Harris’ acquisition of L3 puts 2018 on pace for a record

Harris’ $15.6bn purchase of fellow defense contractor L3 Technologies brings the total deal value within striking distance of 2015’s record haul and above any other full-year total since the dot-com bubble. While an industry consolidation play from Harris may have gotten this year to that mark, this transaction looks more like the acquisitions that pushed 2015 to a record than those that are putting 2018 in contention for a new one.

In handing out $15.6bn of its stock for L3, Harris seeks increased scale to compete with still-larger defense players that include Lockheed Martin, Northrup Grumman and Raytheon. This type of large consolidation play is not without precedent for Harris – in 2015, it spent $4.8bn for Exelis, a deal that valued the target at 1.5x trailing revenue, in line with its acquisition today.

According to 451 Research’s M&A KnowledgeBase, the total value of 2018’s tech M&A market stands at $457bn, currently on pace to surpass 2015’s record haul of $577bn. Back then, consolidation among legacy telcos or aging hardware giants bolstered the annual total – that was the year Dell inked its $63bn purchase of EMC and Charter paid $57bn for Time Warner Cable.

This year’s largest deals are distinctly different. Although there’s still plenty of consolidation, including Comcast’s $39bn reach for Sky and T-Mobile’s planned tie-up with Sprint, there’s more diversity of acquirers and buying strategies beyond industry consolidation. For example, there are two venture-backed targets (GitHub and Flipkart) among the top 10, as well as two private equity purchases – not to mention Broadcom’s head-scratching $18.9bn pickup of CA, a transaction that left Wall Street puzzled.

And as more money goes into new strategies beyond consolidation, the largest deals have fetched higher multiples. According to the M&A KnowledgeBase, in the 10 largest acquisitions this year, targets fetched a median 4x trailing revenue, compared with less than 3x among 2015’s biggest.