Is Exelis Getting Enough in the Buyout?

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Published: February 6, 2015 11:15 am

Last Updated: February 6, 2015 11:18 am

Exelis Inc. (NYSE: XLS) announced that it had entered into a definitive agreement to be acquired by Harris Corp. (NYSE: HRS) in a cash and stock deal that values Exelis at $23.75 per share, or roughly $4.75 billion.

For the sake of comparison, Harris has a market cap of almost $8 billion and Exelis has a market cap of about $4.5 billion.

Under the agreement, Exelis shareholders will receive $16.625 in cash and a 0.1025 portion of a share of Harris common stock, based on the closing price of Harris as Thursday, for each share of Exelis common stock. When the deal closes, Harris shareholders will own approximately 85% of the combined company, and Exelis shareholders will own roughly 15%.

On a pro forma basis, for the 12 months ending last December, the combined company would have had more than $8 billion in revenue and about 23,000 employees globally, including 9,000 engineers and scientists. Thomson Reuters consensus estimates put both companies’ combined revenue right in that range.

David Melcher, CEO and president of Exelis, said:

Combining the companies not only creates shareholder value, but the commitment to excellence and innovation that both companies share will significantly benefit customers and provide new opportunities for employees.

Now we get to the matter of whether Exelis shareholders are getting enough in this buyout. The highest listed analyst price target for Exelis was $22.00, which was well overshot by the offer by Harris. According to what analysts have said prior to knowledge of this deal, Exelis is getting a good deal.

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As for Harris, companies that are acquiring another company, in most cases, drop in terms of share price to compensate for what they are paying for the new company. In fact, shares of Harris were up around 7.5% Thursday, at $74.74.

Exelis shares were up 35% at $23.90 in the first two hours of trading. The stock has a consensus analyst price target of $19.50 and a 52-week trading range of $14.86 to $25.00, with that high set Friday.

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