Lockheed, Leidos merger creates $10B government services giant

Lockheed Martin will merge its IT and government services subsidiary with Leidos Inc., in a complex and tax-advantageous deal, creating the largest government services provider in the U.S. with a $10 billion annual revenue base, the companies’ executives said Tuesday.

Bethesda, Maryland-based Lockheed’s government IT wing, with more than $5 billion in sales and 16,000 employees, is being sold to Reston, Virginia-based engineering giant Leidos for cash and stock. Leidos itself was spun off from Science Applications International Corp in 2013. 

The deal, which is subject to regulatory approval, is expected to close in the third or fourth quarter of 2016.

“By bringing together our IT business with Leidos’ already strong customer base, we will create a competitor with the scale, portfolio and expertise to deliver unparalleled solutions and incredible value in a highly competitive contractor environment,” Lockheed Martin CEO Marillyn Hewson said in a investor call Tuesday.

On the call, other Lockheed and Leidos executives said they expect the company to pull in $10 billion in revenue, nearly double that of its closest contracting competitors, Booz Allen Hamilton and CSRA, Inc.

Sixty percent of Lockheed’s information systems business is based in civilian agency work such as health, energy, aviation and space, and science, while the remaining 40 percent works with defense, intelligence and commercial cybersecurity.

Leidos CEO Roger Krone said his company gains “important mindshare” from the deal, becoming a juggernaut in technology, employees and resources for the federal government.

“By bringing these great organizations together, we will be able to provide a comprehensive and compelling range of solutions to address needs of customers in defense, intelligence, civilian and commercial markets,” Krone said during the call.

Leidos declined any further comment to FedScoop.

With the combination of portfolios, the new service provider works with a suite of government agencies, including all four branches of the military, the intelligence community, the Defense Information Systems Agency the and the Defense Health Agency on the defense side, and the departments of Veterans Affairs, Health and Human Services, and Homeland Security, the General Services Administration, and the Social Security Administration on the civilian side.

The deal was engineered as a Reverse Morris Trust, a process similar to a merger that minimizes the seller’s tax liability. Lockheed will receive a one-time special cash payment of $1.8 billion, while the company’s shareholders will receive 50.5 percent equity in Leidos, worth approximately $3.2 billion. Leidos is expected to pay its shareholders a special dividend of about $1 billion.

Shares of both companies tumbled badly in the wake of the announcement Tuesday morning, although Lockheed’s recovered somewhat during the afternoon, closing at $209.93, down just over a dollar. Leidos closed at $48.83, down $4.83, or 9 percent.