Lockheed Martin to Split Off Government IT Division

When Lockheed Martin Corp. (NYSE: LMT) reported fourth-quarter 2015 earnings Tuesday morning, the defense giant also announced that it plans to hive off its Information Systems & Global Solutions (IT) business in a transaction worth $5 billion. Under the terms of the deal, Lockheed’s IT business will be combined with Leidos Holdings Inc. (NYSE: LDOS) and Lockheed shareholders will receive about 50.5% of Leidos shares, valued at about $3.2 billion, and a one-time payment of $1.8 billion in cash.

The transaction is subject to approval by Leidos shareholders, and judging by the reaction after the report, that may prove tricky. If Leidos shareholders do approve the transaction, the deal is expected to close in the third or fourth quarter of this year. The transaction structure, which is subject to market conditions, is currently contemplated to be a tax-efficient split-off transaction, which would result in a decrease in Lockheed’s share count.

Lockheed CEO Marillyn Hewson said:

This strategic transaction is an important milestone in the portfolio reshaping strategy we announced in July 2015 and allows us to focus on our core business in aerospace and defense. The combination of our proven IT and technical services businesses with Leidos will create a new leader in the government IT sector with a diversified portfolio, greater scale and improved efficiency. The new business will be positioned for growth while unlocking value for our stockholders.

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Last year Lockheed acquired the Sikorsky helicopter business from United Technologies Inc. (NYSE: UTX) in a deal valued at $9 billion.

Lockheed’s stock traded down nearly 3% Tuesday morning, at $204.87 in a 52-week range of $181.91 to $227.91.

Leidos stock traded down nearly 8% to $49.42, in a 52-week range of $37.79 to $59.52.