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Harris, L3 to merge in all-stock deal creating top 10 defense company globally

Harris Corp. and L3 Technologies Inc., on Oct. 14 announced an all-stock mega-merger to create one of the biggest defense companies in the world.

The combined entity, L3 Harris Technologies, expects to generate approximately $16 billion in net revenue and $1.9 billion of free cash flow during calendar year 2018. The merger of equals is expected to close in mid-2019, pending requisite regulatory approval. Both boards unanimously approved the agreement, according to a release.

Under the terms of the deal, L3 shareholders would receive 1.30 shares of Harris stock for each share held. The valuation is consistent with the 60-day trading average exchange ratio of the two. At completion, Harris shareholders will own 54% of the company, with L3 shareholders owning 46%.

The duo, both listed in New York, said the merger would create the sixth-largest defense company in the U.S., and create a top 10 defense company globally, with about 48,000 employees in more than 100 countries.

"Integration planning is already underway, and ... we are confident in our ability to realize $500 million of annual gross cost synergies and $3 billion of free cash flow by year three," Harris Chairman, President and CEO William Brown said in a statement. Savings are expected to come from reduced spending and a consolidated footprint. The company will be committed to maintaining its investment-grade rating, according to the release.

The companies cited increased scale and a balanced portfolio of complementary franchises as a core benefit of the deal. The combined company plans to accelerate some of its research and development to build an expanded role in national security.

According to its annual report, Harris generated $6.2 billion in revenue during its latest fiscal year. Its core segments include communications, electronic and space and intelligence systems. The company has a market capitalization of nearly $18.2 billion.

L3 reported net sales of nearly $9.6 billion in 2017, with its core segments focused in electronics, aerospace, sensor and communications systems. The company has a market capitalization of more than $15.3 billion.

The combined L3 Harris Technologies will be headquartered in Melbourne, Fla. The new company's board would have 12 members, six from each company, and Brown will serve as chairman and CEO for the first two years after closing. L3's Chairman, President and CEO Christopher Kubasik will serve as vice chairman, president and COO during that time period. In the third year, Brown would move to executive chairman and Kubasik would transition to CEO.

The Wall Street Journal first reported the two were nearing in on a deal on Oct. 13.

Morgan Stanley & Co. LLC is acting as financial adviser to Harris, while Goldman Sachs is L3's financial adviser. Sullivan & Cromwell LLP is serving as principal legal counsel for Harris, with Paul Weiss Rifkind Wharton & Garrison LLP as special counsel to its board. Simpson Thacher & Bartlett LLP is serving as legal counsel for L3.