What Does Lockheed's Leidos Deal Mean For Shareholders?

Security and aerospace firm Lockheed Martin Corporation LMT announced plans to separate its Information Systems & Global Solutions segment and merge it with Leidos Holdings Inc SAI in a $5 billion deal expected to help the firm cut down on taxes and focus on its more profitable businesses, according to the Wall Street Journal.

Lockheed Shares Stumble

Lockheed announced its plans on Tuesday during the company's fourth-quarter earnings call; following the results, the firm's share price lost almost 4 percent. However, many believe that the decline was largely the result of shareholders' worries about the company's failure to meet analysts' expectations for 2016 earnings per share.

Related Link: Lockheed Shares Falling Over 2% On Martin-Leidos Deal

Focusing On Profits

The deal with Leidos is expected to help Lockheed focus on its more profitable defense aeronautics business at a time when government defense spending has begun to stabilize.

The 2016 federal budget has allowed $181 billion for weapons and research spending, a 14 percent increase from the previous allotment. This increase in spending from Washington has given Lockheed a clearer picture of what to expect as far as revenue and has provided more incentive to streamline the company's focus.

Innovation Is Key

Lockheed recently announced plans to purchase United Technologies Corporation UTX's Sikorsky segment, a helicopter maker, for $9 billion. While the acquisition was made less lucrative by a drop in energy prices, which dragged down helicopter sales, many believe that Lockheed is on track to benefit from renewed interest in defense spending in Washington.

The Pentagon has been encouraging defense contractors to innovate more quickly in order to keep pace with ever evolving threats, and Lockheed's latest deals suggest that the company is planning to do just that.

Shareholders Could See Gains

Lockheed shareholders will continue to benefit from the company's extensive buyback plans, which have kept shares performing well over the past year. The company has been criticized for spending on a buyback program rather than investing in innovation, but the Leidos deal is likely to give the company some space to do both.