2023-07-31 19:35:29 ET
Summary
- The acquisition of Aerojet Rocketdyne by L3Harris Technologies has been finalized.
- Opposition to the merger by Sen. Elizabeth Warren was driven by anti-consolidation and anti-corporate sentiment, rather than fact-driven concerns about competition.
- Investors should consider the remaining upside of a stock set to be bought against the time remaining for the transaction to close and the opportunities offered by the market.
The acquisition of Aerojet Rocketdyne ( AJRD ) by L3Harris Technologies ( LHX ) has been finalized as announced on the 28 th of July. With the acquisition of the rocket motor specialist, it also concludes my coverage for Aerojet Rocketdyne a company that I have been bullish on since I initiated coverage. So, what could this report possibly be about? It’s actually quite simple, there are always lessons to be learned, and I think that holds particularly true for the Aerojet Rocketdyne acquisition. I will discuss why keeping your eyes on the data is important and why even with a buy offer in, keeping your eyes on the market can be more rewarding from an investment perspective.
Data To Provide Policymakers Wrong
One sentiment that was echoed by investors early on is why an acquisition of Aerojet Rocketdyne by L3Harris Technologies would be approved, while the acquisition by Lockheed Martin ( LMT ) faced a lawsuit from the FTC to block the deal.
Sen. Elizabeth Warren wrote the following, opposing the merger:
This deal between Aerojet and L3Harris would reduce competition in the shrinking defense industry to a new low, and I encourage the FTC to oppose this dangerous transaction.
I believe that the opposition to the merger by Elizabeth Warren was not at all by a justified concern on keeping the industry competitive, but was more driven by an anti-consolidation and anti-corporate sentiment. It is indeed true that both Raytheon Technologies ( RTX ) and Lockheed Martin ((LMT)) voiced concerns regarding the takeover by L3Harris Technologies regarding access to rocket motors, fair pricing and IP protection. However, I don’t think it is the case that competition would be reduced. Aerojet Rocketdyne primarily depends on supply work to Raytheon Technologies and Lockheed Martin, and there is not much competition if any, while continued investment in the company and its manufacturing capabilities is needed in the interest of national security. As part of a bigger company, that investment in Aerojet Rocketdyne is more certain. So, you can hardly speak about a reduction in competition. That is just uninformed fearmongering.
The combination with L3Harris is also different in nature as compared to the combination of Aerojet Rocketdyne with Lockheed Martin. The acquisition by Lockheed Martin was a vertical integration where Lockheed Martin would become the owner of one of its key supplier while its competitor, Raytheon Technologies, also depends on supply work from Aerojet Rocketdyne. The setup in which Raytheon Technologies would see its key supplier being owned by a big competitor was far from ideal. This was not the case with the acquisition from L3Harris Technologies, as that acquisition diversified the areas of activity and should be seen as more of a horizontal move. Vertical integration is not prohibited but could have counted on more scrutiny as was the case when Lockheed Martin attempted to acquire the rocket motor specialist. Our evoX Defense Contracts Monitor also showed the difference in area of activity, directly contracted by the Department of Defense Aerojet received contracts in the missiles & ballistic missiles field, rocket launchers and air & missile defense.
Looking at L3Harris’ area of expertise, we see contracts for Communications & Intelligence, Electronic warfare & Countermeasures and Radars & Radar detection. So, L3Harris Technologies and Aerojet Rocketdyne have significantly different areas of expertise with little to no overlap. Just this data driven insight would have shown how weak the point of those opposing the acquisition really is.
Lesson 1 for investors most definitely is to inform themselves with data and not blindly go by what others, including policymakers, state.
Aerojet Rocketdyne Stock Underperformed In Recent Months
One thing that investors should also take note of is whether the time to wait for the upside towards the buyout offer is worth the wait. In August 2022, I marked the stock a buy and the performance has been terrific with a 40.6% return compared to 9.6% for the broader markets. While we have seen some buy ratings for the stock since the acquisition was announced late last year, I marked the stock a hold noting that much of the upside towards the buyout price had already been priced in and limited upside remained. Since then, the stock has returned 4% compared to almost 19% for the broader market. So, just having a buy offer in does not always mean that the remaining upside is worth waiting for, sometimes in the time it takes for a deal to close the market offers more compelling investment opportunities.
Lesson 2: Consider the remaining upside for a stock that is set to be bought against the time remaining for a transaction to close and the opportunities that the market offers during that “waiting time”.
Conclusion: Keep Your Eyes On The Money
The Aerojet Rocketdyne acquisition provided the upside I saw in the stock, even though there have been suggestions that the acquisition should have been blocked. For investors, I think the valuable lessons are to continue doing your due diligence, don’t overreact and keep a data focused approach to test even the statements of policymakers. Furthermore, investors should continuously assess whether the remaining upside is worth the wait because the market might offer more compelling investment opportunities. In case of Aerojet Rocketdyne, just putting your money in a market tracking fund would have resulted in bigger gains. So, always keep your focus on where there is money to be made, and that is quite often not in a name for which a buyout is pending finalization and regulatory approval.
In a market that at times gets ruled by emotion, a knowledgeable and fact-driven approach can yield superior returns both on the end of identifying entry points as well as exit points.
For further details see:
The Aerojet Rocketdyne Lesson: Eyes On Facts And Opportunity