global terror & the defense industries
DESCRIPTION
Effects of Global Terror on the Defense Industry (presented to International Institute Counter Terrorism, Israel 2007)TRANSCRIPT
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Global Terror and the Defense Industrypresented to the
International Institute for Counter Terrorism's
7th International ConferenceSeptember 2007
Global Terror and the Defense Industrypresented to the
International Institute for Counter Terrorism's
7th International ConferenceSeptember 2007
Joshua Yeres Senior Defense Industries Analyst for Giza Singer
Even Economic and Financial Consulting Ltd
www.gse.co.il
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� Largest and leading private, independent economic and financial consulting firm in Israel , with over 20 years of consulting experience.
� Involved in the largest and most complex transactions in Israel (over 6 Billion NIS in 2006 and exceeding 7 Billion NIS by mid-2007).
� Global business relationships with leading American and European investment banks.
� Vast experience in defense , high-tech, energyenergy, retail telecommunications, transportation and manufacturin g.
� The GSE comprehensive solution: Financial Advisory, Transaction Services, Financing (equity and debt) and Anti-trust Consultancy.
Giza Singer Even Ltd
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Specific Market and Company Characteristics
Market:
• Volatile market
• High level of government involvement (diplomatic relations, international scrutiny, licensing)
• Structure of Conflicts (Symetric vs Asymetric)
Company:
• High R&D expenses
• Technology driven supply
• Weapon System Producer vs Sub-system producer
• Complex and long marketing processes
• Critical mass of about $2Billion revenues/annum required due to low profit margins (avg. net profit 5%) – GSE assessment
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Success Probability
Specific Characteristics & Issues
1.Negotiating:
• Complexity of contractual agreement: Buying Customer (off-the-shelf product) vs Developing Customer (tailor made)
• Negotiating simultaneously with several potential customers
Initial sorting
Secondary sorting
Initial Negotiations
Advanced Negotiations
Closing
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Government
Commercial
Joint
Specific Characteristics & Issues
2. Pipeline of orders
3. Financing and Guarantees
4. Inventory: LCC (Life Cycle Cost) Model, Spares
5. Ownership
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World Military Expenditure ($B)
Constant 2005 dollarsSource: Sipri 2007
700
750
800
850
900
950
1000
1050
1100
1150
1200
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
B$
25%+ growth since 2001
AgreementsAgreements
7 Source: CRS
Arms Agreements Worldwide ($B)
• Developed Countries: US, Russia, W. Europe, Australia, New Zealand, Canada, Japan
• Developing Countries: the rest
Arms Agreements:Leading Indicator
Total Market - over $40 B
Developing Countries - 33% of total
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Arms Agreements – by Supplier ($B)
Source: CRS
Arms Agreements:
Leading Indicator
Increasing market
diversification
In billions of constant 2005 dollars
U.S. Russia
Major West European All Others
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CustomersSuppliers
USA
Developed Countries
Developing
Countries
USA
companies
Companies in Developed Countries
Third World
Companies
)Israel(
Map of Worldwide Competition
1. Is the Developed Countries Market large enough to justify development of advanced weapon systems by advanced producers in ot her countries ?
2. Will the advanced producers successfully compete in the “low tech market”against less advanced producers based in Developing Countries ?
3. Where can Israeli companies get the most leverage from their advanced and “battle proven” technology ?
The Challenge for Israeli Defense Companies
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Market EnvironmentEarly ’90s: end of cold war (cuts in defense budgets)
• attempts to transform to civilian uses (tanks to tractors) –unsuccessful
• rise in refurbishment (of existing main weapon systems)
Late ’90s: LIC in / HIC out
• insurgency threats to be dealt with by “Police Actions”
Since 9/11: War on Global Terror
• weapon-systems for war (HIC)
• continued needs of fighting insurgency
• increased outlays for homeland security
Future: Return of Cold War (?)
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Defense Industries - Capital Structure
Early ’90s: Government owned
Mid ’90s: Privatization and Consolidation
Late ’90s – early ’00s: Corporate structure, increased involvement of Start-up’s
Government Budget
Corporate Finance
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Battlefield Requirements – Customer Demand
