Importance of an Agile Strategy
An Agile strategy is such a broad term. For us, it is constantly evolving, and it is working our deal pipeline both top-down and bottom-up. So we identify areas of focus that help us build that target pipeline.
- What are the biggest markets?
- What capabilities to go after?
- What are the biggest and growing areas of the budget where we might be underrepresented?
- What areas do we really have the strength and capabilities we can leverage and build off?
And then we look at the targets that are potentially out there that fit these strategies and areas of focus so that we're not waiting for things to come to market. We're constantly working to unlock opportunities of interest.
And that might be by talking to companies directly and approaching companies directly. We don't necessarily say we want to acquire them, but we want to establish a relationship with the owners of the companies.
For private equity-owned businesses, the key lever is to know the partners, the funds, and how they think about the future of those companies. So we want to position ourselves as a good home for these businesses.
We have to make sure that the targets we identify might not be perfect, but we have to figure out how they might fit the strategy we're pursuing at any given time.
Prioritization of Pipeline
Prioritization is a core part of what we do, and it continues to evolve.
We have markets of focus. We have three big broadly defined areas or segments:
That is a focus area for us, and that's a segment. We have great positions in that space and want to continue building on that core. And then cyber's continues to be a focus, but very consolidated and fragmented market. So it's been challenging to go and acquire in those areas. So we identify these key markets for us to go after.
But when we evaluate the set of opportunities and we do screens, evaluations, we look at sponsor portfolios that might have been acquired. And frankly, built over time, we look at a competitor and customer cooperators, partner businesses, and which could potentially not be aligned with their strategy as much as ours.
And we fit them into these buckets and identify if those areas are where we have core strength. So we mustn't be just building scale for the sake of scale. Instead, we're looking at areas where we have strengths, key capability gaps, and how a given target might fill that gap and bolster that core.
We have 14 business lines, and in those 14, we have positions that we need and we don't need. So we'll prioritize depending on the market attractiveness. Certainly, we'll prioritize areas of growth, especially as it concerns the defense budget.
Then from there, the next layer of prioritization on the particular target.
- How attractive is the potential capability?
- How much is the strength of our profile?
- Is it actionable?
Prioritization shifts depending on the target. We have a core foundation of the strategy. We're going to focus on building on our technologies and on our core. We will prioritize certain markets we want to access that might be higher growth.
We don't play in certain areas that have attractive trends. They might be either from a growth or a size perspective. Areas of the defense budget or of the defense sector that we should have a bigger plan where we're underrepresented. But if there's nothing to buy there, we can't do anything.
Finding a Target before Strategy
Having a strategy and a direction is important. Otherwise, if there are 500 potential acquisitions, you won't know where to start. When I first came at L3Harris, the first thing that we asked was:
- What do we want to be?
- Where are the areas that we want to focus on?
- What are the general parameters of the types of businesses that we want to go after?
But you have to have a reasonable approach. You have to tweak your aspirations and your strategy to what it is you're able to accomplish. And then from there, you have to ask yourself what are the targets that could enable that strategy.
You go too far down the value chain, you don't want to be a small-time component supplier. You want to play up into that in that prime space and start tying all of these different pieces together building that whole mission, integrated mission solution.
So there's a set of targets, it narrows down pretty quickly. You go from your 500, then you focus on airborne and maybe it's a hundred, and then you go on the value chain and maybe it's 10, and then it's ones where you have the core and it's one or two.
Communicating the Strategy to the CEO
Our focus is not on making a lot of small acquisitions. Our focus is on going after scale and after doing things that matter. And for larger companies, a deal is going to take as much time. Whether it's a hundred million dollars or a billion dollars, sometimes even the larger ones will be simpler.
So you want to make sure you're prioritizing from a resource perspective and focus on the things that move the needle. M&A is a CEO's game, so the CEO runs the company, sets the foundation, and sets the strategy to drive shareholder value.
