Helen Massy-Beresford in London
In some companies the role of chief executive may be filled by one anonymous “suit” after another. This was most certainly not the case for US defence electronics specialist L-3 Communications. While the unexpected death of chief executive Frank Lanza has been greeted with sadness and shock from colleagues and industry counterparts alike, the stock market has reacted to the event as one that could fundamentally alter the company’s future.
Lanza, who was recovering from surgery, died on 6 June, and while the company has moved quickly to fill the gap, albeit temporarily, appointing L-3’s chief financial officer Michael Strianese to succeed him on an interim basis and giving L-3 director Robert Millard the role of non-executive chairman, many in the industry believe that the business Lanza built up will not survive intact now he is gone.
Wall Street seems to agree – L-3 shares spiked in the days following Lanza’s death, as the defence electronics company looked increasingly like a takeover target.
Lanza built up L-3 through numerous acquisitions to create a loosely aggregated whole, following a similar model to the one he employed in the creation of Loral before it was eventually sold to Lockheed Martin, and parts of which formed the basis for L-3.
In a bid to climb up the supply chain, and move from being a products supplier in favour of becoming an integrator, L-3 bought first Integrated Systems from Raytheon and then government IT specialist Titan. But although the company is less product-focused than it once was, this area of the business still accounts for around 50% of its activities and would undoubtedly limit the list of companies that would consider bidding for it.
In the UK there has been extensive speculation about BAE Systems. The company is known to be on the look-out for acquisition targets in the USA. Last year it bought United Defense Industries (UDI) and huge military budgets make the market appealing for the UK-based company. L-3 has been widely touted as the company’s next accquisition target and, as it moves towards the sale of its 20% stake in Airbus, BAE Systems will soon have the cash it needs to fund expansion in this lucrative market.
But there is a large question mark over whether L-3 fits in with BAE’s ambitions, beyond the obvious wish to expand its US footprint. One London-based analyst argues that L-3 is too diversified, and that BAE is unlikely to want the “bag of bits” it has to offer. Although L-3 complements BAE’s North American products business, it would not further the company’s ambition to become a US prime. Deutsche Bank analyst Ben Fidler adds: “We would be very surprised if BAE were to go for L-3. It is too big, too expensive and too diversified.” BAE declines to comment.
So if BAE does not want to buy L-3, who will? The names of most of the big US defence contractors have been bandied about in the last weeks: Raytheon, Lockheed Martin, Honeywell, Northrop Grumman, Boeing and General Dynamics have all been cited. Thanks to the way it grew up, L-3 has over the years acquired elements of other businesses, so it remains to be seen how attractive a target it will be to those entities, which in any case are not pursuing a goal of vertical integration that could be furthered by buying L-3.
Perhaps the company could be attractive to a European defence company looking to consolidate its US footprint? Another possible scenario is that parts of the group could be sold individually. Although US-based private equity group Carlyle declines to comment, it is understood to be interested in snapping up certain parts of the business, if they were available separately.
Of course, L-3 could continue doing what it has been doing so successfully since its inception. Mike Richter, co-president of investment bank Jeffries Quarterdeck, was adviser to L-3 for 15 deals, including its acquisition of the UK’s Nautronix Defence last week. He believes that if L-3 is sold the most likely candidates for acquiring the company are BAE or Carlyle, or a combination of the two, with Carlyle taking on the parts of the business that for political reasons BAE is unable or unwilling to buy.
However, he is convinced that the most likely route L-3 will take is to maintain its independence. “Mike Strianese is emerging as a very strong candidate to be the permanent chief executive of the company,” he says, adding that the doubts over whether anyone can take on Lanza’s legacy would be lessened if, rather than being an outsider, his successor had worked closely with him in the past.
Whatever the outcome of the next few weeks, one thing is certain. While speculation over L-3’s future has fuelled recent share price hikes, the uncertainty over the company’s future will soon translate into dwindling investor confidence: L-3’s next move must be resolved quickly.
Source: Flight International
