Lockheed to buy United Tech's Sikorsky for over $8 billion

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Lockheed Martin Corp has agreed to buy United Technologies Corp's Sikorsky Aircraft for over $8 billion, two sources said on Sunday, cementing a deal that would confirm Lockheed's dominance in weapons making and giving the Black Hawk helicopter to the maker of the F-35 fighter jet.The deal will add further heft to Lockheed, which already has annual revenues of around $45 billion and dwarves its nearest competitors, the defense business of Boeing Co and Northrop Grumman Corp.It will make Lockheed less reliant on the $391 billion F-35 fighter jet business, while expanding its overseas sales by adding Sikorsky's iconic Black Hawk helicopters to a product line that already spans everything from satellites to naval ships.

The two companies plan to announce the deal on Monday before both report second-quarter results on Tuesday, said the sources, who were not authorized to speak publicly.

Full article here: http://www.reuters.com/article/2015/07/19/us-sikorsky-m-a-lockheed-idUSKCN0PT0MM20150719
 
Media Release from LM:

Lockheed Martin to Acquire Sikorsky Aircraft and Conduct Strategic Review of IT and Technical Services Businesses
(Source: Lockheed Martin; issued July 20, 2015)

BETHESDA, Md. --- Lockheed Martin has entered into a definitive agreement to acquire Sikorsky Aircraft, a world leader in military and commercial rotary-wing aircraft, for $9.0 billion. The price is effectively reduced to approximately $7.1 billion, after taking into account tax benefits resulting from the transaction.

"Sikorsky is a natural fit for Lockheed Martin and complements our broad portfolio of world-class aerospace and defense products and technologies," said Marillyn Hewson, Lockheed Martin chairman, president and CEO. "I'm confident this acquisition will help us extend our core business into the growing areas of helicopter production and sustainment. Together, we'll offer a strong portfolio of helicopter solutions to our global customers and accelerate the pace of innovation and new technology development."

The acquisition is subject to customary conditions, including securing regulatory approvals, and is expected to close by late fourth quarter 2015 or early first quarter 2016. The transaction will have no impact on the company's previously stated commitments to return cash to shareholders through dividends and to reduce outstanding share count to below 300 million shares by the end of 2017.

Lockheed Martin and United Technologies Corporation have agreed to make a joint election under Section 338(h)(10) of the Internal Revenue Code, which treats the transaction as an asset purchase for tax purposes. The election generates a tax benefit with an estimated present value of $1.9 billion for Lockheed Martin and its shareholders.

The Corporation plans to align Sikorsky under the Lockheed Martin Mission Systems and Training (MST) business segment. MST and Stratford, Conn., based Sikorsky currently partner on a number of critical programs, including the VH-92 Presidential Helicopter, Combat Rescue Helicopter and the Naval MH-60 Helicopter.

Separately, Lockheed Martin will conduct a strategic review of alternatives for its government IT and technical services businesses, primarily in the Information Systems & Global Solutions business segment and a portion of the Missiles and Fire Control business segment. The programs to be reviewed represent roughly $6 billion in estimated 2015 annual sales and more than 17,000 employees.

"As global security market dynamics shift, this review will strengthen our competitive posture, enabling sustained, profitable growth and positioning Lockheed Martin to deliver value for customers, shareholders and employees," Hewson said.

Lockheed Martin is a leading IT and technical services provider around the globe, and with a series of recent wins in the U.S., Europe and Australia, the business is well positioned for the future. However, following recent shifts in market dynamics, Lockheed Martin will explore whether the businesses can achieve greater growth and create more value for customers and shareholders outside of the Corporation. The strategic review is expected to result in a spin-off to Lockheed Martin shareholders or sale of these components.

The IS&GS programs that are not included in the strategic review are mostly focused on defense and intelligence customers and will be realigned into the Corporation's other four business segments following completion of the review.

For more information and updates on the Sikorsky Aircraft acquisition, visit: lockheedmartin.com/sikorsky.

Headquartered in Bethesda, Maryland, Lockheed Martin is a global security and aerospace company that employs approximately 112,000 people worldwide and is principally engaged in the research, design, development, manufacture, integration and sustainment of advanced technology systems, products and services. The Corporation's net sales for 2014 were $45.6 billion.

-ends-
 
Demon Lord Razgriz said:
Question, will the Sikorsky name still be used for the Helicopters?

I know I'll be really pissed off if they drop the Sikorsky name (which has been associated non-stop with aviation design and manufacture since 1909), considering they resurrected the name Martin which was not associated with airframe production since 1962!
 
Skyblazer said:
Demon Lord Razgriz said:
Question, will the Sikorsky name still be used for the Helicopters?

I know I'll be really pissed off if they drop the Sikorsky name (which has been associated non-stop with aviation design and manufacture since 1909), considering they resurrected the name Martin which was not associated with airframe production since 1962!

It's a shame they didn't resurrect "Convair".
 
