Harris Corporation of U.S. deal to buy Exelis manufacturer of military radios equipment.

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Harris Corporation of U.S. deal to buy Exelis manufacturer of military radios equipment.
Harris Corp. ’s deal to buy a smaller defense-industry rival, the largest defense deal in almost 20 years, has the potential to spur more consolidation as the Pentagon budget stabilizes. The Melbourne, Fla., maker of military radios and air-traffic control equipment agreed to buy Exelis Inc. for about $4.56 billion, creating a top 10 Pentagon supplier by sales and uniting two midtier companies viewed as potential takeover targets.
     
Harris Corp. ’s deal to buy a smaller defense-industry rival, the largest defense deal in almost 20 years, has the potential to spur more consolidation as the Pentagon budget stabilizes. The Melbourne, Fla., maker of military radios and air-traffic control equipment agreed to buy Exelis Inc. for about $4.56 billion, creating a top 10 Pentagon supplier by sales and uniting two midtier companies viewed as potential takeover targets. Harris is an international communications and information technology company serving government and commercial markets in more than 125 countries.
     

The proposed takeover would be the largest in the defense sector since the takeover boom of the 1990s that created such giants as Lockheed Martin Corp. Contractors have avoided big acquisitions because of uncertainty over the Pentagon budget, opting to return cash to holders or expand into non-miliary areas.

The enlarged Harris would have pro forma annual sales of around $8.2 billion and rely on the Pentagon for around half its revenue, a bigger share than at present. “Two or three years ago, buying into the [defense industry] was like catching a falling knife,” Harris Chief Executive Bill Brown said in an interview. “Now I think it’s the opposite.”

Mr. Brown said talks with Exelis started in October after that company spun off its mission systems business, a move widely viewed as prepping it for sale. He said he expects the deal to be welcomed by the Pentagon without the need for any disposals because the department wanted more stability and competition among suppliers.

The deal “represents the re-emergence of a stronger midtier defense sector and may entail more competition for primes in some defense segments,” said analyst Byron Callan at Capital Alpha Partners LLC.

Harris also spends more than most peers on internal research and development—5.4% of sales in the latest quarter—and the Pentagon has been pushing contractors to boost investment and take on additional risk as part of broader acquisition reforms.

Exelis, which was spun out of ITT Corp. in 2011, had sales of $3.2 billion last year after the mission-systems spinoff. The company specializes in parts for commercial and military aircraft as well as sensors and radar technology.