By Mike Stone

WASHINGTON (Reuters) -Lockheed Martin’s exit from its planned purchase of engine maker Aerojet Rocketdyne has refocused investors on the compounding list of problems at both companies, as pressure grows on Lockheed management to improve lagging performance.

Shares of both Lockheed Martin Corp and Aerojet Rocketdyne Holdings Inc fell on Monday after Lockheed walked away from the deal.

Aerojet said it now planned to deliver value to shareholders by advancing hypersonics and strategic, tactical and missile defense systems. Lockheed said it will focus “on the most effective use of capital with the highest return on investment, including our ongoing commitment to return value to shareholders.”

Lockheed’s problems are stacking up, and exiting the deal dealt a loss to CEO Jim Taiclet who has not been able to deliver significant share price appreciation since taking over in June 2020 in the midst of a global pandemic.

In October, management cut sales expectations for both 2021 and 2022, which sent shares down 12%.

The weapons maker said COVID-19 had hobbled its supply chain, but on its post-earnings call with analysts in October, Ron Epstein with Bank of America forced Taiclet to defend his leadership when he asked, “Where are you taking the company? And what’s the vision here? Because it really seems – and I know this may be – might sound unfair, but it seems a little bit rudderless right now.”

Lockheed’s strategy of facilitating the military “internet of things” has failed to gain traction with investors, analysts have said. Making matters worse, Lockheed’s premiere product, the stealthy F-35 fighter jet, could see softer demand from the U.S. Air Force in coming years. The jet makes up about a quarter of the company’s revenue.

In an interview on Monday, Epstein said, “Their strategy has to pivot. If the defense budget (is) growing low-single digits and you have peer companies that are growing with low-single digits and you’re not, most likely the market’s not going to be pleased with that.”

Cowen analyst Cai Von Rumohr said in a note on Monday that while Lockheed had indicated it could still do mergers, “It’s more likely to seek small technology accelerators rather than larger transactions that might face stiffer regulatory hurdles.” Von Rumohr said that in the near-term it was possible the Bethesda, Maryland-based company could increase its share buyback.

At Aerojet, a top shareholder is seeking to revamp the board of directors.

On Feb. 1, Warren Lichtenstein, Aerojet’s executive chairman of the board, launched a proxy fight to replace three members of the company’s board of directors. He wants to ensure the company has the ability to succeed without the deal.

Aerojet filed a countersuit to a lawsuit by Lichtenstein on Feb. 11 asking the court to appoint a special committee in response to the proxy contest.

(Reporting by Mike Stone in WashingtonEditing by Nick Zieminski and Leslie Adler)

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