If the deal goes through, Sikorsky’s roughly 18,000 employees will be nested under Lockheed’s 17,000-person Mission Systems and Training division, headquartered in Washington. Lockheed will retain the Sikorsky name and brand, which stretch back to the 1920s when Igor Sikorsky founded the company.

Source:
http://www.defenseone.com/management/2015/07/lockheed-snatched-sikorsky-steal/118198/
 
Triton said:
If the deal goes through, Sikorsky’s roughly 18,000 employees will be nested under Lockheed’s 17,000-person Mission Systems and Training division, headquartered in Washington. Lockheed will retain the Sikorsky name and brand, which stretch back to the 1920s when Igor Sikorsky founded the company.

Source:
http://www.defenseone.com/management/2015/07/lockheed-snatched-sikorsky-steal/118198/

Glad to hear they are retaining a name which has sentimental meaning (to me at least) for other reasons.
 

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Skyblazer said:
considering they resurrected the name Martin which was not associated with airframe production since 1962!

The name Martin was not "resurrected" as Lockheed Martin was formed by a merger between Lockheed and Martin Marietta. And if anything the new name should have had more Martin Marietta in it than Lockheed. The merger was called "A 'merger of equals,' with Martin Marietta the most equal" (NYT from back when it was the journal of record). The name Lockheed has prominence thanks to its historical fame and association as a marque brand.
 
Retaining the name.

Well, they would say that wouldn't they.

Bet BP wishes they'd kept the Amoco name.

Chris
 
Abraham Gubler said:
The name Martin was not "resurrected" as Lockheed Martin was formed by a merger between Lockheed and Martin Marietta. And if anything the new name should have had more Martin Marietta in it than Lockheed. The merger was called "A 'merger of equals,' with Martin Marietta the most equal" (NYT from back when it was the journal of record). The name Lockheed has prominence thanks to its historical fame and association as a marque brand.

Thanks for clarifying this point. The world of aviation wouldn't have been quite the same without the name "Lockheed".

marauder2048 said:
Glad to hear they are retaining a name which has sentimental meaning (to me at least) for other reasons.

Ha! Makes me think I'm also glad Martin Marietta didn't drop the Lockheed name... for other reasons!

Lockheed.jpg
 
The UTC viewpoint:

United Technologies Announces Agreement To Sell Sikorsky Aircraft: Lockheed Martin to buy Sikorsky for $9 billion
(Source: United Technologies; issued July 20, 2015)

HARTFORD, Conn. --- United Technologies Corp. today announced that it has reached an agreement to sell its Sikorsky Aircraft business to Lockheed Martin Corp. for $9 billion in cash. The transaction, which is subject to regulatory approvals and customary closing conditions and adjustments, is projected to close by year-end or in the first quarter of 2016. Proceeds from the sale are expected to be used to fund additional share repurchase to offset the earnings impact related to the sale.

"We are very pleased to announce this transaction," said UTC President and Chief Executive Officer Gregory Hayes. "Exiting the helicopter business will allow UTC to better focus on providing high-technology systems and services to the aerospace and building industries and to deliver improved and sustained value to our customers and shareowners.

"Sikorsky's acquisition by Lockheed Martin, one of the world's leading aerospace and defense companies, will ensure it remains a technology leader at the forefront of vertical lift," Hayes added. "We are committed to working closely with Lockheed Martin to execute a seamless transition for customers and employees."

The company will discuss this transaction at its previously scheduled conference call with investors and analysts at 8:30 a.m. EDT, Tuesday, July 21, following release of UTC's quarterly financial results. A corresponding presentation will be available prior to the call on the company's website at http://www.utc.com.

In addition, UTC's Board of Directors has authorized a share repurchase program for up to 75 million shares of the company's common stock, which would be worth approximately $8.3 billion based on the NYSE closing price of UTC shares on July 17. The new authorization replaces a previous program, approved in February 2013, which was nearing completion. The precise timing and amount of repurchases will be determined based on the company's evaluation of market conditions and other factors, and the program may be suspended or discontinued at any time.

J.P. Morgan Securities LLC is serving as UTC's financial advisor, and Wachtell, Lipton, Rosen & Katz as its legal advisor for the sale.

United Technologies Corp., based in Hartford, Connecticut, provides high technology systems and services to the building and aerospace industries.

-ends-
 
The purchase price is being reported all over the map:
$7.1 billion
$8 billion
and now $9 billion.
It can't be that hard to figure out how much LockMart is paying, especially since it seems to be a straight cash sale.
 
TomS said:
The purchase price is being reported all over the map:
$7.1 billion
$8 billion
and now $9 billion.
It can't be that hard to figure out how much LockMart is paying, especially since it seems to be a straight cash sale.

Lockheed Martin (NYSE: LMT) has entered into a definitive agreement to acquire Sikorsky Aircraft, a world leader in military and commercial rotary-wing aircraft, for $9.0 billion. The price is effectively reduced to approximately $7.1 billion, after taking into account tax benefits resulting from the transaction.