1. Total War “OUT” / Local Conflicts “IN” – but ….
2. Increase work load of police actions in foreign countries (not defending homeland)
3. Urban setting / Asymetric warfare (Fanatic insurgency coupled with increased lethality of weapons)
4. Shift of struggle from battlefield to international media (TV/web)
5. More Technology (Increased sensitivity to casualties)
6. Increased sensitivity to “collateral damage”
7. Demand for total solution (total knowledge, total control, unification of sensors/weapon sights)
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Defense Industries 2007: General Trends*1. Diversification (technologically and geographically):
• More technology
• More nuanced products (less-than-lethal, protection/body armor, communications)
• More intra-industry (accessing traditionally off-limit markets) and cross border integration (by M&A and or JV)
2. Modernization and Professionalization – from conscript to professional forces (soldier systems and components, C4I, more flexible force)
3. Merging of Defense and Homeland Security Requirements (increase of market size)
4. Increased Competition
5. Increased Sensitivity to Costs* Based on Jane’s Strategic Advisory Services
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Trend in Defense M&A’s Source: Jane’s Strategic Advisory Services
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Defense Industries – Looking to the Future
1. Defense Spending to increase
2. Shift in development business model from in-house R&D to start-up acquisition
3. Accelerated diminishing government involvement –companies must seek sales worldwide
4. Blurring of lines between technology companies and defense industries
5. Shift from governmental budget to corporate profitability (including financing by share or debt public offer)
Bottom Line:
Defense industry more and more dependant on capital markets
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1. USA: US DoD FY 2008 budget ($17B) reflects double 2001 spending (Janes Feb 8 2007);
2. Russia:
• Putin looks to double military aircraft production by 2025 (Janes Aug 13 2007),
• Putin aims to up Russian helicopter production – aim to corner 15% of market by 2025 (Janes Aug 30 2007),
3. Japanese MOD requests budget hike for 2008 (JanesAug 31 2007),
4. Georgia to boost defense budget by 33% (by $200m to $600m) – (Janes Aug 30 2007)
Defense Spending to Continue to Increase
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From gov. budget to corporate profitability
1. Indonesia looking to foreign banks to fund Sukhoi deal,
2. Rosoboronexport says companies may hold IPOs by 2012 (Janes Aug 22 2007),
3. US Bank of West and General Atomics Aeronautical Systems form $300m credit facility (Janes Aug 28 2007),
4. Curtiss-Wright establishes $425m credit facility (Janes Aug
13 2007),
5. PLA increases outsourcing of logisitics to private sector (Janes June 6 2007)
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How Do Capital Markets Rate Defense?
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Investor Growth Expectations
Comparison of Sales Ratio of non representative sample of Defense companies shows increase of appr. 20%between end of 2004 and end of 2006.
Enterprise Value % EV Revenue % Revenue Sales Ratio Revenue based EV basedElbit 1,035 2% 899 2% 1.15 0.02 0.02 Tadiran 407 1% 328 1% 1.24 0.01 0.01 Alliant Techsystems 3,276 5% 2,366 5% 1.38 0.06 0.08 Armor Holding 1,356 2% 771 1% 1.76 0.03 0.04 Ceradyne 598 1% 152 0% 3.94 0.01 0.04 General Dynamics 24,328 41% 19,044 36% 1.28 0.46 0.52 Northop Grunman 29,037 48% 28,958 55% 1.00 0.55 0.48 Total 60,037 100% 52,518 100% 1.14 1.18
2004
Enterprise Value % EV Revenue % Revenue Sales Ratio Revenue based EV basedElbit 1,864 2% 899 2% 1.22 0.02 0.03 Tadiran 372 0% 328 1% 1.44 0.01 0.01 Alliant Techsystems 4,935 6% 2,366 5% 1.53 0.07 0.09 Armor Holding 3,414 4% 771 1% 1.45 0.02 0.06 Ceradyne 1,520 2% 152 0% 2.29 0.01 0.04 General Dynamics 36,508 44% 19,044 36% 1.52 0.55 0.68 Northop Grunman 33,431 41% 28,958 55% 1.24 0.68 0.51 Total 82,045 100% 52,518 100% 1.36 1.41
2006
Weighted Average Sales Ratio (2004): 1.18
Weighted Average Sales Ratio (2006): 1.41
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Comparative Yield Analysis: Strong Growth
0
100
200
300
400
500
600
700
08/1
995
12/1
996
05/1
998
09/1
999
01/2
001
06/2
002
10/2
003
03/2
005
07/2
006
12/2
007
Defense Index Nasdaq Dow Jones
09/2001
GSE Defe
nse Index
Nasdaq Index
Dow Jones Index
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Aerospace and Defense - Product & Services
Source: Nasdaq
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Comparative Yield Analysis
0
100
200
300
400
500
600
700
08/1
995
12/1
996
05/1
998
09/1
999
01/2
001
06/2
002
10/2
003
03/2
005
07/2
006
12/2
007
Defense Index Nasdaq Dow Jones
09/2001
• Comparison of Market Index (Nasdaq index) to a synthetic weighted index of Nasdaq listed Aerospace & Defense Comp.
• 300% higher return than Nasdaq during last 5 years
• Presents “hedging” characteristics against “bad times” (like gold)
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Some Words Of Caution
0
100
200
300
400
500
600
700
08/1
995
12/1
996
05/1
998
09/1
999
01/2
001
06/2
002
10/2
003
03/2
005
07/2
006
12/2
007
Defense Index Nasdaq Dow Jones
09/2001
1. Indicative of trends over time
2. Doesn’t represent any specific company
3. Includes civilian aerospace activities (were hurt after 9/11)
4. Does not take into account non-public companies (The defense industry – more than any other sector – is characterized by a significant number of government and/or private companies)
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Thank You