Today, L3 Technologies touts more than $10 billion in revenue, 84 percent of which supports defense. It’s ranked No. 8 on the Defense News “Top 100” list of the largest defense companies in the world. But about two decades ago, L3 was an amalgamation of businesses divested by Lockheed Martin at a time when military spending nosedived.
For L3 CEO Michael Strianese, it’s been a journey. He sat down with Defense News on Dec. 1 to discuss his tenure, and why — after 21 years with the company and 11 at the helm — he’s ready to pass the baton.
I want to look back a bit. You have been with L3 since the company was established as a result of a Lockheed divestiture. Can tell me the story of how this went down?
Sure. In those days, we worked for a company based in New York known as Loral Corporation, and had done a number of acquisitions in the post-Last Supper days. [That] created about a $6 billion defense business that was acquired by Lockheed Martin. That was around 1995, if I’m not mistaken. And, in integrating the company, Lockheed Martin had identified a dozen or so businesses that it did not want to own and asked me if I would find a buyer.
And — upon looking at them and realizing that we were probably not going to last very much longer as a renegade office in New York, as a group office, if you will — we approached Lockheed Martin and said we would be willing to raise the funds, if they would be willing to sell to us. And, after a few weeks of back and forth, there was an agreement that, assuming we could raise the financing, they would be willing to sell the businesses to us, the legacy management team.
What was appealing about that group of business? How did you know it was worth it?
Well, that was a leap of faith. We knew the businesses well, we knew many of them had No. 1 and 2 positions in their markets. We had an established management team, with Frank Lanza and Bob Lapenta, myself and others that were there. We had a ready turnkey corporate office there on 3rd Ave. in New York City ready to go. And, without this step, we would have all been out of work. So, this was a fight for survival, if you will.
So, there was a real sense of [what] I would call national pride in getting this to work. Everybody put in the extra time and effort to make this a success. And it really has developed to an enduring company, way beyond anything that we would’ve anticipated back then, as to where we’ve taken this. I’m glad to see that it’ll be around for a long time, and it’s up there on the list of the top 10 [defense companies]. And we compete with primes, we partner with them, we’re a direct supplier to the DoD and commercial customers, international customers.
One thing that shouldn’t be overlooked is that when you look at the businesses we’ve created, it wasn’t just buying — 100 acquisitions over 20 years or so. The businesses that we’ve created are tremendous performers. They’re all No. 1 businesses with the airport security business, the night vision business, EO/IR, secure communications. I mean, we, probably without even realizing it, had a good knack for putting together different businesses that formed a group that became a real powerhouse in the marketplace. And that has been very gratifying.
You mentioned the Last Supper; really, L3 was born at a time where there had been this forced consolidation. The Cold War was over, there was a bit of a lull in terms of defense spending. Not a great time to get off the ground. How did you stabilize?
Yeah, you’re absolutely right. The first years were very lean in terms of budget. The budgets were coming down and this was the post-Cold War era. But, then we had that watershed event called 9/11, and it was pivotal to the defense budget and the war on terror, the engagements in Iraq and Afghanistan, the development of new technologies, whether it’s drones, sensors, counter IED, the MRAP programs, our Project Liberty program. There was a lot of new things that happened because of the changes in the threat environment.
And we were always quick and agile and able to respond to customer requirements, and that really played into our capabilities. We may not have been the biggest, and we didn’t make the platform, but we certainly knew our way around the technology probably better than most. And how to read the customer and how to decide where to invest and how to invest and how to get it to the war fighter as fast as we could.
You also took L3 public soon after the company was established.
We went public in ’98. Those first two years were very, very busy years. And, you know, with the news of my upcoming retirement, taking a number of calls from private equity people in New York, saying, “Gee, you know, we have a bunch of companies. Would you like to do it again?” There’s only time in one’s life to do this once. And it was great. I really enjoyed the experience. We created an enduring asset and very proud of it. But, boy, it was a lot of work and I don’t know that I would want to do it again.
And you stuck around. A lot of times executives that get companies off the ground move on fairly quickly — the transition executives, so to speak. You stayed on for another 20 years.
A lot of it is the way the story started. It was something that we created ourselves. And, certainly, a lot of blood and sweat went into it; there’s a lot of affection for it, too, with the people and the fact that everybody’s worked very hard. And there’s nothing I’d really rather do. I mean, this is where I wanted to be.
So why now?
We had our 20th anniversary this year in ’17, and we’re moving on to the 21st year next year. And I’ve been at the helm for the last 11, which is kind of getting long for CEOs. I’m very proud of it, but I don’t want to go out feet-first. It does take a toll but, you know, I love every day of it. And working for the men and women in uniform and the folks in the Pentagon; I mean, there’s nothing really that I would find more rewarding than what I do.
