On Friday commercial remote sensing company GeoEye surprised many in the space field when it announced an unsolicited offer to acquire its chief rival, DigitalGlobe. GeoEye is offering $17 per share in cash and stock, valuing DigitalGlobe at $792 million, a 26% premium compared to DigitalGlobe’s stock price at the close of trade Thursday. (DigitalGlobe stock soared in trading Friday, closing at $16.44 a share.) DigitalGlobe has not formally responded to the offer, although executives of the two companies have apparently been discussing a potential merger, as GeoEye notes in its letter to DigitalGlobe included in the press release. (Update: Sunday afternoon DigitalGlobe formally rejected the offer, saying it undervalued the company.)
While not explicitly stated in the announcement, a key factor driving the proposed deal are cuts in the Defense Department’s budget to acquire commercial satellite imagery. Both companies have “EnhancedView” contracts with the National Geospatial-Intelligence Agency (NGA). The contracts, awarded in August 2010, are valued at a combined $7.3 billion over 10 years. However, the proposed fiscal year 2013 budget would cut spending on those contracts significantly: from $540 million to $250 million, according to a recent Reuters report. (The details of the NGA budget request are classified.)
“Given this uncertain political and fiscal climate, we believe it is in our mutual interest to provide our customers with creative solutions to problems rather than passively speculate on one or another outcome,” GeoEye president CEO Matt O’Connell wrote to his counterpart at DigitalGlobe, Jeffrey Tarr, in a letter proposing the acquisition.
A week before the proposed merger, executives in the commercial remote sensing industry, along with some of its commercial customers and even government officials, raised concerns about the proposed EnhancedView cuts during a forum on Capitol Hill organized by the Space Enterprise Council. Their concern was that the proposed cuts were putting industry in a corner, since they were already making large investments in developing new satellites to meet the demand of the EnhancedView contracts, only to have that major source of revenue threatened.
“You can’t tell industry that we need you to bring these novel approaches forward, we need you to invest along with us, we need you to share the risk with us, and then, six months into a ten-year program, propose cuts,” said Kyle Schmackpfeffer of ITT Exelis, a company that has developed imaging systems for both DigitalGlobe and GeoEye. (The “six months” he cited referred to an earlier, smaller budget cut in EnhancedView proposed for fiscal year 2012.)
Others warned that the proposed cuts could sour the financial community on this industry, jeopardizing future private investment at a time when other countries are closing the gap in the capabilities currently offered by US commercial satellites. “EnhancedView was a really good idea at the time by having a public private partnership. Wall Street was involved, and there was a lot of support,” said Eve Douglas of the Department of Commerce’s Office of Space Commercialization. If the proposed cuts go through, she warned, Wall Street was unlikely to invest in this industry again.
What wasn’t discussed during that earlier forum was the possibility that the two companies might merge, combining their resources and consolidating their contracts. That, though, may be the solution the companies have to adopt in response to reduced spending from their biggest customer.