Lockheed Martin Goes All In on Defense

by Richard Pettibone, Aerospace & Defense Companies Analyst, Forecast International.

As it deals with a global defense downturn and the possible return of sequestration in the U.S., Lockheed Martin has decided to double down on this core market. With the acquisition of Sikorsky and the planned divestment of its services operations, the company has made it clear that it will focus on what it does best, defense contracting.

Lockheed Martin purchased Sikorsky from its parent company United Technologies, which, in contrast to Lockheed, has decided to cut its exposure to defense markets. After several months of negotiations with various suitors, Lockheed Martin emerged as the victor with a $9 billion offer. The deal is the largest since it purchased Martin Marietta in 1995 and will help diversify Lockheed Martin’s aircraft portfolio, which is dominated by the F-35 program.

With Sikorsky, Lockheed Martin is going all in on defense, further expanding its platform and systems integration capabilities as it dives into the $30 billion military and commercial helicopter market.  While that market has been suffering of late, Sikorsky’s long-term potential in the world rotorcraft industry is substantial. With a solid business foundation based on production of UH-60 Black Hawks and Seahawks for the U.S. armed forces and foreign customers, Sikorsky is the leading Western manufacturer of military rotorcraft and is expected to remain so for at least the next 15 years, and likely beyond.   Under Lockheed Martin, Sikorsky will likely be an even fiercer competitor for international orders and the ever- lucrative aftermarket services.

In tandem with the Sikorsky acquisition, Lockheed Martin announced plans to divest a large chunk of its federal information technology business – a business that the company had spent several years investing in as it sought to diversify.  The simple fact seems to be that these markets are highly competitive and serve two masters, military and commercial.  According to reports, company executives described a market that was increasingly difficult, with narrow margins pressured by customers.

The company is reportedly in talks with a host of suitors for the operation, including CACI International, Science Applications International Corp (SAIC), Booz Allen Hamilton, and Leidos. Interestingly, Lockheed Martin’s increasing emphasis on defense manufacturing will have a ripple effect in that another manufacturer will likely become the largest contractor in government IT and services space.

Looking ahead, the company expects that it will return to growth in 2016 despite the threat of sequestration coming back. While an outright repeal of the Budget Control Act of 2011 is unlikely, Congress is expected to reach a compromise on defense spending. Regional turmoil in parts of the Middle East, Europe and Asia will drive this need. Further, international sales will also expand, driven by fear over the Islamic State, a more bellicose Russia, and regional pressures from China and North Korea.

As the world’s largest defense contractor, Lockheed Martin will only benefit as countries seek to improve their militaries in the face of these contemporary threats.

The focus of the Defense & Aerospace Companies series is on worldwide aerospace and defense prime contractors and subcontractors. Concise reports provide data on individual corporations regarding recent mergers, restructurings, and joint ventures, along with a Strategic Outlook that examines the company’s strengths, weaknesses, and opportunities. Also included in each report are financial and industrial segment data, snapshot coverage of major programs, and recent U.S. Department of Defense contract awards.

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