Aerojet Rocketdyne

Aerojet Rocketdyne Holdings, Inc. was a prominent American manufacturer of rocket, hypersonic, and electric propulsion systems for space, defense, civil, and commercial applications. Essentially, if something needed to be blasted into orbit or fly at incredible speeds for the U.S. government or its allies, there was a good chance an Aerojet Rocketdyne engine was involved. The company was a critical piece of the U.S. defense industrial base, with a history stretching back to the dawn of the space race. For investors, Aerojet Rocketdyne became a fascinating case study in corporate drama, regulatory power, and strategic value, culminating in its acquisition by defense contractor L3Harris Technologies in 2023. Prior to the buyout, its stock traded under the ticker symbol “AJRD” on the New York Stock Exchange.

The final years of Aerojet Rocketdyne as a standalone company were not for the faint of heart. The story was dominated by two high-stakes acquisition attempts, offering a masterclass in the opportunities and risks surrounding corporate takeovers.

In late 2020, aerospace giant Lockheed Martin announced its intention to acquire Aerojet Rocketdyne for $4.4 billion. The logic was simple: Lockheed is a prime contractor for missiles and space systems, and Aerojet was its key supplier of the propulsion systems that make those products work. Bringing this capability in-house would create a vertically integrated powerhouse. However, the deal immediately raised red flags with competitors and regulators. Other defense companies, like Raytheon Technologies, argued that if Lockheed owned Aerojet, it could potentially restrict their access to critical rocket motor technology or raise prices, giving Lockheed an unfair advantage. The Federal Trade Commission (FTC) agreed, filing a lawsuit to block the acquisition on antitrust grounds. Fearing a long and costly legal battle it was unlikely to win, Lockheed walked away from the deal in early 2022. The news sent Aerojet's stock price tumbling, as the premium offered by Lockheed evaporated.

For the patient value investor, the failed Lockheed bid was not an ending, but an opportunity. The underlying value of Aerojet—its technology, its contracts, and its critical market position—hadn't changed. The company was now “in play,” and another suitor was likely to emerge. That suitor was L3Harris Technologies. In late 2022, L3Harris announced it would buy Aerojet for $4.7 billion, offering a significant premium to shareholders. Because L3Harris was not a direct competitor in the missile manufacturing space like Lockheed, this deal faced fewer regulatory hurdles and was successfully completed in July 2023. For investors who bought in after the Lockheed deal collapsed, the L3Harris acquisition was a profitable exit.

The Aerojet saga highlights several key themes central to value investing.

Aerojet operated in a market with incredibly high barriers to entry. You can't just decide to build a solid rocket motor factory in your garage. The technical expertise, manufacturing facilities, and security clearances required are immense. In the U.S., the market for these critical components is essentially an oligopoly, with Aerojet and Northrop Grumman being the two dominant players. This powerful competitive advantage, or moat, ensured a steady stream of government contracts and durable profitability.

The market often overreacts to bad news. When the FTC blocked the Lockheed deal, many investors fled, fearing the company's prospects were doomed. However, a savvy investor would have recognized that the regulatory action was about who could buy Aerojet, not about the intrinsic value of Aerojet itself. The FTC's action depressed the price, creating a classic value opportunity where the stock was trading for less than its long-term worth.

• Look for “boring” but essential businesses: Aerojet wasn't a flashy tech startup, but it was an indispensable part of the U.S. defense infrastructure. These types of businesses often have the strongest moats.
• Understand the players: In a takeover situation, it's crucial to understand the strategic interests of the buyer, the seller, competitors, and regulators. The failure of the Lockheed deal was predictable to those who understood antitrust concerns in the defense sector.
• Price is what you pay, value is what you get: The story is a perfect example of this famous Warren Buffett quote. The value of Aerojet's business remained stable, even as its price fluctuated wildly on acquisition news.
• Merger Arbitrage can be tricky: While the L3Harris deal ultimately worked out, the failed Lockheed deal shows the risks involved in betting on acquisitions. If a deal fails, the target company's stock can fall sharply.