Finmeccanica Targets U.S. Defense Firm

Team Infidel

Forum Spin Doctor
Wall Street Journal
May 12, 2008
Pg. B3
Purchase by Italians Could Boost Contracts With American Military
By Daniel Michaels
In the past decade, Rome-based Finmeccanica SpA has clawed its way up the ranks to become one of Europe's leading defense-and-aerospace firms by pulling off a string of acquisitions and winning key contracts from Washington to Moscow.
But its plan to bid for defense contractor DRS Technologies Inc. could mark a new hurdle. New Jersey-based DRS makes strategically sensitive technologies such as electronics and equipment used by the U.S. Department of Defense and police forces.
To date, foreign sales of sensitive U.S. defense companies have been almost exclusively to companies from America's closest allies: Britain, Canada and Australia. Britain's BAE Systems PLC has become a top Pentagon contractor thanks to a series of U.S. acquisitions, including companies handling supersecret intelligence work. "This will test the limits of what a non-Anglo-Saxon defense contractor can buy in the U.S.," said Nick Cunningham, an equity analyst at Evolution Securities Ltd. in London.
DRS said in a statement Thursday that it is "engaged in discussions contemplating a potential strategic transaction." People familiar with the talks said DRS could sell for more than 25% above its recent market capitalization of $2.6 billion.
DRS shares rose 16% Thursday following reports of a possible offer, and on Friday they traded at $74.80, up 91 cents, in 4 p.m. New York Stock Exchange trading.
A Finmeccanica spokeswoman declined to comment on the potential acquisition. But a person familiar with the talks said Finmeccanica feels confident the transaction can close without facing unusual obstacles.
Finmeccanica's board met Saturday to discuss a potential offer.
Much of Finmeccanica's recent success has been boosted by a scrappy diplomacy from Rome, which has allowed the company to forge close ties not only with Washington but also with Moscow. Italian Prime Minister Silvio Berlusconi in his previous term, for example, managed to become a trusted ally of President Bush. He deployed Italian troops in Iraq -- even though the war was intensely unpopular in Italy -- giving the U.S. a staunch ally in continental Europe. Italy's envoy in Washington, Giovanni Castellaneta, is a former Finmeccanica vice chairman and currently a nonvoting board member.
Political and industry analysts credited Mr. Berlusconi's charm offensive with helping Finmeccanica win its most prestigious -- and politically sensitive -- contract so far: Its Agusta Westland unit is part of a consortium with Lockheed Martin Corp. that is supplying a new fleet of presidential helicopters.
At the same time, Mr. Berlusconi is a good friend of former Russian President and now Prime Minister Vladimir Putin. Last month, several days after he won national elections in Italy, Mr. Berlusconi hosted Mr. Putin at his estate on Sardinia and flew in a cabaret troupe from Rome for entertainment. Finmeccanica is a partner in Russia's first effort to develop a civilian jetliner since the fall of the Soviet Union.
Analysts familiar with both DRS and Finmeccanica say the Italian company stands a good chance of success. "Italy is the next-favorite tier after the U.K., in terms of U.S. allies," said Alex Ashbourne, an independent defense analyst in London. Ms. Ashbourne said that talks on the deal probably wouldn't have advanced so far without some degree of approval from U.S. defense-security officials.
The talks come as another major U.S. defense-electronics company, Harris Corp., is considering strategic options such as selling itself, according to people familiar with the matter. Such high-tech military contractors this decade have become increasingly attractive to big defense conglomerates, in part because of growing world-wide demand for their advanced products and also because the field requires less capital investment than big military systems like planes, ships and tanks. Acquisition of big "platforms" like fighter jets or warships can be much more cyclical than defense electronics.
In a sign of the sector's appeal, officials at Finmeccanica's Franco-German rival European Aeronautic Defence & Space Co. in the U.S. said they were also interested in such companies. "DRS is a company with capabilities that deserve a serious look," said an EADS official, who said if it was uncertain if EADS would bid for the company. The official said Harris is probably beyond EADS's reach because it does large amounts of highly classified work.
Finmeccanica, which is listed on the Milan Stock Exchange but is effectively controlled by the Italian government, which holds a 34% stake, enters its talks over DRS with a strong track record. Created by Italian politicians years ago as a hodgepodge of the state's industrial holdings, it has focused during the past decade on aerospace. It is a top supplier to Boeing Co. on its new 787 Dreamliner jet plane and a key partner to Lockheed on military projects. One Finmeccanica unit builds vital elements of the International Space Station.
Still, the DRS acquisition would require Finmeccanica to navigate America's strict national-security regulations. To get the deal done, Finmeccanica will need to pass two separate U.S. reviews, in which the company's nationality and ties to Russia could become an issue. BAE Systems, Rolls-Royce PLC and other foreign buyers have gone to great lengths to comply with U.S. security regulations. And while both Finmeccanica and its Franco-German rival EADS have won huge contracts from the Pentagon, they have been in less sensitive areas.
EADS recently was selected by the Air Force to supply jetliners for its new fleet of refueling aircraft. But the Airbus planes will be converted to military aircraft by EADS's American partner on the project, Northrop Grumman Corp.
Even multibillion-dollar sales like these must be fronted by the European supplier's U.S. partner. "You can only go so far in the U.S. without a big acquisition," said Ms. Ashbourne.