Dominick & Dominick Managing Director and Analyst James McIlree said both companies were making an intelligent decision as the market anticipates continued cutbacks in federal spending and increased competition for limited government contracts.

   “The DigitalGlobe/GeoEye merge did not come as a surprise to us, as it’s a logical step for both companies,” McIlree said in a July 24 research note. “We believe there will be significant cost savings that could be realized, as well as capital spending savings. Additionally, the combined business stands a better chance of competing with other internal government agencies that are positioning themselves to receive funding.”

   Some analysts suggest that the initial reaction could have been the result of market confusion, as DigitalGlobe had rejected a GeoEye buyout offer for approximately $800 million as recently as this past May. GeoEye shares fell almost 25 percent in June after the U.S. National Geospatial Intelligence Agency (NGA) scaled back on its EnhancedView contract with the company.

   In a separate research note, Raymond James Analyst Chris Quilty seconded McIlree’s sentiments and stressed that the merger’s potential synergies and $1.5 billion in cost savings are tangible and achievable.

   “We believe operational cost savings of the new entity could total between $90 million and $120 million per year and are affirming our strong buy rating on both companies following the July 23 announcement,” said Quilty. “We fully expect DigitalGlobe to outperform on both cost-saving and revenue metrics over time. In agreeing to merge, the two companies may have short-circuited their argument for greater EnhancedView funding, assuming that there is no extension for GeoEye. DigitalGlobe gains a ground spare satellite, production and analytic capabilities, and increased exposure to faster growing commercial market opportunities. DigitalGlobe management has also indicated that the new entity would reduce the size of its constellation from five satellites to three, which could force the NGA to pony up if they want or need additional capacity.”

   DigitalGlove expects to close the deal sometime between the 2012 fourth quarter and the 2013 first quarter, pending regulatory and shareholder approvals. Once completed, DigitalGlobe shareholders will own about 66 percent of the new Colorado-based entity and GeoEye shareholders will hold the remaining 34 percent.