Source:
http://www.lockheedmartin.com/us/news/press-releases/2015/july/sikorsky-acquisition-strategic-review.html

Unfortunately, I don't know what tax benefits to which Lockheed Martin is referring. It seems to me that United Technologies is getting $9.0 billion for Sikorsky Aircraft, but the transaction is costing Lockheed Martin $7.1 billion because there is $1.9 billion in tax reduction (federal, state, local?) for the company.
 
Prior to the deal being announced, press reports indicated a sales price of about $8B. However, the actual purchase price of Sikorsky was $9B - $1B in cash and $8B in new debt. Both companies elected a 338(h)(10) for tax purposes which gives Lockheed a NPV $1.9B gain on the deal. So effectively, Lockheed paid $7.1B for Sikorsky. At about 10x EBITDA, it was a fair price.
 
doggedman said:
Prior to the deal being announced, press reports indicated a sales price of about $8B. However, the actual purchase price of Sikorsky was $9B - $1B in cash and $8B in new debt. Both companies elected a 338(h)(10) for tax purposes which gives Lockheed a NPV $1.9B gain on the deal. So effectively, Lockheed paid $7.1B for Sikorsky. At about 10x EBITDA, it was a fair price.

Thank you for the explanation, doggedman.
 
It seems likely to me that the SA-38B Twin Condor will be rebadged as a Lockheed Martin product since they intend to keep the name Sikorsky, not Schweizer.
 
What will happen to the production of the S-92 and Black Hawk series of helicopters under Lockheed management?
 
FighterJock said:
What will happen to the production of the S-92 and Black Hawk series of helicopters under Lockheed management?

I'd hope the only thing that happens is the sign out front changes.
 
It's hard to imagine that much would change (at least in the near term). The construction facilities are already up and running, so no one rational is going to move them at this point.
 
TomS said:
It's hard to imagine that much would change (at least in the near term). The construction facilities are already up and running, so no one rational is going to move them at this point.

As far as the CH-53K goes, most of the structure isn't even built at Sikorsky anyway. They just do the assembly. ( I say "just" but it's still a huge job.)
 
sferrin said:
TomS said:
It's hard to imagine that much would change (at least in the near term). The construction facilities are already up and running, so no one rational is going to move them at this point.

As far as the CH-53K goes, most of the structure isn't even built at Sikorsky anyway. They just do the assembly. ( I say "just" but it's still a huge job.)
I was under the impression that 53K fianl assembly was going to happen at West Palm Beach. Probably wrong. I suspect that some of the smaller facilities of Sikorsky will get closed up. Good news for Sikorsky is that they will have full access to many of the capabilities and facilities of Lockheed (Skunk Works, Light House, etc.) that they did not have with UTC.
 
If I were Sikorsky, I'd be very happy with the LMT acquisition. Under UTX, Sikorsky was treated like an unwanted stepchild. LMT doesn't seem to have any plans for footprint reduction other than the normal reduction in corporate overhead associated with any acquisition. It's unlikely LMT moves production lines as I'm sure several Pentagon customers would have a difficult time buying off on changes to the delivery schedule caused by the disruption of moving production facilities. Sikorsky is entering a period of significant R&D on several development programs like the SB.1 and LMT is much more likely to invest in new technology than the CEO of UTX who used to work for Harry Stonecipher. The Harry Stonecipher who came from McDonnell Douglas then Boeing and an architect of the shareholder value philosophy for capital deployment. So I think Sikorsky is in much better hands.
 
yasotay said:
I was under the impression that 53K fianl assembly was going to happen at West Palm Beach. Probably wrong. I suspect that some of the smaller facilities of Sikorsky will get closed up. Good news for Sikorsky is that they will have full access to many of the capabilities and facilities of Lockheed (Skunk Works, Light House, etc.) that they did not have with UTC.
Yes, CH-53K final assembly is being done at West Palm Beach. I don't think that contradicts the idea that LM will not change the Sikorsky construction facilities very much. The assembly line is already there and the suplier base is established -- messing wiht it now woudl incur a bunch of costs and delays that LM-Sikorsky would have to eat.

Sikorsky has already done a lot of consolidation, killing off the Elmira/Horseheads, NY site and the Bridgeport, CT plant, for example. A few of the peripheral facilities like Lifeport in Washington state should be worried, but that was true even before the acquisition.
 
"Malloy: Lockheed to honor UTC promise to keep Sikorsky in CT for 5 years"
By Mark Davis, News 8 Chief Capitol Correspondent Published: July 20, 2015, 3:29 pm Updated: July 21, 2015, 8:30 am

Source:
http://wtnh.com/2015/07/20/malloy-lockheed-to-honor-utc-promise-to-keep-sikorsky-in-ct-for-5-years/

There are about 8,000 Sikorsky employees at Stratford, and facilities in Trumbull, Bridgeport and Shelton.

