The rules of the Defense Industrial Base are officially changing.
In a move that signals the end of passive procurement, the Pentagon announced a $1 billion direct investment into L3Harris Technologies (LHX)‘s rocket motor business. The deal, structured as a convertible security, paves the way for the unit to be spun off into a new publicly traded company in late 2026.
🔥 THE DEAL STRUCTURE:
- The Investment: $1 billion in government convertible securities (converting to equity upon IPO).
- The Spin-Off: L3Harris will carve out its Missile Solutions unit (supplier for Patriot, THAAD, Tomahawk) but retain majority control.
- The Market Reaction: Shares of $LHX surged 11.4% pre-market.
🏛️ THE NEW “ARSENAL OF FREEDOM” STRATEGY: This is the first outcome of the DoD’s “Go Direct-to-Supplier” initiative.
- The Goal: Bypass prime contractor layers to secure the supply chain for critical munitions.
- The Precedent: Follows the administration’s 10% stake in Intel and aligns with Commerce Secretary Lutnick’s hint at taking equity in major defense firms.
- Under Secretary Michael Duffey: “We are fundamentally shifting our approach… By investing directly in suppliers we are building the resilient industrial base needed.”
⚠️ THE CONFLICT OF INTEREST: The deal creates a complex new dynamic: The Pentagon will soon be both the Customer and a Shareholder of a company bidding on contracts against rivals like Lockheed Martin and RTX.
- The Risk: Competitors may argue this creates an uneven playing field.
- The Reward: The government stands to profit if the 2026 IPO is successful, potentially turning procurement dollars into investment returns.
💡 ANALYST TAKEAWAY: This is “Industrial Policy” on steroids. By taking an equity position, the Trump Administration is signaling that Solid Rocket Motors (SRMs) are now considered a sovereign strategic asset, too critical to be left solely to private market forces. Expect Aerojet Rocketdyne (L3Harris) and Northrop Grumman to face intense scrutiny—and potentially new funding opportunities—as the DoD reshapes the market duopoly.
👇 GovCon Leaders: Does the DoD owning equity in contractors solve the supply chain crisis, or does it destroy fair competition?