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Truman
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JRD Aerojet Rocketdyne trades lower as deal with Lockheed Martin gets terminated (36.98 -2.04)

Aerojet Rocketdyne (AJRD 36.98, -2.04, -5.2%) is trading lower on news that its deal to be acquired by Lockheed Martin (LMT) has been terminated. AJRD makes rocket propulsion systems and hypersonic engines for space, defense, civil, and commercial applications while Lockheed Martin is a major defense customer. Given the companies’ seeming compatibility, the deal made sense to us when it was announced in December 2020.

First off, the deal’s termination does not come as a big surprise. Last month, the FTC filed a lawsuit to stop the deal, citing anti-competitive concerns. We can see why the FTC had reservations. Lockheed Martin is AJRD’s largest customer at 34% of sales, but LMT rival Raytheon (RTX), which is a major supplier of missiles to the Department of Defense, is also a key customer at 17% of sales.
Raytheon has been vocal about its opposition to the deal, understandably. Solid fuel rocket motors are clearly a vital component for the US missile industry. The deal would have given LMT a big advantage, as there would be concerns that LMT would favor its own needs over those of its competitors. There are not a lot of alternative rocket makers.
When the FTC announced the lawsuit last month, we figured there was a less than 50% chance that the deal would go through. LMT could have fought the lawsuit, but that would have taken a lot of time and resources without guarantee of success.
Going forward, this cancellation certainly lowers the likelihood that AJRD could get acquired and almost certainly eliminates the possibility of a defense company buying it. We could see a non-defense company acquiring it, such as a propulsion-related company in the aerospace supply chain. But AJRD sounds confident that it can stand on its own, saying today that it is confident in its future performance and noting that it has an impressive backlog that is more than 3x the size of its annual sales.
Bottom line, when the deal was announced in late 2020, we had reservations about its potential to go through, and when the FTC filed its lawsuit last month, we felt the deal was on life support. That explains why shares of AJRD are not down more today; the stock had already taken a hit upon the filing of the lawsuit.

We note that this is the second major deal to fall apart in as many weeks. Last week, NVIDIA (NVDA) backed out of its deal to acquire SoftBank’s Arm Holdings owing to significant regulatory challenges. These terminations are a reminder that not all deals close successfully, especially ones in which the target company is a key supplier to the acquiring company’s rivals. We are sure that the rivals were very vocal to the US government in both deals, and those concerns gained traction.

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