Space Industry Consolidation Continues as Companies Seek Vertical Integration

COLORADO SPRINGS, Colo. -- Exelis Inc. and Harris Corp. here at the 31st annual Space Symposium have set up exhibit booths directly next to each other. By next year's conference, they will be occupying the same spot.

Harris in February announced that it would acquire Exelis for $4.75 billion, making it the latest in a wave of consolidation for companies who do business in the space industry.

And mergers, large and small, continue. SolAero Technologies Corp. of Albuquerque, New Mexico, announced April 14 that it was acquiring Alliance Spacesystems LLC of Los Alamitos, California.
SolAero manufactures solar power systems for satellites and Alliance makes composite materials that go aboard spacecraft. Brad Clevenger, SolAero CEO, spoke of the two companies' synergies.
"The acquisition combines highly complementary core businesses to create a stronger company that will drive value for our worldwide customer base," Clevenger said in a statement. The combined company will employ about 400 with revenue totaling about $100 million per year, the statement added.

The hall at the Space Symposium has lost some of its largest exhibitors as consolidation continues. The last few years has seen United Technologies Corp. in 2011 buy Goodrich Corp. for $18.4 billion and change its name to UTC Aerospace Systems. The year 2013 saw GenCorp. acquire Pratt & Whitney's Rocketdyne division and combine it with its competitor in the rocket motor business to form Aerojet Rocketdyne.

More recently, satellite and rocket manufacturer Orbital Sciences acquired one of its chief suppliers, ATK.

Neither Harris Corp. nor Exelis, are exclusively in the space business. Both offer a variety of products to commercial and military customers. Jamie O'Keefe, a Harris spokeswoman, said executives couldn't comment at the time on where the two companies may overlap or complement each other. The deal is expected to be completed this summer pending regulatory approval. Until then, they are not at liberty to speak publicly on the deal.

Free to talk was OrbitalATK's Vice President of Investor Relations Barron Beneski, who said the acquisition created a vertically integrated company, which fits with more recent business trends.
The two companies had been doing business with each other for a couple of decades, with ATK being the supplier of several rocket and satellite components to Orbital, which serves as a prime contractor. From a business standpoint, there was little overlap in what they did, he added. ATK had built up,a success sporting goods business, which was spun off.

"We are already seeing the benefits of a combined organization," he said. The deal was announced in April 2014 and was completed Feb. 10. The Department of Justice wanted assurances that there would be firewalls when other satellite makers shared specifications  when purchasing subsystems from the ATK side of the company, Beneski said. ATK specialized in rocket motors, solar arrays, fuel tanks, antennas and heat pumps.

"That was a big piece of the Department of Justice review to make sure that those protections are fully adequate, in place and that we are committed to selling those subsystems on an equal opportunity basis," he said.

About 500 "back office personnel" that duplicated tasks such as accounting and logistics were laid off. But since the two companies had different products, the engineering, science and research and development workforce was kept intact, he said. The company is anticipating about $100 million per year in cost savings.

There are other benefits of vertical integration, he said. "Where ATK  was once our biggest supplier, now we are supplying ourselves," he said.

"For the government customer, on cost reimbursed, cost-plus contracts, they get the savings. We pass the savings on to them because our costs are lower," he said. "That was very well received by the government."

In theory, it will help make the company more competitive and win more contracts, he added. That is the advantage of a more vertically integrated company. "It helps us drive costs out of our products, and make us more competitive on fixed-price contracts."

He cited launch provider SpaceX as an example of how vertical integration creates savings. It manufactures all its subcomponents.

Beneski estimated additional profits of $150 million to $200 million per year by 2017.

Topics: Space