L 3 Communications Holdings, Inc. Business Information, Profile, and History

Company Perspectives:

L-3 Communication's goal is to be the leading mezzanine supplier to prime contractors. The company will do so by investing in its core technologies and acquiring companies that enhance or complement its current technologies.

History of L 3 Communications Holdings, Inc.

L-3 Communications Holdings, Inc., through its L-3 Communications Corp. subsidiary, operates companies that produce secure communication systems, training systems, microwave components, avionics and ocean systems, telemetry, instrumentation, and space and wireless products. Its customers are mostly defense and intelligence agencies, as well as aircraft manufacturers and defense contractors. L-3 also supplies the commercial telecommunications industry. L-3 maintained a 60 percent defense, 40 percent commercial product mix. Like its predecessor Loral Corporation, L-3 Communications has undergone phenomenal growth, orchestrated by former Loral executives Frank Lanza and Robert LaPenta.

Origins

Loral Corporation was an assemblage of defense units acquired from Fairchild, Ford, IBM, Unisys, and others between the mid-1970s and mid-1990s by Wall Street investor Bernard L. Schwartz. In April 1996, Lockheed Martin acquired most of these businesses for $9.1 billion. Two Loral executives, COO Frank Lanza and comptroller Robert LaPenta, joined Lockheed Martin as executive vice-president and vice-president, respectively. Loral's space businesses formed a separate firm, Loral Space & Communications Ltd., run by Schwartz.

Lockheed Martin, which had been formed in 1995 by the merger of Lockheed Corp. and Martin Marietta Corp., began to divest noncore units after the massive Loral acquisition. It sold its stake in the Martin Marietta construction materials business in 1996.

Lanza, described by the Washington Post as "a taciturn New Yorker admired for his creativity and engineering genius," reportedly felt stifled by the bureaucratic corporate atmosphere at Lockheed Martin. An electrical engineer by training, Lanza had joined Loral in 1972 and was named president and chief operating officer in 1981. Along the way, he was instrumental in growing the company from modest origins to a $7 billion giant.

In 1997, as he approached traditional retirement age, Lanza convinced his new employer, Lockheed Chairman Norman R. Augustine, to spin off ten former Loral companies to form L-3 Communications. ("It took me less than half an hour to get a yes," Lanza later told Business Week.) Lanza finally got a chance to be CEO, and numbers whiz LaPenta was named president and chief financial officer.

The ten businesses spun off had annual revenues of $650 million and 4,900 employees. The largest of these were Wideband Systems in Salt Lake City and Communications Systems in Camden, New Jersey. Also included were two northern California companies, Randtron and Narda-Microwave, which manufactured microwave antennas for military applications. These two together had fewer than 400 employees.

Lockheed Martin received $503.8 million for selling 65 percent of its ownership in the ten companies. After the sale, a limited partnership led by Lehman Brothers owned half of L-3; Lockheed Martin retained a 35 percent interest and a management group accounted for another 15 percent. Lockheed agreed to invest $43.75 million in L-3, Lehman invested $62.5 million, and the management group provided $43.75 million. Another $375 million was financed with bank debt and high-yield bonds. The name of the new company came from Lanza, LaPenta, and either Lockheed or Lehman Brothers, according to varying reports.

In July 1997 L-3 found itself aggressively bidding against its part-owner, Lockheed Martin, for control of a Texas Instruments chip-making business that Raytheon was being forced to unload as part of a Justice Department settlement. The desired unit produced gallium arsenide high-power amplifier monolithic microwave integrated circuits, or MMICs, a proprietary product. L-3 was eager to expand its microwave components business, which accounted for a quarter of sales, and also sought out joint ventures with Sweden's Ericsson Microwave Systems AB and France's Thomson-CSF to bring new technologies into the U.S. military market.

L-3 had a well-developed commercial business as well. Its Advanced Recorders plant in Sarasota, Florida, which made "black boxes" for aircraft, landed a contract to supply American Airlines with solid-state flight data recorders for both its existing fleet and planes on order with Boeing. The deal had a potential value of $16 million.

1998 IPO

L-3's first year revenues were $701 million. Plans for a $100 million initial public offering (IPO) were announced in February 1998. The IPO at $22 a share came on May 19; in the next six months the company's share price would rise to $46 a share, helped by strong earnings.