The Governor negotiated a $400 million research tax credit deal with U.T.C. last year that included a promise to keep Sikorsky in Connecticut for five years. He tells News 8 that he has been assured that will be honored by Lockheed Martin, “They’re going to figure out how to bind it and continue the operations for the period of time that was stipulated in the agreement.
 
Business | Wed Jul 22, 2015 5:46pm EDT
Related: Deals, Aerospace & Defense
"Lockheed Sikorsky deal marks turning point for more assertive CEO"
WASHINGTON | By Andrea Shalal

Source:
http://www.reuters.com/article/2015/07/22/us-lockheed-martin-hewson-idUSKCN0PW2H120150722

Lockheed Martin Corp's (LMT.N) decision to buy helicopter maker Sikorsky Aircraft and sell $6 billion in lower-margin units marks a clear turning point for Lockheed CEO Marillyn Hewson, who is shaking up the world's largest weapons maker.

Thrust into the CEO job in January 2013 after retiring CEO Robert Stevens' designated successor was fired for having an affair with a subordinate, Hewson spent her first year largely executing a strategy Stevens had mapped out and repairing tense ties with the Pentagon on the $391 billion F-35 fighter program.

Over the past 18 months, the seemingly mild-mannered engineer who is ranked No. 4 on Fortune's list of most powerful U.S. women executives, has grown more assertive, her power buoyed by a powerful share price rally that has earned her the respect of her board and key shareholders.

Lockheed shares closed at $202.79 on Wednesday, not far off a historic high of $207 reached in February.

"It's a great story. The accidental CEO steps in, doubles the share price, raises margins and then executes the biggest M&A deal the company has done in two decades," said one industry executive familiar with Hewson's career. "But remember, the higher you aim, the greater the crash if things don't work out."

Indeed, the Sikorsky acquisition could test the 61-year-old executive's legacy of pleasing investors by running a tight ship.

Industry executives said Hewson's track record of cutting costs - she pared the company's workforce by 8,000 people, or 6.7 percent, closed facilities and streamlined its structure - helped her convince Lockheed's generally conservative board to make a bet on the helicopter maker.

That may not have been an easy call given a market downturn and uncertain outlook for near-term military sales. To seal the takeover of the unit that United Technologies Corp (UTX.N) unloaded because of its narrow margins, Lockheed agreed to pay a premium $9 billion for a company projecting revenues of just $6.5 billion.

NOT WITHOUT RISKS

A 30-year veteran of Lockheed, Hewson has focused on long-term investments, like "over the horizon" projects such as work on a portable fusion energy reactor, where she has channeled some savings from the recent cost cuts.

In February, she told reporters that companies needed to "see the big picture" on challenges such climate change, energy and other national security threats.

Her legacy and the future outlook of the Pentagon's biggest supplier will be shaped by Lockheed's ability to integrate Sikorsky, offload its services business, and keep key programs like the F-35 and Sikorsky's presidential helicopter on track.

Officials are also anxiously awaiting the outcome of two military competitions - a new Air Force bomber valued at over $80 billion for which Lockheed is teamed with Boeing Co (BA.N), and a multibillion-dollar ground vehicle competition to replace tens of thousands of military vehicles.

"These deals are critical to helping her solidify her personal leadership since Lockheed has been heavily focused in recent years on share repurchases, dividends and turning F-35 around," said Jim McAleese, a Virginia-based defense consultant.

Sikorsky is Lockheed's biggest takeover since it bought Loral Corp's defense electronics business for $9.1 billion in 1996, and is just shy of the $10 billion merger with Martin Marietta in 1994 that created the company as it stands today.

An executive at another firm that looked at buying Sikorsky cautioned that the deal is not without risks, given the threat of further defense budget cuts, issues with several helicopter development programs, and overall cost of the deal.

Lockheed would also face difficult contract negotiations in coming years with Sikorsky's unions.

Still, Hewson was intent on adding another "signature" product line to help balance the company's portfolio, which is growing increasingly dependent on the F-35, according to sources familiar with the company. She had Sikorsky "in her sights" after her days working on the MH-60R and MH60S helicopters the two company co-produce for the Navy.

Beyond the risks in Sikorsky, losing either one of the big weapons programs on the table would also be a big setback given how much the company has invested in both, analysts said.

Executives who have worked closely with Hewson describe her as tough and detail-oriented, someone who demands a lot of herself and others around her. An early riser who dashes off emails well before dawn, Hewson is not someone prone to fly off the handle when something goes wrong, associates say.

Married and the mother of two grown sons, Hewson promotes diversity programs within the company and writes a regular blog for networking site LinkedIn. She also often brings in writers like "The Tipping Point" author Malcolm Gladwell to explore new ideas and stimulate conversations with her leadership team.In a May LinkedIn posting, Hewson drew on her own experience to urge workers to push themselves beyond their comfort zone.

