As expected, Leidos [LDOS] on Tuesday completed its $4.6 billion acquisition of Lockheed Martin’s [LMT] information technology and technical services businesses, making it the largest pure play IT and services provider to the federal government with between $9 billion and $10 billion in annual revenue.
The $4.6 billion price is about $400 million less than originally announced in January. The $1.8 billion cash payment is the same but only $2.8 billion in Leidos common stock is being distributed to participating Lockheed Martin shareholders versus the originally planned $3.2 billion through an exchange offer.
Lockheed Martin is using the $1.8 billion payment to repay debt, pay dividends and possibly repurchase shares of its stock. Through the exchange offer, Lockheed Martin reduced the outstanding shares of its common stock by 9.4 million shares, about 600,000 million fewer than expected.
The drop in share repurchase expectations sent Lockheed Martin’s stock price down $9.73, nearly 4 percent, to close at $256.77 on Tuesday. Leidos’ stock price closed at $51.69, up $1.45 or nearly 3 percent.
For Lockheed Martin the portfolio reshaping move allows it to focus more on its aerospace and defense businesses.
“This strategic transaction enhances our competitive posture in our core aerospace and defense markets and increases the value we deliver to our stockholders,” Marillyn Hewson, chairman, president and CEO of Lockheed Martin, said in a statement. “As we position our company for the future, this action will enable us to focus our business growth strategy, align our technology investments and increase the value we deliver to customers worldwide.”
Leidos said in January that the deal gives it the scale to provide a more comprehensive range of solutions across its customer base in the defense, intelligence, civil and commercial markets. With the acquisition, it nearly doubles its annual sales.
“Today marks the next step in the evolution of Leidos,” Roger Krone, the company’s chairman and CEO, said in a statement.
Lockheed Martin structured the deal as a Reverse Morris Trust, allowing the company to avoid paying taxes on any gains associated with the divestment of its IS&GS segment.
Lockheed Martin shareholders that participated in the share exchange offer have about a 50.5 percent stake in Leidos. As part of the deal terms, Lockheed Martin designated three new directors for Leidos.
The new directors are Gregory Dahlberg who served as senior vice president for Washington Operations at Lockheed Martin from 2009 to 2015, Surya Mahapatra, chairman, president and CEO of healthcare company Quest Diagnostics Inc. [DGX], and Susan Stalnecker, who worked for chemical and materials giant E.I. du Pont de Nemours & Co. [DD] for nearly 40 years until 2016 including 10 years as vice president and treasurer and most recently as vice president for Corporate Productivity and Hospitality.