By Steven Alvarez,
Money and Investing Writer
The aerospace giant Northrop Grumman (NYSE: NOC) and missile maker Orbital ATK (NYSE: OA) have agreed to a deal as of earlier this week. For $7.8 billion in cash plus the assumption of Orbital ATK’s debt, the agreement is valued at about $9.2 billion for Northrop Grumman.
Northrop Grumman builds airplanes, military avionics, is the primary contractor for NASA’s James Webb Space Telescope and designed parts of NASA’s Goddard Space Flight Center.
Orbital ATK makes satellites, missile defense programs, and launchers including the solid rocket boosters for NASA’s Space Launch System, boosters to launch cargo freighters to NASA’s International Space Station, and Minotaur solid rocket launchers. This deal brings together a variety of contracts from both companies including NASA, commercial, government, and military.
Orbital ATK stockholders benefit from this deal, as they will receive $134.50 per share, a 22% premium above the share price of $110 before the transaction. The timing seemed to be a bit questionable but the fit is undeniable. Northrop Grumman could have bought out Orbital ATK had they done this sooner, but with the massive upside of this transaction, it was still worth it.
The transaction will make Northrop Grumman the fourth largest defense contractor behind Lockheed Martin, Boeing, and General dynamics.
The fit is largely strategic and complimentary for Northrop Grumman as they absorb Orbital’s small systems and missiles capabilities that it lacked. For the seven times smaller Orbital ATK, the move gives them more mechanical and financial resources.
Both companies unanimously approve of the deal, largely because of the complimentary fit. The chief officer and president of Northrop Grumman Wes Bush expressed that, “we have very little overlap, and we fully expect our combined portfolios of leading technologies, along with our aligned and innovation-focused cultures, to yield significant value creation through revenue, cost and operational synergies, accelerating our profitable growth trajectory.”
With many countries racing to expand their defense sectors, the acquisition of Orbital ATK allows Northrop Grumman to expand its market in missiles and rockets. Northrop is currently working towards the most significant upgrade in the nation’s Minuteman nuclear missile system since the 1970s. The acquisition of Orbital ATK improves Northrop’s capabilities in this project along with other projects.
“The combination of our companies and human capital will also significantly benefit our customers,” Bush said. “Together, we can offer our customers enhanced mission capabilities and more competitive offerings in areas such as space, missiles and strategic deterrence.”
The agreement is expected to finalize in 2018. At that point, Orbital ATK will operate as a separate sector continuing their business as usual under Northrop Grumman to ensure a smooth transition.
The goal of this transaction was to create a more diverse aerospace and defense company- a goal that is easily reached given the complimentary fits of Northrop Grumman and Orbital ATK. The agreement allows Northrop Grumman to expand their market and range of capabilities and Orbital ATK to benefit from the new opportunities of a larger company.
“I think this is really a classic win-win transaction, a very strategic combination that also makes good sense for both companies from a financial standpoint”, says Orbital ATK’s chief executive and president David Thompson.
A version of this article appeared in the Tuesday, September 26th print edition.
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