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Lockheed Martin Acquisition of Sikorsky Makes Sound Strategic Sense By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

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21 Jul 15. With minimal concern on potential competition elements the proposed Lockheed Martin acquisition of the Sikorsky helicopter division of United Technologies (UTC) looks to be a great fit for the Bethesda, Maryland based company and one that makes a great deal of sense.

While the agreed deal will now be heavily scrutinised by the Department for Defense Lockheed Martin has already stated that it will review its government IT and technical services businesses. At the very least this suggests that the company is prepared to dispose of some of the reported $6bn portfolio of service based assets should this be deemed necessary or appropriate. The bottom line is that in comparison to past deals in the aerospace and defence sector I can see little if any reason that might stop this excellent deal in its track.

Might the Lockheed Martin/Sikorsky acquisition announcement be the starting gun for another round of aerospace and defence industry consolidation? Frankly I doubt that it will and I see this as a very interesting one-off opportunity that came into view only because of a change of strategy at UTC. Nevertheless, from a strategy point of view, it does in my view make great sense for Lockheed Martin to acquire Sikorsky not least because it stretches and enhances potential to add higher margin sustainment programmes and through life product revenues just as it also does in terms of reducing the overall reliance on military fast jet programmes.

When completed my understanding is that Sikorsky is to become part Lockheed Martin’s Mission Systems and Training (MST) division rather than be pushed into the aeronautics division. This makes good sense as I will later explain and it appears that I am rather less surprised about than other analysts. My reasoning is that as a systems integrator Lockheed Martin has long been engaged in rotary. For one of many examples of this look no further than the ongoing delivery of 24 MH-60 Sikorsky built MH-60R Anti-Submarine (ASW) Anti Surface Warfare (ASuW) multi-mission helicopters for the Royal Australian Navy. Built by Sikorsky in a partnership with Lockheed Martin the latter’s MST division is providing advanced mission systems and sensors capable of detecting and prosecuting modern submarines in littoral and open ocean scenarios. In addition, LM has provided Electronic Warfare Support Systems to be used to generate and test what are considered to be unique Australian mission data loads.

As a systems integrator and the largest defense company in the world Lockheed Martin has a long history of involvement in rotary capability and not just in the US. For example, 15 years ago Lockheed Martin UK was responsible for the supply of integrated mission systems for the Royal Navy fleet of EH-101 Merlin HM Mk 1 helicopters. Since then LM UK has been responsible for upgrading Merlin Mk 2 helicopters with advanced glass cockpits and improved avionics and aircrew consoles, the latter designed to significantly improve the ability to detect and track targets and share data with other aircraft and ships whilst airborne.

In a separate capability sustainment programme Lockheed Martin UK is currently engaged converting 30 former Merlin Mk 1 helicopters to Mk 2 standard for the Royal Navy. In partnership with the UK MOD it was recently announced that Merlin Mk 2 helicopters would be fitted with the Crowsnest system, a capability designed to deliver essential surveillance and intelligence and also to provide early warning of potential threats. The Crowsnest technology will be used to protect the two new Queen Elizabeth class carriers currently being built for the Royal Navy and the partners recently confirmed that Thales has been chosen to provide the radar and mission systems at the heart of this technology.

As one of the world’ leading systems integrators helicopters are certainly nothing new to Lockheed Martin. Just over ten years ago after a long running campaign in which I myself had some involvement Lockheed Martin, teamed in this case with AgustaWestland, was awarded a contract to supply a US version of the EH-101 helicopter for the VH-71 ‘Marine One’ US presidential helicopter completion. Known as the US101 the programme, based at Owego, New York State, was beset with problems that were primarily caused by a constant round of Department of Defense design and material change requirements that delayed the programme and pushed up the cost. Politics and differing cultures also played a part against US101 and it is a great shame that from the start and although up against a Sikorsky helicopter – the S92 which was still under development and yet to fly President Obama cancelled the programme shortly after taking office in 2009. Finally, in 2014, the Department of Defense confirmed that Sikorsky would build 23 new S-92 helicopters for the presidential fleet for delivery in 2022.

The announced price of the Lockheed Martin purchase of Sikorsky is $9bn (£5.8bn) although we are told that the net cost after tax benefits will be $7.1bn. Lockheed Martin is in rude health and performance in terms of net profits, cash flow and dividends has been growing strongly under the guiding hand of Chairman, President and CEO Marillyn Hewson. I do not see this as a diversification but rather an interesting addition to the diverse portfolio of interests.

Just as Lockheed Martin has significantly increased its international earnings in recent years Sikorsky derives almost half of its revenues outside of the US. Sikorsky has strong and still fast growing revenues although work needs to be done to improve margins.

Are there implications for Europe caused by this deal? While Lockheed Martin is a formidable and well run organisation I doubt that AgustaWestland or Airbus Helicopters will lose any sleep. The same is probably true in the US where the likes of Boeing and who, contrary to analysts and press suggestions, apparently had no interest in acquiring Sikorsky, or Bell Helicopters, a subsidiary of Textron, will lose any sleep.

hwheeldon@wheeldonstrategic.com

Tel: 07710-779785

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