Lockheed Martin Corp.’s $9 billion acquisition of United Technologies Corp.’s Sikorsky Aircraft would bring together two companies that are heading in the same direction.
Lockheed Martin, the largest U.S. defense contractor, maker of warplanes, aviation electronics and other weapons systems, wanted to push deeper into the military helicopter business.
Sikorsky, the largest helicopter maker in the world, provided a rare opportunity. With its emphasis on primary contracts with the Pentagon, the Stratford company no longer fit well with Hartford-based UTC’s focus on systems and services for the aerospace and building industries.
And Lockheed Martin already was integrating operating systems on helicopters for Sikorsky and other companies.
“They make some of the parts, put them together, but don’t sell the whole package,” said Mike Blades, a senior defense analyst at Frost & Sullivan in San Antonio, Texas. “Now they will.”
The acquisition, announced Monday, culminates a strategic repositioning at UTC that started even before November, when Gregory Hayes took over as the UTC chief executive from Louis Chênevert, who retired suddenly. Hayes has been clear in his view that Sikorsky’s growth prospects are limited.
“The decision to sell Sikorsky was not an easy one, but it is the right one for both Sikorsky and UTC,” Hayes wrote in an email to UTC employees Monday. “By focusing on our core businesses, UTC is better positioned to deliver value to customers, growth for shareowners and opportunities for employees.”
Sikorsky employs 8,000 in Connecticut and 15,000 worldwide, with its head office and largest plant in Stratford and satellite locations in Bridgeport, Trumbull and Shelton. The engineering office in Bridgeport is scheduled to close late next year, and its 450 workers will go to Stratford.
The sale, if approved by regulators, would remove Sikorsky from Connecticut-based ownership for the first time since 1929, four years after it was founded on Long Island by Russian immigrant Igor Sikorsky.
Sikorsky builds the Black Hawk and the presidential Marine One helicopters, the Stallion family of U.S. Marine Corps helicopters as well as rotorcraft used to ferry workers to offshore oil platforms.
UTC, which bought Goodrich Corp. for $16 billion in 2012, authorized a buyback of up to 75 million shares, worth $8.3 billion — indicating that the company is satisfied shrinking its asset size and does not intend to use the Sikorsky proceeds for acquisitions.
On Monday, analysts said that they don’t expect any immediate threat to Connecticut employment, but that they do expect an intensive review by Lockheed on how Sikorsky is managed, all with an eye toward improving profit margins.
There was a general sense of optimism among employees and public officials that Lockheed as a buyer is better than, say, Boeing or Textron, because Lockeed doesn’t make helicopters, at least not the complete aircraft.
But Lockheed said it has identified $150 million in savings as a result of the merger, either from squeezing costs out of the supply chain or, eventually, through “consolidation of footprint and headcount,” said Dan Nelson, a spokesman for Lockheed.
He said he didn’t know the deadline for achieving those savings.
“They are not going to force Sikorsky into any preconceived mold,” said Loren Thompson, a defense analyst with the Lexington Institute, a think tank in Arlington, Va. “It will be gradual over time increasing the margins, between now and the end of the decade.”
The helicopter maker’s sales of $7.4 billion in 2014 amounted to about 11 percent of UTC’s $66 billion in revenue. But Sikorsky’s operating profit margin was the lowest of any UTC division in 2014 at 2.9 percent.
By contrast, Lockheed’s business units historically have had profit margins ranging between 11 percent and 18 percent, Thompson said.
Mark Bobbi, an aerospace analyst and consultant, said he expects that Sikorsky management will come under scrutiny as Lockheed Martin looks to improve efficiency, including looking at outsourcing more work to lower-cost suppliers.
Thompson said he doesn’t expect broad-based layoffs in Stratford or at any other Sikorsky location, as long as demand remains relatively stable. Lockheed has a reputation for reducing its workforce through retirement and attrition, he said.
“This may be the best outcome for workers at Sikorsky,” Thompson said. “It will now be part of the best-positioned military contractor in the world.”
