WASHINGTON — The announcement late Tuesday (Dec 17) that services giant Leidos will procure defense technology firm Dynetics for $1.65 billion gives Leidos a boost in a number of future technologies sought by the Pentagon, and it could help it stand out among competitors.
Leidos, ranked as the 21st largest defense contractor in the world according to the Defense News Top 100 list, grew its business in recent years by focusing on core competencies in the government services area. In contrast, Dynetics is a product-focused company. But Byron Callan, an analyst with Capitol Alpha Partners, said in a note to investors that the deal “continues a trend of blurring of business lines by services-focused defense contractors who are moving more into product segments.”
“Leidos is not a stranger here, given its work on the DARPA Sea Hunter autonomous naval vessel on simulation products,” Callan wrote, referring to the Pentagon’s Defense Advanced Research Projects Agency. “While Leidos is still going to be dominated by services, the Dynetics deal adds it as a competitor to Lockheed Martin, L3Harris, Northrop Grumman, and Raytheon Technologies.”
Leidos plans to keep Dynetics as a wholly-owned subsidiary, which should both smooth the transition and make sure current programs and partnerships are not interrupted.
In a statement, Leidos Chairman and CEO Roger Krone called Dynetics an “ innovative company” that “will significantly increase our capabilities for rapid prototyping and agile system integration and production, enhancing our overall offerings and services to customers.” He specifically called out hypersonics, space solutions, autonomy and advanced sensors as four areas where Dynetics will enhance Leidos’ portfolio. Leido’s lists some of those enhancements on their website as follows:
Compelling Strategic and Operational Benefits
- Adds Innovative Capabilities in High Growth Areas: The addition of Dynetics represents an opportunity to grow in new, attractive segments, including hypersonics, space, and weapons solutions. In particular, Dynetics brings top programs in small glide munitions, hypersonics, and directed energy, which will be a complementary fit and growth driver within the Leidos Defense portfolio. The enhanced diversification of products and services will enable Leidos to capitalize on new opportunities for growth.
- Expands Rapid Prototyping and Secure Agile Manufacturing & Systems Integration Capabilities: Dynetics’ rapid prototyping and secure agile manufacturing and systems integration capabilities will complement Leidos’ current ability within the LInC to further enhance innovation and help customers achieve their goals. Specifically, Dynetics’ prototyping expertise spans radars, air vehicles, weapons, c-UAS systems, space, and avionics. Through the transaction, Leidos will gain more than 350,000 square feet of production space, which will support full-cycle product development capabilities from concept through assembly, test and production.
- Bolsters Footprint in Strategic Huntsville Location: Dynetics’ location in Huntsville builds on Leidos’ current presence in this strategically important city. Dynetics’ Huntsville headquarters provides close proximity to key customers and a strong campus environment with co-located engineering, manufacturing and test capabilities. The talented team at Dynetics also brings deep and well-established customer and community connections.
- Expands Relationships with Existing Customers: Dynetics brings strong customer relationships that will build on Leidos’ existing relationships, including with the U.S. Army, Defense Intelligence Agency (DIA), Defense Advanced Research Projects Agency (DARPA), National Aeronautics and Space Administration (NASA), U.S. Army Rapid Capabilities and Critical Technologies Office (RCCTO) and United States Special Operations Command (SOCOM). This will provide an opportunity for Leidos to grow its opportunity space with current customers, particularly in Huntsville.
- Enhances Talent to Provide Value for Customers: With the addition of Dynetics’ more than 1,000 engineers and 1,000 technical specialists, Leidos will have greater technical expertise and talent that will benefit its collective customers. The transaction will unite two highly skilled workforces with a strong commitment to serving customers and communities and solving problems.
In recent years, Dynetics carved out a strong niche as a developer of future defense technologies, particularly with the U.S. Army. The service selected the firm in August to be the first to manufacture hypersonic glide body prototypes for the department, in a team-up with Lockheed. Earlier this year, a team-up of the two firms also was awarded an Army contract to build a 100-kilowatt laser weapon.
In November 2018, Dynetics was awarded a contract to produce two experimental satellites under the Army’s Gunsmoke program. And in April 2018, the firm was awarded a contract through DARPA for the Gremlins recoverable unmanned systems project.
That Dynetics is located in Huntsville, Alabama, one of the major hubs for space-related military efforts, may also help Leidos grow its practice in the space and missile systems sector, or at least help attract top talent, wrote Callan, who noted that the overall deal is “more about future sales growth opportunities and posture rather than cost synergies.”