By Graham Warwick in Washington DC
Interim chief executive Mike Strianese says focus is switching from acquisitions to internal streamlining
Mike Strianese was surprised when the market reacted to the sudden death of L-3 Communications chairman and chief executive Frank Lanza on 6 June with speculation that the company he founded would be broken up or sold off. "The wheels aren't coming off because we lost our leader," he says.
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| Strianese: "The wheels aren't coming off" |
L-3's chief financial officer, Strianese was appointed interim chief executive while the board searches for a new chief executive - a position for which he is a candidate. He sees his role as continuing - and fine-tuning - a business strategy that has built L-3 into a $12 billion-plus company.
"I was surprised at the initial reaction, that we would be sold off or broken up," Strianese says. "Frank was our founder and guiding light, but he was not running the company day-to-day. The group presidents are running the business," he says, referring to the C³ISR, Government Services, Aircraft Modernisation & Maintenance (AM&M) and Specialised Products segments that group together the more than 90 companies making up L-3.
Breaking up the company would be a "huge mistake", says Strianese, who does not see any financial advantage. "I don't believe this is a situation where you could get more for the sum of the parts than the company is worth. It is the $12 billion in critical mass that counts." It is a scale that has secured L-3 a place in the upper echelon of US defence contractors. "We knew we had grown up when there was a meeting at the Pentagon and we got invited along with Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics," he says.
L-3 was formed in 1997 with the $525 million purchase of 10 electronics companies that were part of the Lockheed/Loral merger in 1996. Over the years, the company was built up by an unbroken stream of acquisitions, a strategy which will continue, with refinements, Strianese says. "We will continue to pursue acquisitions that fit our business models in core areas. But we will also spend some time doing internal pruning of the businesses we have."
Anticipating a slowing of US defence spending, L-3 is starting to look for internal efficiencies to improve its margins. "We have not spent a lot of time optimising our operations. We can gain by configuring our businesses and consolidating facilities carefully and selectively."
The process began under Lanza, he says, driven in part by the increasing challenge of maintaining L-3's growth rate through acquisitions as the company got larger.
With acquisitions adding around 25% on top of an organic growth rate of 8-10%, L-3 has been growing at around 35% a year. "It's impossible to keep that up. We would have to do $2.5 billion a year in acquisitions," says Strianese. Instead, the company is looking to maintain a steady 5-7% annual acquisitions growth with "good companies that fit L-3".
At the same time, the focus on optimising operations will continue, with the goal of getting profit margins back above 11-12%, where they were before L-3 bought government information-services specialist Titan for $2.65 billion in 2005 - its largest acquisition so far.
L-3 also wants to use some of its free cashflow - expected to exceed $1 billion within a year or two - not just for acquisitions, but to pay down the debt accumulated with the Titan deal, as well as increase dividends and possibly repurchase shares.
There are two reasons why L-3 has not paid much attention before to consolidating its businesses, Strianese says. "It was a function of being in a building stage, with a lot of focus on acquisitions. Then, after 9/11, the growing defence budget kept our factories pretty busy." But 2007 looks likely to be the last of the growth years for US defence, with 2008 bringing a different administration and different spending. "We've got to get ahead of the curve," he says.
Of the four business segments, the area "ripest for rationalisation", Strianese says, is Specialised Products, a grouping of 65 companies that remains closest to L-3's original incarnation as a merchant supplier of electronics to the prime contractors.
While the other three segments act as primes in their own right, Specialised Products "continues our legacy of being a supplier to all the big primes", he says, adding: "Those relationships continue to be important."
Within the subgroups that make up Specialised Products, such as electro-optical/infrared components, L-3 is looking at "how to optimise manufacturing" to improve efficiency. "It will be a culture shift, but not a wholesale shift in the way we do business," he says. In its fuzes business, for example, L-3 consolidated two companies, but kept both engineering teams.
Having purchased Titan and formed Government Services, Strianese does not see much potential for further large acquisitions in this segment. The latest deals were "too pricey" so, with revenues already over $3 billion, the segment will "grow through growing marketshare, with small acquisitions to fill gaps".
Acquisitions continue in the other segments, meanwhile. The May takeover of Florida-based Lockheed Martin C-130 maintenance specialist Crestview Aerospace boosted AM&M's hangar capacity, while last month's purchase of Nautronix Defence and the pending deal for TRL Electronics are adding to Specialised Products and C³ISR, while also boosting L-3's presence in the UK - its second biggest market.
While it is business as usual at L-3, despite Lanza's death, speculation the company could be sold persists. Strianese, who has been with L-3 since its formation, is pragmatic: "If someone made an offer for the entire company that provided shareholder value, the board would have to look at it." Absent any offer, L-3 will continue with the strategy that has taken it into the Top 10.
Source: Flight International
