Thursday, November 14, 2002

Military Morsels

Since Northrop Grumman's $7.8 billion bid for TRW last July, speculation is simmering about more dealmaking in the defense industry. While big acquisition candidates such as Raytheon and Harris receive much attention, investors may also want to keep an eye on possible targets further down in rank.

Integrated Defense Technologies is one such company. The $284 million (market value) firm sells electronic combat, power and surveillance systems to all the military branches as well as to government agencies, prime defense contractors and foreign governments. An example of its product offerings: coastal radar systems that detect small boats and low-flying aircraft in severe weather.

Huntsville, Ala.-based Integrated Defense held a successful initial public offering in March, but it's had a rough ride lately. Last month, a warning that quarterly earnings per share would fall 4 cents short of the consensus estimate spooked investors. Shares fell to a low of $10, less than half the offering price of $22. The stock has recovered somewhat to $14.

At its current price, Integrated Defense has an enterprise value of $347 million. Enterprise value--a company's common market value plus its debt and minus its cash--gives a rough idea of the minimum price a company would have to pay to acquire another firm outright.

Dividing the enterprise value for Integrated Defense by its latest 12-month operating earnings (here defined as earnings before interest, taxes, depreciation and amortization) produces an enterprise multiple of 6.1. That's cheap relative to the 7.7 average multiple for the defense industry as a whole.

So the price may be right here, but is Integrated Defense primed for a sale? Adam Friedman, co-portfolio manager of the $740 million (assets) Armada Small Cap Value Fund, thinks so. With the firm's shares depressed and Wall Street down on the stock, he suspects a deal might provide a more lucrative exit for the company's venture investors.

As for possible acquirers, Friedman sees a good fit with General Dynamics. "They could use more pizzazz in their portfolio," he says.

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