Lanza's acquisition strategy was to buy technology leaders, either struggling independent companies or black sheep divisions of major defense contractors, observed Business Week. Lanza focused on small to medium sized companies to avoid costly takeover battles with aerospace giants. ESSCO, a leading producer of ground-based radomes (protective shields for antennas) and precision millimeter wave antenna systems, acquired in September 1998, was a representative purchase.

By November 1998, L-3 had already acquired seven companies, including SPD Technologies, which supplied power equipment to the U.S. Navy, and Storm Control Systems, Inc., which made satellite control software. The company spent heavily--$40 to $50 million a year--on R&D to improve its existing products and to make them cheaper to produce.

In December 1998, L-3 agreed to acquire Microdyne Corp., based in Alexandria, Virginia, for $90 million. Microdyne made radio receivers used in tracking satellites and aircraft. L-3 companies already made the data hardware that used these antennas.

L-3 posted after-tax profits of $32 million on revenues of $1 billion in 1998. An additional stock offering was announced in early 1999, intending to raise $136 million to pay down debt and fund further acquisitions.

In December 1999, L-3 agreed to pay $55 million for two businesses Honeywell International Inc. was required to sell after its merger with Allied Signal Inc. One of these produced gyroscopes, controlled momentum devices, and sensors for weapons systems and satellites; the other made an inertial sensor product based on micromachined electro-mechanical systems (MEMS) technology used in advanced guidance systems. L-3 also bought Honeywell's Traffic-Alert Collision Avoidance System (TCAS) business for $255 million. L-3 incorporated the TCAS unit into a joint venture with Sextant, a Thomson-CSF affiliate. TCAS had recently been required on all European cargo aircraft and passenger planes with more than 30 seats.

Another important acquisition in 1999 was that of Satellite Transmission Systems. This brought L-3 into a $200 million a year business of fixed wireless communications systems, typically installed in developing countries that lacked traditional land lines. Meanwhile, new Federal Aviation Administration requirements were boosting L-3's cockpit voice recorder business.

In January 2000, L-3 agreed to buy Raytheon Company's flight simulation and training business for $160 million. Link Simulation and Training, based in Arlington, Virginia, became L-3's largest division, with $300 million a year in revenues. Link had pioneered the earliest mechanical flight simulators in the first decades of aviation, but had languished in later years as it was shuffled among a succession of corporate foster parents; Lanza declared L-3 was committed to help Link thrive in the growing training market. In March 2001, however, L-3 sued Raytheon to cancel its acquisition agreement, alleging that Raytheon failed to disclose liabilities in the business.

Bigger Game in the New Millennium

When Institutional Investor asked Lanza L-3's next move in November 2000, he quipped, "We're gonna go buy Lockheed." L-3's impressive growth made this a less than outrageous prospect. The company's share price reached $80 by the end of the year. A new stock offering announced in April 2001 was to raise $350 million.

In the spring of 2001, Lanza announced that he was changing his acquisition strategy to buy larger companies in a bid to become "the Home Depot of the defense industry." He aimed for L-3 to have revenues of $6 or $7 billion within the next several years--a stretch for what was then a $2 billion company, but not a laughable one, especially given Lanza's reputation. Faster growth was deemed necessary to compete against Honeywell International Inc., which was being acquired by (the U.S.) General Electric Co., reported the Wall Street Journal.

At the 2001 Paris Air Show, Lanza told www.AviationNow .com that L-3 was a catalog company. It was more efficient, he said, to approach the handful of major aerospace companies with a vast array of products, than to try to vie for their business as a small, $100 million supplier. L-3 also boasted considerable financial resources and R&D capabilities and offered administrative efficiencies to the companies it acquired.

Principal Subsidiaries: L-3 Communications Corporation.

Principal Divisions: Communication Systems & Wireless Products; Avionics & Ocean Products; Simulation & Training; Microwave Components; Telemetry, Instrumentation & Space; Commercial Products.

Principal Competitors: CAE Inc.; The Carlyle Group; General Dynamics Corporation; General Electric Co. (U.K.); Global Technology Partners; Honeywell International Inc.; Lockheed Martin Corporation; Raytheon Company.

Chronology

• Key Dates:
• 1997: Lockheed Martin spins off ten Loral companies to form L-3.
• 1998: L-3 goes public in a very successful IPO.
• 1999: Another stock offering fuels continued expansion.
• 2001: L-3 begins setting sights on larger companies, offers more shares.