined company, L3 Harris Technologies Inc, will have about 48,000 employees and customers in over 100 countries, the companies said. The merger is expected to close in midyear 2019, they added.

The new company’s board of directors will have 12 members, consisting of six directors from each company. Brown will serve as chairman and chief executive officer, and L3 CEO Christopher Kubasik will serve as vice chairman, president and chief operating officer for the first two years following the closing of the deal, the companies said.

In the third year, Brown will transition to executive chairman and Kubasik will become CEO. After that year, Kubasik will be both chairman and CEO.

“The aerospace and defense industry is continuing to see a lot of change over the last year or so, and many people have believed for a long time this combination made sense and we have worked hard to make that happen,” Kubasik said in an interview.

A string of deals have taken place in the sector. In June, U.S. defense contractor Northrop Grumman Corp NOC.N acquired Orbital ATK Inc for about $7.8 billion, giving it greater access to lucrative government contracts and expanding its arsenal of missile defense systems and space rockets.

In April, weapons maker General Dynamics Corp GD.N bought CSRA Inc for $9.7 billion to expand its government services business, after CACI International Inc CACI.N withdrew its offer for CSRA following a bidding war.

Morgan Stanley MS.N is acting as financial adviser to Harris and Sullivan & Cromwell LLP is serving as principal legal counsel, with Paul, Weiss, Rifkind, Wharton & Garrison LLP acting as special counsel to the board of directors. Goldman Sachs Group Inc GS.N is acting as financial adviser to L3 and Simpson Thacher & Bartlett LLP is serving as legal counsel.

Reporting by Jarrett Renshaw and Harry Brumpton in New York; Additional reporting by Chris Sanders in Washington; Editing by Sandra Maler and Peter Cooney