"Don't limit yourself by doubting your ability to step up to a challenge ... Take advantage of the growth opportunities that come your way - even if they might seem like a reach," she said, adding, "results matter.
 
Sikorsky Deal Could Presage Industry Realignment
By Andrew Clevenger 9:48 a.m. EDT July 25, 2015

Source:
http://www.defensenews.com/story/defense/policy-budget/industry/2015/07/25/sikorsky-deal-could-presage-industry-realignment/30644059/

WASHINGTON — Lockheed Martin’s planned acquisition of Sikorsky Aircraft may be a harbinger of increased mergers and acquisitions (M&A) activity as defense firms reassess their business strategies in an increasingly competitive marketplace.

Lockheed ended months of speculation with its formal announcement of the $9 billion deal last week, and at the same time indicated it would sell off some of its information technology and technical services businesses.

Some industry observers raised concerns that by acquiring the biggest American helicopter manufacturer, Lockheed, already the world’s largest defense contractor and a major integrator of helicopter systems, could run afoul of antitrust strictures against too much vertical or horizontal integration.

Jeff Bialos, an M&A attorney at Sutherland who specializes in aerospace and defense, said Lockheed signaled its awareness of these possible roadblocks in its stock purchase agreement. Specifically, Lockheed indicated it would divest itself of up to $650 million in revenues in its mission systems business unit, which includes subsystems for helicopters.

Lockheed also proposed a behavioral remedy designed to ensure its conduct in the market wouldn’t be anti-competitive, he said.

“The question is whether bigger creates leverage that could be used anti-competitively,” he said.

On a call with investors last week, Gregory Hayes, CEO of Sikorsky parent company United Technologies, said valuations put Sikorsky’s worth at $5 billion, and he believed he could sell it for $6 billion. Even with $1.9 billion in tax benefit, Lockheed is poised to pay $7.1 billion for the helicopter maker.

This doesn’t necessarily mean Lockheed is overpaying, Bialos said.

“When companies evaluate mergers, they will look at what additional revenue they can get from the synergies, and they’ll have some specifics, so they might think that they can leverage additional systems on their platforms, or logistics or services work on their platforms, and that would grow the revenue effect of owning Sikorsky,” he said.

Steve Grundman, a former Pentagon industrial policy chief who is now a consultant and member of the Atlantic Council, said he doesn’t see any obvious deal-breakers, but he expects that antitrust regulators in the Department of Justice will subject the purchase to close scrutiny. Should the deal go through, it would not mean that regulators — or top industrial policy officials inside the Pentagon — have established a precedent and given the go-ahead to similarly sized deals in the future, he said.

“The potentially precedential character of this merger for corporate strategy is it may signal other companies that the marketplace for large systems integration is gone; if you want to be a major prime contractor in the US defense market going forward, you’re going to have to bring a platform,” he said.

In a previous era of defense contracting, large systems integration, or the ability to offer your customer a solution to any military equipping challenge, was seen as a successful business model, he said. Now, the Pentagon has signaled that it wants to serve as its own systems integrator and no longer wants to outsource that function to industry.

“The marketplace for large systems integration is gone. So if you want to be a prime contractor in this market, you have to have platforms. And if you don’t have platforms, you have to be able to assure yourself you can get preferred access to strategic platforms.”

This helps explain why a company like Lockheed, which does not have recent experience producing helicopters, would want to acquire Sikorsky, he said.

“If you’re a company like Lockheed Martin, and you want to sustain your position in prime contracting in a broad rather than a narrow scope of products, you need platforms now. Just saying, 'I’ll system-integrate any problem you got' is not competitively tractable anymore,” Grundman said.

Andrew Hunter, director of the Defense-Industrial Initiatives Group at the Center for Strategic and International Studies, said the deal fits with the defense industry trend of reshaping portfolios to focus on core efficiencies.

“In Lockheed’s case, certainly they are at the top of the chain in most of the markets they are in, and acquiring Sikorsky lets them do that in a new market area where they’ve played, but they haven’t necessarily been the platform integrator,” he said. “For the industry generally, it seems to me that there’s quite a diversity of strategies out there, both business strategies and market positioning strategies.”

The common thread is that companies seem to be focusing on specialization as opposed to the conglomerate approach, he said.

Byron Callan, an analyst with Capital Alpha Partners, said the Sikorsky acquisition marks a change of strategy for Lockheed.

“By buying Sikorsky, they’ve realigned themselves with the single platform” model, he said. Possible explanations could include Lockheed trying to diversify its portfolio over concerns about the future of F-35 and the possibility that its entry (together with Boeing) in the competition for the Air Force’s long-range strike bomber, or LRS-B, will not win.

“Is this another signal that the systems integration model, where you had proprietary architectures, is going away?” Callan mused. “The Air Force in particular is trying to open up more open architectures, so your value isn’t building a proprietary network, it’s in building the subsystems and platforms that you plug into that network.”

