What's going on?
Northrop Grumman, the world’s sixth-largest defense contractor, said on Monday that it has agreed to buy aerospace and defense company Orbital ATK in a $9 billion deal!
What does this mean?
Northrop is paying a 22% premium on top of the market price of Orbital ATK shares (an acquiring company typically pays more than the market price to incentivize shareholders to sell their stakes). It will establish Orbital ATK as a fourth business unit in addition to its existing three – aerospace, mission systems and technology.
Northrop expects the deal to result in annual cost savings of $150 million by 2020 and to add complementary products to its offering; Orbital ATK has expertise in several military fields (like launch vehicles and smaller satellites) that Northrop currently lacks. In fact, Northrop had already partnered with Orbital ATK to compete with Boeing for an $80 billion upgrade of America’s nuclear deterrent capability – which has arguably become a lot more relevant since tensions with North Korea started escalating.
Why should I care?
For markets: Investors seem happy with the deal – and the defense sector overall.
Shares of Orbital ATK were up 20%, and even shares in Northrop were up – by 1% – despite it having to pay up for the deal (which indicates that investors are receptive to the deal and agree with its rationale). Defense companies have had a strong year so far and the Trump administration promised tens of billions in additional funding for the Department of Defense (plus, it could receive significantly more on the heels of escalating tensions with North Korea if a bill currently being discussed goes through).
The bigger picture: Big aerospace and defense companies have been buying smaller ones.
The industry is going through a wave of consolidation: this is the fourth significant deal in the industry this year (read our story on the most recent deal here). One reason for this consolidation is that some smaller companies are key suppliers to larger ones – and acquiring a key supplier means securing access to important components.