A balanced scenario where the deal can produce positive or slow results for both the companies
Lockheed Martin Corporation (NYSE:LMT) plunged 3.68% to $255.27 as at 3:25 PM EDT yesterday, after the announcement of Leidos planned merger with it. The spinoff of Lockheed’s IT division to Leidos is not probable to boost earnings as the investors were expecting. This is mainly because the IT business is facing slow growth.
Lockheed Martin stated that it repurchased 9.4 million shares through Reverse Morris Trust, which the investors believe that Lockheed would withdraw but it didn’t. The repurchasing means that the deal will have no significant impact on EPS of Lockheed in the near quarters.
IT business was not doing phenomenally well and was facing stiff competition. The Silicon Valley and new entrants have given tough time to the IT business, making it a slow growth. As a result, many investors are skeptical about the deal.
Management at Lockheed believes that the deal will produce tangible value for both the companies. It will help both the companies to stay strong in the competitive market and will aid in delivering strong results to shareholders.
As part of the deal, Lockheed received $1.8 billion as cash payment. This will allow the company to pay back its debt. The company also reduced its outstanding shares by 9,369,694 shares, which is 3% of the outstanding common shares. As part of the exchange, Lockheed Martin also received 50.5 percent stake in Leidos.
This stake in Leidos will help Lockheed to use its government connections and help both the companies strive. Synergies can be created if both the companies work engagingly and collectively using each other’s core competencies.
Lockheed is still in a very strong position. It is still gaining contracts which will help the company expand and grow further. Recently, it has signed a training contract with the US Navy for F-35s, which is Lockheed’s most profitable one. It has also signed an agreed for MK-7, part of the modification contract with the Navy.