More and more firms are getting out of services businesses, he said.

“The underlying dynamic of the services businesses facing more competition, they were hardly the first people to reach the same conclusion,” Callan said, noting that BAE Systems had recently announced it is exploring options for shedding its services business in its US Intelligence and Security Unit. Callan also pointed to the SAIS/Leidos and Engility/L-3 splits as examples.
 
"As Lockheed Gobbles Up Sikorsky, Are Defense-Contractor Giants Getting Too Big?"

Mark Thompson @MarkThompson_DC
July 21, 2015

Source:
http://time.com/3966756/lockheed-sikorsky/

Fewer defense contractors will mean less competition

Lockheed, the nation’s biggest defense contractor, announced Monday that it plans to buy Sikorsky, the world biggest military-helicopter builder, for $9 billion. If all goes according to plan—and, as antitrust experts predict, neither the Pentagon nor Justice Department objects to the purchase—Lockheed will add Sikorsky to its stable by early next year.

Lockheed stands atop a group of the Defense Department’s big five suppliers. Last year, its $25.3 billion in Pentagon contracts accounted for nearly 9 cents of every U.S. defense-contracting dollar spent, which also includes spending on non-military items like fuel and food. The other four are Boeing, (6.4%) General Dynamics (4.8%), Raytheon (4.2%) and Northrop Grumman (3.3%). United Technologies, which owns Sikorsky, ranked #6, but it builds more than just helicopters for the Pentagon. Over the past 25 years, the 10 biggest global defense contractors have seen their share of the market climb from 40% to 60%.

Lockheed builds the F-35—the most costly weapons system in history, with a projected price tag of nearly $400 billion—as well as the C-130 cargo plane and various missile-defense systems. Sikorsky manufactures the UH-60 Black Hawk and several other military choppers, including a new fleet of Marine Ones for presidential hops.

The Pentagon and other federal agencies account for about 80 cents of every dollar Lockheed makes, and its Sikorsky purchase is the defense industry’s biggest deal in 20 years. Once Lockheed digests Sikorsky, Lockheed will be a key source for much of the Pentagon arsenal.

Are these defense giants getting too big?

“I don’t think we will know until we’ve reached a breaking point, and then only in hindsight we will say it was too big,” says Todd Harrison, defense-industry expert at the non-profit Center for Strategic and Budgetary Assessments in Washington, D.C. “An over-consolidated industrial base could crowd out new entrants, stifle innovation, and prevent opportunities for competition.”

It may depend on how you look at it. “After [Lockheed acquires Sikorsky], they’ll be the biggest fighter[-jet] prime [contractor] in the world, the biggest helicopter prime in the world, and the U.S.’s biggest military transport [-plane] maker,” says Richard Aboulafia, a defense-industry analyst at the Teal Group Corp., a consulting firm based just outside Washington, D.C. “But there is still competition in each of these segments.”

The last big defense-industry consolidation took place in the mid-1990s. It followed then-deputy defense secretary William Perry’s infamous 1993 “last supper” with defense-industry titans at the Pentagon. He warned that shrinking military budgets wouldn’t let them all survive, triggering a wave of mergers.

But concern over the shrinkage in the total number of defense contractors since the end of the Cold War misses the evolving nature of the defense business, Aboulafia says. “In 1978 you had companies like LTV making relatively simple jets like the A-7,” he notes. “They built most of the plane, aside from the engine and some relatively low-cost instrumentation.” But today’s warplanes are less aircraft than flying computers. “Today, [the airplane-building contractors] do much less, and the internal value is huge,” he says. Nearly all of that work is done by other companies, where competition can be intense.

But then there’s the flip side of the coin. As defense contractors have gotten bigger by gobbling up fellow defense contractors, that leaves fewer to compete for future contracts. “I believe the government must be alert for consolidations that eliminate competition,” Ashton Carter told the Senate Armed Services Committee earlier this year before it confirmed his nomination as defense secretary.

You don’t have to look far to see how that can happen. The Army’s next-generation fleet of helicopters—dubbed Future Vertical Lift, in the service’s typical poetic style—pits two helicopter giants against each other for the $100 billion jackpot. Lockheed is building the cockpit and electrics as the key supplier for one of the contending teams, headed by Bell Helicopter. The other candidate is Sikorsky itself. Assuming Lockheed succeeds in gobbling up Sikorsky, it’s tough to see how Lockheed loses, either way.
 
Lockheed builds the F-35—the most costly weapons system in history, with a projected price tag of nearly $400 billion

I find it hard to take such assertions seriously. This seems like a biased comment, honestly, because the cost of a weapons system cannot be measured simply by the final pricetag of the program. It's the cost per unit that matters. Construction, maintenance, upgrades, operational merit, all matter in the end to define whether a program is "costly" or not. The operational history of the F-35 is much too limited to tell whether it is the white elephant some would have us believe or whether it will prove a more costworthy weapon than expected in the final analysis. I still don't think that in terms of cost per unit any weapon system can ever come close to the Northrop B-2.
 
