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ITT Exelis (nee Defense) Enters Brave New World of Defense Contracting

ITT Exelis (XLS) is what used to be ITT Defense, one of the component parts of the former ITT Corporation (ITT). That company decided to break itself into three separate parts spinning its defense, water and electronic components into separately traded companies. Reportedly the flat performance of its defense business had been one of the prime factors driving the decision.

In the early Nineties ITT Corporation itself was formed as ITT broke itself apart into ITT Industries; Starwood Resorts, which managed hotels and casinos; and Hartford which sold insurance. ITT Industries changed its name to ITT Corporation in the last decade.

ITT Exelis will now have all of the defense related industries which includes electronic warfare systems, radars, command & control systems, intelligence and surveillance as well as defense services and sensor and networks.

The new company is estimated to have earnings of about $800 million for this year and there are already rumors of the defense component being the target of acquisitions by other larger defense contractors.

ITT follows Northrop Grumman (NOC) which earlier this year separated its shipbuilding piece into a separate company entirely, Huntington Ingalls Industries (HII). Northrop was concerned that with budget cuts and the U.S. Navy’s shipbuilding plans that growth in this area would be very limited. This allows them to separate that sector from other more successful parts of the parent company.

How long ITT Exelis makes its as a unique company depends on how quickly the U.S. defense spending decreases and decisions about what the U.S. and Western Europe buys. If there are smaller amounts of budget available for new electronic systems ITT Exelis could be facing a very limited market. This might make it attractive to someone looking at buying capability and access to specific parts of the ITT Exelis portfolio and would see chunks of the company wither away.

The other question will be if similar moves are made by defense contractors splitting their military and commercial arms or jettisoning pieces that in the view of management and shareholders do not have much upside in the future. Exelis could be the start of a trend.

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