1. Global Terror and the Defense Industry
presented to the
presented to the
International Institute for Counter Terrorism's
7th International Conference
September 2007
September 2007
Joshua Yeres
Senior Defense Industries Analyst for Giza Singer
Even Economic and Financial Consulting Ltd
www.gse.co.il
1
2. Giza Singer Even Ltd
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, energy, retail
energy
telecommunications, transportation and manufacturing.
The GSE comprehensive solution: Financial Advisory,
Transaction Services, Financing (equity and debt) and Anti-
2 trust Consultancy.
3. 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 $2Billion revenues/annum required
due to low profit margins (avg. net profit 5%) – GSE assessment
3
4. Specific Characteristics & Issues
1.Negotiating:
• Complexity of contractual agreement: Buying Customer (off-
the-shelf product) vs Developing Customer (tailor made)
• Negotiating simultaneously with several potential customers
Initial Secondary Initial Advanced Closing
sorting sorting Negotiations Negotiations
Success Probability
4
5. Specific Characteristics & Issues
2. Pipeline of orders
3. Financing and Guarantees
4. Inventory: LCC (Life Cycle Cost) Model, Spares
5. Ownership
Government
Joint
Commercial
5
7. Arms Agreements Worldwide ($B)
Arms Agreements:
Leading Indicator
Total Market - over
$40 B
Developing
Countries - 33%
of total
• Developed Countries: US,
Russia, W. Europe, Australia,
New Zealand, Canada, Japan
• Developing Countries: the rest
7 Source: CRS
8. Arms Agreements – by Supplier ($B)
U.S. Russia
Arms
Agreements:
Leading
Indicator
Major West European All Others
Increasing
market
diversification
In billions of constant
2005 dollars
8 Source: CRS
9. Map of Worldwide Competition
Suppliers Customers
USA
companies USA
Companies in The Challenge for Israeli
(Israel) Developed Developed
Defense Companies
Countries Countries
Third World Developing
Companies Countries
1. Is the Developed Countries Market large enough to justify development of
advanced weapon systems by advanced producers in other 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 ?
9
10. Market Environment
Early ’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 (?)
10
11. Defense Industries - Capital Structure
Government
Early ’90s: Government owned Budget
Mid ’90s: Privatization and
Consolidation
Late ’90s – early ’00s: Corporate
structure, increased involvement of
Start-up’s
Corporate
Finance
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12. 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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13. 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
13 * Based on Jane’s Strategic Advisory Services
15. 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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16. Defense Spending to Continue to Increase
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 (Janes
Aug 31 2007),
4. Georgia to boost defense budget by 33% (by $200m to
$600m) – (Janes Aug 30 2007)
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17. 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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22. Comparative Yield Analysis
• 700Comparison of Market Index (Nasdaq index) to a synthetic
weighted index of Nasdaq listed Aerospace & Defense Comp.
600
• 300% higher return than Nasdaq during last 5 years
• 500Presents “hedging” characteristics against “bad times” (like
gold)
400
300
200
100
0
09/2001
5
6
8
9
1
2
3
5
6
7
99
99
99
99
00
00
00
00
00
00
/1
/1
/1
/1
/2
/2
/2
/2
/2
/2
08
12
05
09
01
06
10
03
07
12
Defense Index Nasdaq Dow Jones
22
23. Some Words Of Caution
700 1. Indicative of trends over time
600
2. Doesn’t represent any specific company
3. Includes civilian aerospace activities (were hurt after 9/11)
500
4. Does not take into account non-public companies
(The defense industry – more than any other sector – is characterized by a
400 significant number of government and/or private companies)
300
200
100
0
09/2001
5
6
8
9
1
2
3
5
6
7
99
99
99
99
00
00
00
00
00
00
/1
/1
/1
/1
/2
/2
/2
/2
/2
/2
08
12
05
09
01
06
10
03
07
12
Defense Index Nasdaq Dow Jones
23