Black Hawk Down

Lockheed Martin agreed this week to purchase Sikorsky Aircraft from United Technologies. The sale amount does not matter much because the acquisition will be funded from an outstanding credit facility, Lockheed Martin stock, or both. Earnings dilution will be minimal. No, what is interesting about this transaction are the ulterior motives of the two parties and the inevitably lousy outcome it will produce.

At first glance the purchase makes a lot of sense for both sides. United Technologies has flirted with disaster over the years because of Sikorsky. That is because the military helicopter business is feast and famine. In the years after a model is accepted by the military and been put into production, profits rush into UT’s coffers. But during off-years the business goes into triage as Sikorsky funds expensive new developments, pays high-performing engineers to stay on the payroll to preserve intellectual property, and lays off plant workers to try to stem the bleeding.

Granted that UT’s Pratt & Whitney’s business selling commercial aircraft engines has gone a long way to insulate UT from Sikorsky’s ups and downs. Not to mention UT’s significant commercial portfolio helps disguise volatility. But UT, like all Dow Jones components, is under extreme pressure to add businesses that generate smoothly growing earnings. Given that environment it is a minor miracle that UT hung onto Sikorsky for almost 90 years.

From Lockheed Martin’s perspective, the purchase of Sikorsky has removed a constant thorn in its side. Sikorsky’s defense procurement politicking has often been effective against LM. As an example, Sikorsky’s competition went a long way in making the VH-71 Presidential Helicopter program the expensive millstone / screw-up that it has become for LM.

LM in one stroke obtains the helicopter expertise and product portfolio it needs to compete against the other two defense leviathans–Boeing and Northrop Grumman. And earnings volatility is the name of the game for LM already…adding Sikorsky isn’t going to make the choppiness in earnings any worse.

But here’s the rub: Sikorsky’s absorption into LM only serves to shrink the competition in defense aviation–a sector that is already suffering from rather extreme ossification. Aircraft development that used to take years from drawing board to initial production now takes decades–very often resulting in no product at all (refer to the above mentioned VH-71). And since competition is limited, innovation suffers. It is fortunate for the US that aircraft technology is pushed unwillingly along by developments in other industries.

The reduction of competition will also serve to shrink the workforce. Aerospace engineers and supporting technical staff will displace each other either at LM or Sikorsky. Suppliers to UT will now have to re-qualify with LM, leading to inevitable job losses as many vendors are left hanging in the breeze.

The purchase of Sikorsky will also concentrate too much political influence with LM. This is an industry problem already that has led to excessive defense spending in some areas and too little defense spending in others as congressional district influence-peddling has disrupted sensible strategic and operation planning at the Pentagon.

In short it is hard to imagine how LM’s acquisition of Sikorsky advances the US’ interests—whether with respect to national security or the country’s economy. And as for the workers, well, it looks like they’re getting the shaft again.

2/7/2018 update. Subsequent to the Sikorsky divestiture, UTC acquired Goodrich Corporation and Rockwell Collins.

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