(Reuters) - Harris Corp (>> Harris Corporation) will buy Exelis Inc (>> Exelis Inc) in a deal valued at about $4.75 billion, combining two big suppliers to the U.S. military at a time when the government is squeezing spending on defense.

Shares of Exelis soared as much as 37.4 percent to a record $24.34 on Friday, topping the $23.75 per share cash-and-stock offer from Harris.

Harris shares jumped as much as 12.7 percent to a record $78.30.

U.S. defense contractors, including Lockheed Martin Corp (>> Lockheed Martin Corporation) and General Dynamics Corp (>> General Dynamics Corporation), have cut costs and increased their international exposure as the Pentagon tries to reduce spending by $1 trillion over a decade.

Exelis, a company spun off from ITT Corp (>> ITT Corp) in 2011, said in September it would work more closely with the U.S. Air Force and Navy, which have fared better in recent defense spending cuts than the Army.

The company makes antennas for military aircraft, domes for Navy ships, sonar systems and GPS navigation systems. Harris's products include intelligence, surveillance and reconnaissance systems.

Harris Chief Executive William Brown, who will lead the combined company, said the deal was "transformational" and would expand scale, technology and customer base in existing markets.

In an interview with Reuters, Brown described the acquisition as "straight down the fairway" — a combination of two companies with similar cultures and many of the same customers.

Brown said the prospect of rising U.S. defense spending beyond 2015, as well as current low interest rates, convinced him to proceed with a deal conceived after Exelis spun off its lower-margin government services business last year.

"A number of factors ... had me convinced that this was the right time and the right company to acquire," said Brown, adding that Harris does not expect to encounter any major antitrust concerns.

The offer values Exelis, codenamed "Maple" to Harris's "Hotel" during negotiations, at about $4.44 billion, based on shares outstanding as of Oct. 28.

On a pro forma basis for the year ended Dec. 31, the combined company would have recorded revenue of $8.2 billion and earnings before interest, taxes, depreciation and amortization of about $1.6 billion.

Harris shareholders will own about 85 percent of the combined company, which will have about 23,000 employees.

Byron Callan, analyst with Capital Alpha Securities, said there were few mid-sized defense contractors left to consolidate but that some of the bigger companies could divest underperforming units.

"It will be more about ripples than a tidal wave," he said.

Morgan Stanley & Co LLC is adviser to Harris and Sullivan & Cromwell LLP is principal legal counsel. J.P. Morgan Securities LLC is advising Exelis, and Jones Day is legal counsel.

(Additional reporting by Ankit Ajmera and Sagarika Jaisinghani in Bengaluru; Editing by Saumyadeb Chakrabarty, Steve Orlofsky, Robin Paxton and Joyjeet Das)

By Andrea Shalal and Subrat Patnaik