 |
 |
 |
 
|
| |
Equity Firms See Dollar Signs As Defense Companies Sell Units
As the Pentagon examines ways to modernize the U.S. military, Veritas Capital Inc., a New York based private equity investment firm, sees increased opportunities for acquiring mid-sized defense businesses from larger defense contractors.
“We see a lot of opportunities in the component manufacture and subsystems area,” said Robert McKeon, president of Veritas Capital. The firm intends to focus on defense firms with sales of $50 million to $500 million, McKeon said.
In June, Veritas Capital bought a majority share of the Madison, Miss.-based Raytheon Aerospace Co., the aerospace business of Raytheon Co., Lexington, Mass, for $270 million. As the major defense contractors continue to trim their portfolio by focusing on major platforms and systems integration, components and subsystems work is likely to become a non-core activity for such large firms, McKeon said.
Defense companies are stable and less risky than most commercial businesses, and offer an opportunity to work on high technology, global-scale projects, McKeon said, explaining Veritas Capital’s interest in the sector. Eighteen mergers and acquisitions were concluded in the mid-sized defense segment during 1995, but that number rose to 61 completed transactions in 1998, McKeon said. “I would expect that number to increase in the next few years,” he added.
Private equity firms like Veritas Capital, with expertise in investing in the highly volatile telecommunications and high-technology sectors, will be able to apply lessons learned in the commercial world to the defense area, said Jay Korman, analyst at DFI International, a defense consulting firm here. That expertise would be valuable as the U.S. military increasingly is becoming dependent on electronic sensors and systems to fight future wars, Korman added.
Private equity firms create a capital fund by raising money from a small group of investors to buy undervalued companies and resell them for a profit. In the process, such firms bring financial discipline and help to reduce the cycle time from design to production of a weapon system, Korman said.
The Carlyle Group, based here, headed by former U.S. Defense Secretary Frank Carlucci, is considered by analysts to be one of the largest private equity funds active in the defense and aerospace industry, with a $12.5 billion capital fund. In June 2000, the Carlyle Group bought the commercial aerostructures division of Northrop Grumman Corp., Los Angeles, for $843 million.
Veritas Capital currently has a $175 million fund and plans to raise another $300 million, McKeon said.
Many private equity funds have stayed away from the defense sector, since they see the sector as too risky and highly tied to politics, said David Snow, editor of PrivateEquityCentral.net, New York, an online trade news service. “Most [private equity] firms would rather not deal with politics,” Snow said.
The Carlyle Group’s focus on the defense and aerospace sector comes from its extensive contacts here and in other world capitals, Snow said. For instance, former U.S. President George Bush is a senior adviser to the group, and John Major, the former prime minister of Great Britain, was recently appointed as the chairman of the company’s European operations. Veritas Capital, while not boasting of former presidents and prime ministers on its board, counts among its advisers several retired senior U.S. military officials.
Working in a highly regulated industry is not new to many private equity firms, Korman of DFI International said. Many of these firms have invested in the telecommunications and health care industries, which are equally highly regulated and just as politicized as the defense sector, he said. But unlike the telecommunications and health care sectors, there is just one customer in the defense sector, and knowledge of government procurement practices is essential, Korman said.
While defense procurement practices are highly bureaucratic, the benefits are equally rewarding, since “the Pentagon has deep pockets,” he added. 8/6/2001 Return to News
|
|
|
| |
|
660 Madison Avenue, 14th Floor, New York, NY 10021
E-Mail: info@VeritasCapital.com • Tel: 212-688-0020 • Fax: 212-688-9411--> |
|
|
|
|
