Boeing is buying combat engineering firm Argon ST for about $775 million, reflecting a shift by defense contractors seeking to accommodate a Pentagon that now wants high-tech intelligence tools as much or more than big guns and heavy armor.
The Pentagon is cutting some big weapons meant for conventional wars out of the budget while it shops for technology better suited to fight against shadowy insurgent groups in places like Iraq and Afghanistan.
Argon ST Inc. is a Fairfax, Va., company that develops a variety of systems used in surveillance and combat. That includes reconnaissance equipment mounted on planes, sensors meant to warn of an approaching enemy and special sights to help troops locate snipers in urban warfare. Its primary customers are the Air Force, Navy, and Department of Homeland Security.
Roger Krone, head of Boeing's network and space division, said the company was interested in Argon because of the changing priorities at the Pentagon and the fact that warfighting technologies are "going to be the really important markets in the future."
Boeing gets roughly half of its revenue from government defense, space and security contracts. It makes fighter jets, cargo planes and is expected to compete against Airbus parent European Aeronautic Defence and Space Co. for a $35 billion contract to build a new fleet of refueling jets.
Yet Defense Secretary Robert Gates has canceled a number of big contracts in recent years. That includes breaking up a huge Boeing contract last year to oversee of construction of new armored vehicles and other battlefield hardware for the Army.
Gates has begun to focus on smaller weapons, like precision missiles, unmanned planes that can snoop on insurgents, and special forces. The technology and strategy is intended to aid U.S. forces engaged in counterinsurgencies that they face in rough terrain of Afghanistan, urban zones like Baghdad, and elsewhere.
There is also an attempt to ease the financial burden of the nation's war effort. Earlier this week, Gates said he planned to save up to 3 percent annually on defense contracts by pushing defense firms to cut overhead.
The deal shows the willingness of big contractors to make acquisitions as they try to match the Pentagon's shifting priorities, analyst Brian Ruttenbur of Morgan Keegan wrote.
"We believe companies in this space are attractive targets for the larger defense contractors who all have strong balance sheets but are facing slowing growth opportunities," he wrote.
A host of companies that could be buyout targets saw shares rise Wednesday. Shares of rival Applied Signal Technology Inc. rose 8 percent.
Boeing's offer of $34.50 per share is a 41 percent premium to Argon's closing price on Tuesday. Argon said its board has approved the takeover and plans to recommend it to shareholders. The deal is expected to close in the third quarter. Once acquired, Argon will be a standalone subsidiary of Chicago's Boeing Co.
Argon reported $366 million in revenue during the 2009 fiscal year, has about 1,000 employees and operates in several states. The company's CEO, Terry Collins, was the largest shareholder with a 12.4 percent ownership stake as of a company regulatory filing in January. He stands to make $93.7 million on his shares if the deal goes through at the proposed price.
The deal is expected to close in the third quarter.
Boeing shares fell 29 cents to close at $62.75 while Argon shares skyrocketed 40 percent to $34.29. They hit a new annual high of $34.37 earlier in the session.