Skyblazer said:
Lockheed builds the F-35—the most costly weapons system in history, with a projected price tag of nearly $400 billion

I find it hard to take such assertions seriously. This seems like a biased comment, honestly, because the cost of a weapons system cannot be measured simply by the final pricetag of the program. It's the cost per unit that matters. Construction, maintenance, upgrades, operational merit, all matter in the end to define whether a program is "costly" or not. The operational history of the F-35 is much too limited to tell whether it is the white elephant some would have us believe or whether it will prove a more costworthy weapon than expected in the final analysis. I still don't think that in terms of cost per unit any weapon system can ever come close to the Northrop B-2.

I believe that the $400 billion price tag comes from this Government Accountability Report:

"Total U.S. investment is nearing $400 billion to develop and procure 2,457 aircraft through 2037."

Source:

"F-35 Joint Strike Fighter:
Restructuring Has Improved the Program, but Affordability Challenges and Other Risks Remain
GAO-13-690T: Published: Jun 19, 2013. Publicly Released: Jun 19, 2013."
http://www.gao.gov/products/GAO-13-690T

It appears that the General Accountability Office adjusted the cost of procurement for inflation through the year 2037. The dollar cost does not include the cost to operate and sustain the F-35 fleet over the estimated service life which has been predicted to be from 30 to 50 years. $1 trillion to operate a fleet of 2,443 F-35 fighter jets over the next 50 years?
 
To the best of my knowledge the $400 Billion figure now stands at $391 Billion. The should cost goals for the program and the DOD are more aggressive but they aren't yet going to (or allowed to rather) book the future year profits until they have demonstrated them to a high degree of certainty. The should cost goal out into the full rate of production is $80-$85 Million for the CTOL in then year dollars (or $75 Million in 2013 dollars) and if this number is achieved it would have an impact on the $391 Billion dollar overall development+Procurement price tag. I think the actual budget estimates puts the Fly-Away cost of the CTOL at the rate of 60 (USAF) a year at around $90 Million, or about 5-11% more than what the JPO's goal is.

A little more on the should cost -

https://www.youtube.com/watch?v=tHwY5StkSBE

Also, it is my understanding that the overall maintain and operational cost over the lifetime is also represented in then year dollars (the Trillion dollar figure).
 
This PDF from the JPO, based on the FY14 SAR, gives a well presented look at the costs:

Total program cost $918.1 billion in 2012 (BY12) dollars; $1407.6 billion in then-year (TY) dollars.

Broken down (in billions):

RDT&E = $59.2 (BY12); $54.9 (TY)

Procurement = $257.2 (BY12); $331.6 (TY)

MILCON = $3.9 (BY12); $4.6 (TY)

O&S CAPE estimate = $597.8 (BY12); $1016.5 (TY)

O&S JPO estimate = $535.8 (BY12); $859.0 (TY)

Note that the CAPE estimate for O&S hasn't changed since the FY13 SAR, which suggests that CAPE hasn't done a re-evaluation since then.

---

URFC estimates (weighted avg. price in millions over the life of a 2443 acquisition) - these do not include Blueprint for Affordability cost reductions:

F-35A = $76.8 (BY12); $102.7 (TY)
F-35B = $105.1 (BY12); $126.1 (TY)
F-35C = $89.1 (BY12); $115.4 (TY)

APUC = $105.3 (BY12); $135.7 (TY)
PAUC = $130.4 (BY12); $159.2 (TY)
 
Triton said:
Skyblazer said:
Lockheed builds the F-35—the most costly weapons system in history, with a projected price tag of nearly $400 billion

I find it hard to take such assertions seriously. This seems like a biased comment, honestly, because the cost of a weapons system cannot be measured simply by the final pricetag of the program. It's the cost per unit that matters. Construction, maintenance, upgrades, operational merit, all matter in the end to define whether a program is "costly" or not. The operational history of the F-35 is much too limited to tell whether it is the white elephant some would have us believe or whether it will prove a more costworthy weapon than expected in the final analysis. I still don't think that in terms of cost per unit any weapon system can ever come close to the Northrop B-2.

I believe that the $400 billion price tag comes from this Government Accountability Report:

"Total U.S. investment is nearing $400 billion to develop and procure 2,457 aircraft through 2037."

Source:

"F-35 Joint Strike Fighter:
Restructuring Has Improved the Program, but Affordability Challenges and Other Risks Remain
GAO-13-690T: Published: Jun 19, 2013. Publicly Released: Jun 19, 2013."
http://www.gao.gov/products/GAO-13-690T

It appears that the General Accountability Office adjusted the cost of procurement for inflation through the year 2037. The dollar cost does not include the cost to operate and sustain the F-35 fleet over the estimated service life which has been predicted to be from 30 to 50 years. $1 trillion to operate a fleet of 2,443 F-35 fighter jets over the next 50 years?

