L-3 boosts military stakes with Titan deal

NEW YORK — L-3 Communications Holdings Inc., a maker of satellite and marine communication equipment, is buying defense contractor Titan Corp. for nearly $2 billion in a cash deal that will give it a major stake in servicing U.S. military and intelligence agencies.

San Diego-based Titan is L-3's largest acquisition to date and will boost the company's ability to compete as a prime contractor for government business, coming at a time when spending on defense equipment and technology continues to grow.

Frank Lanza, L-3's chief executive officer, said Friday that while L-3 and Titan operate in the same business segment, the companies are focused on certain niches that complement — rather than compete with — each other.

"There just aren't many companies left in that mezzanine area that you can make an acquisition, particularly a company that is so complementary to L-3 and which we don't compete with at all," Lanza told analysts on a conference call. "We don't compete with Titan. We might have had one competition in the last six or seven years."

New York-based L-3 agreed to buy up all of Titan's shares at $23.10 apiece in cash for a total of about $1.97 billion. L-3 is also assuming about $680 million in debt as part of the deal, which is expected to close during the second half of 2005.

The offer is a slim 1.4 percent premium to Titan's Thursday closing price of $22.79, its highest price in almost four years, but tops a $20-per-share bid from defense contractor Lockheed Martin Corp. that Titan accepted before that deal collapsed in mid-2004.

Speculation over a possible deal lifted Titan's stock in recent weeks, but L-3's bid came in below analysts' expectations and sent shares falling 32 cents to close at $22.47 on the New York Stock Exchange. Meanwhile, L-3 shares jumped $3.12, or 4.4 percent, to $74.15.

Communications Systems-West, the Salt Lake division of L-3, employs 2,000 people in Utah.

Joe Nadol, an analyst with JPMorgan, said he believes the acquisition is expensive and that L-3 will not see more than $10 million of pretax savings from the combination.

"We believe that L-3 will be able to generate some limited cost synergies, but as with any defense merger, most savings go back to the customer," Nadol said in a report. "The amount that can be kept by L-3 in this case would be particularly limited by Titan's concentration of cost-plus contracts." Titan's board unanimously approved the deal, which is pending clearance from regulators and Titan shareholders. Titan said separately that it postponed its June 7 annual meeting to give investors more time to mull the offer.