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Textron Acquires Overwatch
Systems
It's been half a century since the Pentagon's
requirement to direct its combat forces first began to
be addressed with a double-barreled acronym:
command and control (C2). Then came revolutions in
the fields of telecommunications and computing
which allowed the Pentagon to set its sights higher,
tacking on two more "C"s to the acronym
(for "communications" and "computers") and an "I"
(for "intelligence", the ineffable human quality which
animates all that technology).
Then, in the early 1990s, came the first Gulf War.
The frustrating hunt for Saddam's Scud launchers
highlit the shortfalls in C4I, and before the decade
was out, the verdict was in: it wasn't enough to
command, control, or communicate with your assets
— not even with computers, not even guided
by intelligence. No, unless you had Surveillance and
Reconnaissance feeding into the system, C4I might
just as well be dropped in favor of "GIGO" (for
garbage-in, garbage-out).
Thus did the current C4ISR acronym come into
being, a ponderous accretion of half a century's
worth of change in technology and military doctrine.
Somewhere in all those letters and numbers a simple
idea got lost: that a military force needs to hurt the
enemy more than he can hurt you, using technology
as a force multiplier. That's the idea behind the
Pentagon's newest double-barreled catch phrase:
the sensor-to-shooter chain (a coinage so simple
that as yet the Dept. of Defense has felt no need to
tag it with an acronym).
It's the people who understand the
sensor-to-shooter chain, and have a strategic sense
of how to package and sell that knowledge to the
Pentagon, who have realized some of the richest
returns in recent memory for the defense industry.
And few people exemplify the gold-rush quality of the
marketplace like William R. Craven, the man who in
three-and-a-half short years took Overwatch
Systems from acquisitions vehicle to acquisitions
magnet.
A short look at Mr. Craven's eventful career helps
set the stage for understanding this deal. He was
hired into the defense industry in the mid-1990s to
lead Paravant, Inc., a provider of digital battlefield
equipment to the U.S. Army and Air Force and
high-speed signal intelligence processing systems to
U.S.
intelligence agencies. He engineered a successful IPO
in 1996 and then a series of four acquisitions of
defense and intelligence companies. In 2002
Paravant was sold to DRS Technologies for $110
million — more than twice its revenues of $52
million.
It was a strong performance, but Mr. Craven was
just getting warmed up. In Jan. 2004 he created an
acquisitions vehicle, Federal Information Technology
Systems LLC, which he swiftly moved to fill out with
five targeted acquisitions: Austin Info Systems Ltd.,
Sensor Systems Inc., IT Spatial Inc., Paragon
Imaging Inc. and Visual Learning Systems. A year ago
Mr. Craven's vehicle received the catchier
name "Overwatch Systems LLC." And now, only three
years after the company made its first deal, Mr.
Craven has tied a ribbon around Overwatch's
well-integrated holdings and sold them for the
eye-popping figure of 325 million dollars.
We find the comparison interesting: Paravant
already existed when Mr. Craven came aboard in
1996, and it took six years and an IPO to get it to
the sales price of $110 million. But it took only half
that time for Mr. Craven to create Overwatch from
scratch and sell it for price tag which was nearly
three times higher.
What made the difference?
We could throw out a few explanations…
September 11th, Mr. Craven's deeper industry
experience, the current hot market for intelligence
companies. Surely all three played some role. But we
think a fourth factor probably outweighed the others:
the decision to build Overwatch Systems with private
equity capital rather than through a public offering.
And this wasn't just any private equity capital
— owner Kelso & Co. had already been
recognized for its acquisitions-driven tenure as owner
of TransDigm, a Cleveland-based supplier of highly
engineered aircraft components which it sold in 1998.
With no requirement to meet quarterly earnings
expectations, and exempt from the Sarbanes-Oxley
requirements which hobble other smaller publicly held
companies, and with ready access to all the cash it
needed, Overwatch was able to quickly to seize on
opportunities as they presented themselves. And the
company wasn't just nimble, but smart, targeting all
five of its acquisitions at a single sub-niche within
the C4ISR marketplace: image analysis and
exploitation.
This capability represented an attractive fit for
Texton Systems, which in recent years has built a
Tier 1 business in unattended sensors (which we can
only imagine are getting plenty of use along Iraq's
borders with Iran and Syria). This technology gives
the company a beachhead at the "sensor" end of
the "sensor-to-shooter" chain. In July the company
moved to augment its capabilities in this area with
the acquisition of Innovative Survivability
Technologies, a Goleta, Calif.-based specialist in the
research, development and rapid prototyping of
complex electronic, optical and mechanical sensors
and countermeasure systems.
Meanwhile, the company of course already has
the "shooter" end of the chain covered with some of
the most fearsome anti-armor and anti-personnel
ordnance in the U.S. inventory.
And now comes this deal, giving the company a
full-blown imagery analysis capability —
somewhere in the "to" portion of the
"sensor-to-shooter" equation, as it were. It's hardly
an end-to-end capability — not yet. But it's a
sign that wheels are turning up in Textron Systems'
headquarters building in Wilmington, Mass. And
they're meshing well with other wheels at the
Providence, R.I. headquarters of the company's
parent, which undoubtedly is encouraged by
generally expanding operating margins at its Bell
segment (of which Textron Systems is a part).
We don't see too many conglomerates pursuing
technologically-driven acquisitions strategies on
behalf of their defense segments. And we still have
questions about this strategy where Textron is
concerned (like whether Bell and Textron Systems
will someday have an operational reason for being in
the same operating segment). We will watch with
interest where Textron Systems' next gap-filler
acquisition lands.
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