Not Its Own Business
Sikorsky would be Lockheed’s largest deal since 1995 when it merged with Martin Marietta Corp. for $10 billion in a stock deal, creating Lockheed Martin.
Although UTC will receive $9 billion, Lockheed expects to realize $1.9 billion in tax benefits because of the way the sale is classified, which means the effective price is $7.1 billion, Lockheed said.
Lockheed makes the F-35 Joint Strike Fighter jet, which uses Pratt & Whitney engines in the largest Pentagon program. It also makes the C-130 Hercules transport, the F-16 Fighting Falcon and other aircraft, as well as missile systems and the controversial Littoral Combat Ship, a Navy program that has had significant cost overruns.
Lockheed is not currently a maker of helicopter airframes, but the company is in the rotorcraft business as a system integrator, developing electronics — as a partner on several Sikorsky helicopters, including the new Marine One fleet, the next generation MH-60 Seahawk and a new high-speed combat rescue aircraft known as the Raider.
Lockheed is also a partner with Bloomfield-based Kaman Corp. on the K-MAX unmanned helicopter.
“Sikorsky is a natural fit for Lockheed Martin and complements our broad portfolio of world-class aerospace and defense products and technologies,” Lockheed CEO Marillyn A. Hewson said in a press release.
In a separate transaction, Lockheed said it would sell off a chunk of commercial, nonmilitary business.
Sikorsky would not be its own division, but will be included in the Lockheed Martin Mission Systems and Training business segment. That segment, before Sikorsky joins, has 17,000 employees, and is headquartered in Washington, D.C. All of Lockheed Martin has about 112,000 employees worldwide, and is headquartered in Bethesda, Md.
Lockheed sales, $45.6 billion in 2014, have barely changed in the past five years. Operating profit grew from $3.9 billion in 2011 to $5.6 billion and is expected to finish 2015 slightly lower, as the Pentagon tightens budgets.
Hayes told employees: “As a long-time partner of United Technologies, we know they share our values and our commitment to innovation and operational excellence, making them the right company to continue Sikorsky’s proud legacy.”
Textron Inc. had submitted a bid for Sikorsky, but dropped out of the bidding after the price rose, according to several sources familiar with the matter, Reuters reported.
Federal Review
The deal would close in late 2015 or early 2016, Lockheed Martin said. The Department of Defense can object to a merger involving its key suppliers during a federal antitrust review.
The department said it was informed of the Sikorsky deal by Lockheed Martin prior to Monday’s announcement.
“The department intervenes in the marketplace only when necessary to maintain appropriate competition — balanced against market efficiency pressures,” Maureen Schumann, a Department of Defense spokeswoman, said in an email. “This includes being watchful for consolidations that eliminate competition or cause market distortions that are not in the department’s best interest.”
A sale of Sikorsky has been the source of speculation for more than a year.
In March, UTC said that it would explore alternatives and, by June, it had settled on either a sale or a spinoff to shareholders. But even under Chênevert, under a previous reorganization of UTC, Sikorsky was left out of the business unit that included Pratt & Whitney and the other aerospace businesses.
Sikorsky has downsized its workforce in Connecticut by more than 1,000 positions in the past five years as the wars in Iraq and Afghanistan wound down, which meant that the Pentagon needed fewer military helicopters.
But in the past round of layoffs, announced in June, Connecticut’s share was much smaller than the hit to Coatesville, Pa., where commercial assembly moved in the 1990s. Of 1,400 layoffs, just 180 were in Connecticut, while the Pennsylvania operations were cutting 160 employees and 560 contractors.
Low oil prices have meant fewer commercial orders. Coatesville had 1,060 employees before the layoffs, spokesman Paul Jackson told the Philadelphia Inquirer in June. The cuts were also deeper in Poland, where the Black Hawks for foreign militaries are built.
UTC shares closed Monday at $110.48, down 26 cents on the New York Stock Exchange, and Lockheed was up $3.95 to $205.13.