Of course, they have a team that helps them do that. But the goal is to grow the pipeline and profit growth and deliver shareholder results. So our CEO is intimately involved in any deals we might be looking at.
It's not like he will be in the sausage-making, but we have a quarterly cadence established where we'll brief the CEO, a couple of our CFO, and our General Counsel. So the four of us really review all transactions for approval before any major milestone.
We also have these pipeline reviews where we evaluate the strategies, potential acquisitions, or targets that align with those strategies. So members of my team will ensure that the pipeline is constantly being worked on and we're evaluating and dispositioning candidates on an ongoing basis.
In addition to my joining last year, the company has been shifting. It's a natural evolution. And the last three years were spent entirely focused on delivering value realization and ensuring that integration goes smoothly.
You look at our strategy and some of the investor decks from three years ago, the first thing was to integrate flawlessly. The integration management office focused on that business, it has been dissolved, because we're done integrating. So the strategy is evolving and it is much more focused on growth.
We want to increase our content in areas where we can't prime, and we want to expand some of our addressable markets.
So first, we defined the strategy, then we started building our pipeline and looking at the landscape of assets out there. What can we go after that will fit our capabilities or gaps?
To me, strategy is always foundational, and that's what comes first. If you're just out there looking at potential targets, you frankly end up getting yourself in a lot of trouble because that's what makes M&A work.
If you do deals that are not aligned with your strategy, you quickly get distracted and lose focus if leadership changes. And now, nobody knows the strategy or acquisition rationale for a given transaction because it was never clearly set up and communicated.
And if you have a big team trying to execute a given value realization or integration strategy. And if that wasn't crystal clear at the beginning, you're much more likely going to fail.
Working with Business Leaders
We are going to involve the business leader. I'm a big believer in a programmatic M&A strategy and continually add on capabilities through acquisitions. And in that instance, those businesses aren't going to be mergers of equal, they're going to be capability adds.
There will be areas where we continue to build on our core technology strengths. They're going to fit into one way or another, into either a segment, so the bigger piece or what we call a sector, and we need to figure out who's going to own them.
The business leader needs to fit the business strategy, it needs to fit their mindset, and they need to figure out how they will run these businesses together.
More often than not, because we have been proactive in building our pipeline, we have certainly vetted our pipeline with our business leaders. We have a monthly cadence where they're bringing us targets, we're doing independent work, and my team is doing independent work. We get together and we hash it out.
It depends on whether we bring them in and how early we bring them in. But, generally, they have a business to run. Until something is active, we leverage them for insights.
As we do our own internal work and our own evaluations, before a deal is active, we ensure that we're leveraging their business knowledge, customer knowledge, and potential knowledge of the target.
We start it pretty early. The initial evaluation, it's all about strategic alignment. In the end, if we're buying businesses and throwing money around and just destroying value, it doesn't work.
We have to realize appropriate returns. We have to pay appropriate prices. We need the discipline to ensure that we are continuing to generate shareholder value, so that's key.
But the way we do that is through integration. So to inform what a given business is worth to us, what kind of returns we could realize, and what we could pay, it's all dictated by the integration plan.
The level of integration will drive the potential synergy realization on the cost side. It'll drive the way we run the business and the cost that we need to incur up front and that has to happen early on.
The level of detail will be different. If the business looks similar to us, we could integrate immediately. If it's not and what makes them special is that they operate very differently than we do, we don't integrate and keep it separate.
Pitching a Deal to the VP of Corp Dev
Before I buy into a deal, I'll ask about the strategy. What is the strategy for the business as we have it today? And how does that target or that particular transaction align with that strategy?
That's the fundamental question before we get into price and valuation and why this makes all the sense. And then, we start getting into the financial profile of the business.
- What is the valuation?
- What are the returns that this business will generate?
- Is it accretive?
- Does it cover our cost of capital?
- What are the long-term returns on invested capital that we can look for?
If you want me to buy in and sign on the dotted line to buy the target company, that's the level of analysis that I want.