Sometimes, nothing improves a company’s outlook like a smart, well-timed acquisition. When done right, these deals can transform companies with unexciting prospects into compelling growth stories.

Mid-size defense firm Harris Corp. (NYSE: HRS) is set to make such a transformation this summer, when its $4.8-billion buyout of industry peer Exelis, Inc. (NYSE: XLS) is scheduled to close.

Harris, known for secure tactical radio communication systems, wasn’t in trouble before the deal announcement, but it certainly wasn’t in expansion mode, either.

By fiscal (June) 2014, annual sales had actually returned to the recession level of about $5 billion, despite a brief spike to nearly $6 billion a few years earlier. Earnings per share of $4.95 in 2014  weren’t much better than 2010 and 2011’s totals of $4.28 and $4.60, respectively.

Harris has been a good dividend source, more than doubling its payout since 2010. If not for that, the stock probably wouldn’t have been able to deliver solid gains over the past five years. In all likelihood, shares were driven up mainly by income investors seeking higher yields than were typically available in bonds.

To avoid shedding market value as the Federal Reserve raises interest rates, Harris will need to provide something other than income, namely growth. That’s where Exelis comes in.

The acquisition will immediately boost sales by more than 60% to an estimated $8.2 billion. It’ll also make Harris the eleventh-largest federal government contractor, up from number 30. This is due to increased exposure to the Department of Defense (DoD), the Commerce Department and other federal entities that form the bulk of Exelis’ customer base; about half of projected revenue will come from the DoD.

#-ad_banner-#These are timely developments, as defense spending will rise a bit in 2016 after five years of cuts. Thanks to Exelis, Harris will be a larger player in a couple of defense areas slated for greater funding: intelligence, surveillance and reconnaissance (ISR), along with information technology (IT).

In the IT market, Exelis recently signed a deal to perform software/systems design, implementation and maintenance for the Department of Homeland Security. Other major IT customers include the U.S. Army, the U.S. Navy, the Swedish Navy and the Norwegian Coast Guard.

Among the types of IT systems Exelis provides: advanced missile warning; tactical signal jamming; shipboard command and control; and submarine weapons targeting. Importantly, the firm’s IT portfolio complements those of Harris, which includes information networks for voice, data and video communication; cloud services; and cyber security.

Once combined, the two firms will also boast highly diverse ISR services. Among these: jam-resistant radio communications; night vision goggles; high-resolution infrared surveillance systems; military satellite technology; audio and visual data analysis systems; and unmanned surveillance technology.

Outside of defense, the Exelis deal should enhance an already solid relationship with the Federal Aviation Administration. Over the years, the FAA has awarded Harris numerous multi-million dollar contracts to help upgrade communications and data sharing throughout the air-traffic control system.

By owning Exelis, Harris gets in on other lucrative FAA-authorized projects aimed at modernization, such as the installation of state-of-the art ground stations that determine aircraft position and the development of satellite-guided air-traffic procedures.

Exelis also provides an excellent entrée into the National Aeronautics and Space Administration, where Harris’ presence has traditionally been low. However, NASA is Exelis’ fourth-largest federal-government customer.

Its recent work for NASA includes a $435-million, multi-year contract to provide specially designed antennae, communications technologies and maintenance facilities for the agency’s deep space network, or DSN. The DSN is helping to develop an international system of communications complexes designed mainly to support deep-space exploration with robotic spacecraft.

Exelis also has a NASA contract to adapt laser technologies for use in studying climate change. And it’s the prime contractor for the agency’s Space Communications Network Services, a program that provides communications and tracking capability for the space shuttle, international space station and other spacecraft.

With projected budgets of roughly $18 billion annually through 2019, NASA is a good government customer to have. Most of its budget goes for contracting, notes Bloomberg’s government analyst Jesse Holler.

While Harris and Exelis complement each other well, there is a bit of overlap. For instance, both offer similar types of technical support for the DoD and some comparable satellite surveillance technologies.

Eliminating redundancy could take a few years, but should eventually lead to $100-to-$120 million a year in cost savings, analysts estimate. Profits should pick up considerably from the roughly 2% overall growth rate of the past few years.

Risks To Consider: The Exelis acquisition is being funded mainly with $3.6 billion in debt, enough of an additional burden for Moody’s Investors Service to downgrade the credit rating for Harris’ senior unsecured bonds to Baa3 from Baa1. Moody’s also issued a negative outlook, which means further downgrades are possible if Harris doesn’t sufficiently deleverage its balance sheet within a couple of years.

Action To Take –> Although investors should monitor Harris’s debt, it’s not something to be overly concerned with. Ratings downgrades are common for firms making large acquisitions, and for Harris the outcome should be positive. It still has an investment grade credit rating, and the transformative nature of the Exelis acquisition should enable the profit growth necessary to satisfy Moody’s bond analysts.

The stock remains widely underappreciated, though. Shares carry a price-to-earnings ratio of 16, 11% cheaper than the industry average and a 20% discount to the S&P 500.

Sterne Agee analysts estimate 11% near-term upside for Harris to $90 a share, with a longer-term target of $100 as acquisition-related synergies are achieved.

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