These are uncertain times for the military community. Any reservations about moving on now?
Well, you know, the company has been doing great. We found a very qualified candidate to succeed me. And, yes, it’s given me a little bit of pause, because every day the geopolitical environment seems to deteriorate a little bit more. Should things get worse, I’d certainly want to be there to help if I could. But, you know, the company’s going to be fine. They know the game and they know how to get everything done, and they know what our core values are in performance and integrity. I’m very comfortable that the company’s in a great place, probably one of the best places it’s ever been.
If I’m doing the math correctly, you’ve worked under four administrations. Any major shifts in the market under a particular one versus another?
Again, in the earlier years, when it became post-9/11, it was this urgency to deal with the terrorist threat, secure the airlines and the transportation hubs and get our men and women in uniform the right equipment to deal with the overseas threats that they were facing.
But as time moved on, those efforts kind of got managed, and some of the differences in administrations had to do with policy changes … addressing budget realities, that we had to do more with less. And we had Better Buying Power, which caused massive shifts in the industry with companies exiting services. That just happened over the last four or five years, with services completely separate and distinct from the hardware companies. It’s happened.
However, I think that the major upheavals of that are over and companies are consolidating again. We’ve seen a flurry of consolidations over the past year. Large ones for our industry that we haven’t seen in many years. Given the threat environment and the new administration, who is focused on our national security and war fighter needs and rebuilding our defense, [I think that] the funding is going to be there. And I think the industry’s going to be very healthy.
There was quite a lull in M&A there for a while. And now we’ve seen some major deals. Might we see the Pentagon step in and say, “too much”?
There’s always that possibility, and that this administration is very focused on competition. So, where there’s a potential deal that will end up stifling competition and costing more in the long run, I would expect somebody to raise their hand and say, “Let’s do a review on this before this goes forward.” The deals that we’ve seen, however, I don’t believe have restricted any competition, because they were really companies that were adding on, branching out to other areas. There weren’t a lot of overlaps.
You know, having said that, it’s addressing the lack of growth over the past decade or so. In the beginning of L3’s time, in the post-9/11 years, our growth rates were 8-10 percent on any given day, and typically more. And, we went to a period [with] low, single-digit [growth]. They were very lean years. These acquisition [address] the lack of growth, the need to expand business space, get cost synergies and the like.
But we need to get to a point where we have a steady defense budget and we’re not dealing with continuing resolutions every year. It’s very hard to plan and resource the business without that kind of visibility. And not only does it hurt us, but it hurts our customers, because we can do things much more efficiently if we can plan it.
I speak to other executives who always say that the CRs do serious harm. Can you quantify the kind of effect that has on a company like L3?
Well, for the customer as well. We review all our business units every year, individually, as to their next-year plan. And where a business unit may want to go out and do R&D for next-generation product or go into production in advance of a contract because they expect one — it’s kind of unusual in our business. Generally, we don’t build to inventory; we build to a contract. Many companies have gotten burned building to inventory that no one ever bought. So, that’s one case where we may not take that leap of faith and build.
I remember back in the beginning of the engagements overseas we had a product known as Rover that put the overhead full-motion video in the war fighter’s hands. So, the war fighter would be able to see beyond that hill, beyond that building, from the overhead videos, as to whether there were enemy positions. And it really saved lives. And we were able to build those in advance, so that we were able to match any deployment. So, no one left home without a Rover, and that was important. The secretary of the Air Force at the time asked us to do that and we agreed.
And with the lack of budget visibility, we certainly take a much more substantial risk in building products that will not get sold. We’re just not used to that in this industry, and it’s not a thing that we’re really geared up to handle well as a commercial entity. You know, we’re used to fulfilling contracts. If you wait for the contract, the war fighter on the other side of it may take six to nine months to get their unit in their hands. And we didn’t want that; we wanted them to be ready to ship. And we had a lot of confidence it would happen at that time. But I could tell from the customers’ discussions that they’re not quite convinced that the funding is going to be there. And if they’re not convinced, they’re not going to get me convinced.
You bring up a good point about procurement, and some of the challenges associated with the cycle. Has it gotten any better?
First, please get the budgets passed timely, so we can do our plans in a rational way and not have to risk-weight everything as to what happens if the money doesn’t come. And that becomes the whole discussion: putting boundaries around how much we’re going to be able to afford to lose. It’s not the right discussion.
The lack of growth has caused things like massive share repurchase plans with the cash, because there wasn’t an alternative, because there wasn’t the visibility to invest more heavily in R&D. Now, we’ve been one of the companies that’s leaned forward and have stepped up our R&D spending just on the confidence of what we’re seeing in the areas that are needing additional technology. We’re certainly way behind on maintenance, training. And where we can get better solutions in our customers’ hands, we’re going to do that. There are certainly threats in the environment that we’re aware of, that we are developing solutions for. You just can’t sit on and wait for the money to show. I mean, it is so badly needed that we’ve gone ahead and invested anyway, because we’re very confident that they need solutions now.