I think the reason for his criticism is the obligatory, "most expensive weapon system evah". It's almost a guarantee where the article is going when they put that in. (The really dumb part about it is if you had to pick what you thought would be the most expensive weapon program in history what would it be? Exactly.)
 
"DoD Weighs Supplier Base, Competition in Sikorsky Deal"
by Aaron Mehta 5:03 p.m. EDT July 30, 2015

Source:
http://www.defensenews.com/story/defense/policy-budget/industry/2015/07/30/dod-weighs-supplier-base-competition-sikorsky-lockheed/30897627/

WASHINGTON — As regulators begin to look into Lockheed Martin's plan to acquire helicopter manufacturer Sikorsky, Pentagon officials are focused on identifying potential reverberations down to the lowest level of tiered suppliers, as well as sorting out potential issues of competitiveness.

Speaking on background due to the nature of regulatory inspections, a senior defense official said the goal is to leave "no stone unturned" while looking at the proposed acquisition.

That includes paying attention not just to the big picture issues of the world's largest defense company buying a major player in the global military rotorcraft market. It also involves looking at what happens much farther down the supply chain.

"This is not just a helicopter business. There are electronic components and subsectors underneath the traditional vertical lift, so we are looking at the subsectors," the official explained.

"Is there healthy competition there? Will this be further vertical integration on any particular subsector?" the official said. "So we're looking at all the sectors and all the suppliers we have visibility into from a fragility and criticality standpoint. We're looking at the lowest tiers to ensure that we maintain a healthy industrial base."

Competition, both vertical and horizontal, is also a key aspect of the deal being weighed by regulators.

"We look at the benefits and efficiencies from any proposed merger. Will we get better cost, more efficient product, more affordable … Industrial capacity and industrial capabilities is also something that's key to me and key to the department," the official noted. "We always have to take into consideration any potential impact it can have on a current or future program."

There has been speculation that the Lockheed and Sikorsky deal could create issues of vertical integration, given Lockheed's role as a major producer of helicopter electronics.

"We are always concerned about vertical integration, where it could put significant pressure on competition," the official said. "That is a question. Absolutely."

Information Exchange

To help answer those questions, regulators will be in close contact with both Lockheed and Sikorsky — communication which is already underway.

Lockheed Martin CEO Marillyn Hewson called Frank Kendall, the Pentagon's top acquisition official, the night before the deal was announced, said the DoD official. That started the process of organizing for regulators.

The Department of the Treasury and Federal Trade Commission will each have a say in the process, with the three departments expected to sort out who will be the lead agency "in the next few days," the official said, before adding that the discussions between the three offices has been very smooth so far.

"Because of its visibility and its size, it has risen to a high enough level to get senior engagement early," the official noted. "And anytime you can get senior engagement early you usually have better outcomes."

After a lead is decided, all three teams will dig into the deal to determine where any potential roadblocks may be.

How long the process takes, however, is unclear. The official noted that each acquisition review has its own challenges and issues to work out, and take, essentially, as long as they take.

At the same time, everyone involved is pushing to get this done as quickly as possible, the official said, adding that long audits can become costly for both the government and industry.

To help speed the process along, DoD is tapping its knowledge base, both inside and outside the building.

"We've pulled out all stops," the official said. "We brought in anyone who was familiar with complex M&A activity, whether they worked on the [Northrop Grumman and Ingalls shipbuilding] spinoff or something more recent."

"We have experts in vertical lift," the official continued. "There are experts in engines, electronic, component parts, metals — we're looking across the sector at anything Sikorsky has built, builds or [could be] part of their offering, and quite frankly, Lockheed as well."

More M&A Coming?

The $9 billion acquisition is the largest to hit the defense industry in some time, and has been seen as a potential harbinger of more mergers and acqusisition activity to come.

Asked if the Pentagon expects to see assets shifting in the defense industry in the near future, the official said "there is nothing" indicating a major overhaul of top tier firms on the horizon.

But, he said, "we do recognize that there is a lot more activity of companies rebalancing their portfolios, as they should. With budget uncertainty companies are making their decisions on the survival of the company."

Lockheed is taking part in that rebalance not just with its Sikorsky procurement, but by shedding its IT and technical services business. That follows a recent trend, with BAE Systems exploring options for shedding its services business in its US Intelligence and Security Unit, as well as the splitting off of SAIS/Leidos and Engility/L-3.

Given the focus on M&A activity, the official said, keeping in contact with industry is important for the Pentagon.

"We see a lot of movement, but it doesn't always materialize," the official noted. "Sometimes companies test the water to see what's out there for them. We have a close eye on it, and we do meet with a lot of companies over the year."
 
Indeed. Now let's just hope and pray that the name Sikorsky doesn't fade from memory and will remain active under the new ownership.
 
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