L3’s in a position to perhaps be able to do that better than some others. Is there an understanding in government of the need for a public company to balance the needs of shareholders with the needs of the military and customer?
I believe that there is. Part of it is some of the great work we’ve done with the Aerospace Industry Association, our trade group. And I had invited a financial analyst to a Pentagon meeting to explain to them the rock and the hard place that we get put in between. If we start missing numbers, because we’re making investments and then the investments aren’t paying off fast enough, you know what happens. You have activists show up and all of a sudden you’re divesting this or you’re taking some unnatural action to keep the activists at bay, or keep shareholders happy. And those trade-offs have to be acknowledged, at least for the company. I mean, we are running companies for the benefit of the shareholders, but we also have an obligation to our customers, too. So, it is a good balancing act.
Many of us in this industry mastered how to balance those two. We’ve had to. Balance it to survive. But hopefully the days of the constant dropping budgets are over for the short term.
Do you feel the Budget Control Act is finally going to get dealt with?
All the budget forecasts are above the sequestration caps. And, to actually pass them, because sequestration is law, you need an act of Congress to do that. Certainly, more and more I hear folks say on the Hill that there was not a dumber way to do this. Everything was slashed equally, whether it was needed or not, and it’s caused some serious damage. And our adversaries have taken advantage of that. I think it will get done, I think it will get done this year. And I have a lot of confidence in everything that we’re hearing from the Hill, that we’re going to get a budget, we’re going to get funded. National security is a priority, not an option. And I think people have woken up to some of the threats out there and what we’re facing.
The Trump administration has taken an interesting approach. What is your perspective on how the Trump administration is dealing with the defense industry?
Well, they certainly have focused on it in terms of needs, whether it’s training or upgrading equipment. I took great note with some of the phone calls the president personally made to some of our colleagues in the industry about the cost of some platforms and the like. And it was good to see him engaged at that level. When everybody was popping champagne when he first won the election, I was a little more cautious, and said, “You know, he’s a New York businessman and this may not be the party you think … This may be, ‘I can get it for you cheaper.’” He is a negotiator. He wrote The Art of the Deal, so, you know, he’s not a pushover. And he is going to question things that he doesn’t understand, which I think is good. I think that’s healthy. And, I think, as a taxpayer I want to see the DoD get the biggest bang for the buck that they can, because we need it.
The U.S. has always enjoyed a technological advantage over adversaries, and it’s due to this industry. It’s private industry — nothing’s made in the Pentagon. It’s a nice building, it’s beautiful, but nothing gets shipped out of there. It’s made by companies. And we need the budget visibility and the support to stay healthy.
The Trump administration has been very vocal on expectations of our global partners. How are foreign customers and companies responding to that?
I certainly applaud the call for other nations to step up and spend at least a minimum amount of GDP on their national security. It’s not fair for somebody to be taking a free ride, just betting on the U.S. to come to their aid should there ever be a problem. It’s just not fair. And we cannot afford to pay everybody’s bill.
At the Paris Air Show this year, there were a number of comments made by some international players that we visited with about this Trump request. And, you know, we certainly are more than happy to find places for them to spend their money.
His trade policy is also refreshing — that we should have more of a level playing field with trade balances with some of these countries. I think all-in-all this is very good, and it’s very timely, and I’m glad it’s finally being addressed.
Should export restrictions be loosened?
That started to happen when Hillary Clinton was the secretary of state, and there was a recognition by her and her staff there that the defense exports needed some help. Because, we’re getting the door slammed on us regularly, even though some of the products were available elsewhere internationally, whether it be night vision or the like. And if we didn’t sell it, they’ll buy it from another country. So that has certainly made progress over the years. And nobody in this industry would advocate for giving away our advantages or the national jewels, if you will — our advanced technology. But there are some obvious areas where exports would not damage anything that we have, and that would be helpful for balancing some of the budget realities that we’re dealing with.
Last question: the future of L3 — where do you see the company going over the course of the next five years?
We were on our way to capturing more business as a prime. Recognizing we’re not going to get into building planes, ships or tanks, we did identify areas, whether it’s space payloads or this undersea area that we’ve invested in this year, where we can emerge as a prime. And we are doing payloads as a payload prime, if you will. We’ve certainly gone up the food chain from the black boxes to sub-systems to complete systems. And, I think, there’ll be more of that, and I also think more areas will be identified where we can cobble together solutions of our own in-house. When we meet with certain customers that weren’t really aware of the depth of technology in the company, they’re generally surprised at what we can deliver. I just am very optimistic for the future of L3.