"Israel's defense industry must consolidate"

Outgoing Elbit Systems CEO Joseph Ackerman says only big companies can compete on global markets.

"Throughout my work at Elbit Systems, I always tried to lift my head and take the long view. Life sometimes draws into looking at the short term, but fundamental issues, such as acquisitions, strategic collaborations, investment in R&D, and hiring - the right decisions are the ones that take the long view," outgoing Elbit Systems Ltd. (Nasdaq: ESLT; TASE: ESLT) president and CEO Joseph Ackerman told "Globes" in an interview.

Ackerman (63) is retiring, after serving at Elbit Systems for 31 years, including 17 as CEO. "I've been planning and working on this for three years. There are companies which collapsed during a change in CEOs, and I realized that this was also a strategic step at the company which requires caution, consulting, review of alternatives, and sufficient advance warning," he said.

"At first, I was asked not to talk about this, but they slowly realized that I would not stay on as CEO until I was 67. I sat with Michael Federmann (Elbit Systems' chairman and controlling shareholder - R.S.) and we made suggestions about who could take up the post. I thought, and I am glad that Michael agreed, that my successor should come from within the company. There was more than one good candidate, and we analyzed the advantages and disadvantages of choosing each one of them."

When the process was over, Bezhalel (Butzi) Machlis (50) was chosen for the job. Machlis has served as Elbit Systems VP and general manager land and C4I division for the past ten years, and was personally recruited for the company by Ackerman 20 years ago.

"Since January 1, he's occupied the office next to me and we've been managing the company together. He's ready, and if you'll compare the company's performance in 2013 with 2012, you won't feel that there was a change in CEO. And if you do,, it will only be for the better," said Ackerman.

I should have bought another US company

When Ackerman was appointed CEO in 1996, Elbit Systems had 1,250 employees, after spinning off its medical electronics and imaging business at the end of that year. Its annual turnover was $307 million. In 2012, Elbit Systems posted $2.9 billion revenue, and it had 12,000 employees, including 10,000 in Israel at plants from Tel Hai in the Galilee to Sderot in the Negev.

Investors have also benefited from Elbit Systems' rapid growth: following the spin-off, it had a market cap of $106 million; its current market cap is $1.66 billion, and this is without taking into account the dividends that the company has distributed over the years.

"Globes": What is Elbit Systems' future growth horizon?

Ackerman: "I'm very optimistic about the company, and I say this because of the R&D programs which are reaching maturity, our orders backlog, and the strategic collaborations we recently signed with several companies, which give us a strong outlook. In general, Elbit Systems' areas of business have not been affected, or have been far less affected, by defense budget cuts."

How do you explain this?

"The defense budget does not affect a small niche company, and we're a small company with $3 billion in sales. We're not Lockheed Martin with $40 billion in sales, and every movement in the defense budget affects it. In addition, companies affected are those that invest in big platforms. The world is buying fewer such platforms, and more intelligence and defense systems."

Are there things you regret you didnt do during your term?

"If I regret something, it's that what we've done we didnt do faster. But honestly, when I look back at my career, I dont regret the things I did, but the things that I didnt do.

I regret that I didnt buy another company in the US. I have no specific name, but I would like to be stronger there; it would be right strategically. I also regret that I didnt do more about restructuring Israel's defense industry."

The structure of Israel's defense industry - comprising four big companies (Elbit Systems, Israel Aerospace Industries Ltd. (IAI) (TASE: ARSP.B1), Israel Military Industries Ltd. (IMI), and Rafael Advanced Defense Systems Ltd.) and many small and mid-sized companies - is an acute issue for Ackerman.

"Elbit Systems is Israel's largest defense company. This feels good, but in the world, where the real competition is, we're number 34. Ultimately, we're small, and our competitors are much bigger, which is why Elbit Systems' acquisitions in Israel were necessary for both the buyer and the seller."

During Ackerman's tenure, Elbit Systems acquired 25 defense companies, ranging from big firms, such as Tadiran Communications, Elisra, and El-Op Electro-Optics Systems, to small companies like ITL, Soltam Systems, BVR Systems, and Azimuth Technologies.

"The acquisitions have paid off for everyone, because if the companies acquired had remained independent, they'd be in tough shape, and the sellers understood this," said Ackerman. He pointed to the Israeli defense company which feels this acutely - IMI, saying, "IMI did not just end up in its current shape. It's a small company and things are tough for it."

Ackerman's solution is well known: consolidate Israel's defense companies into two big conglomerates. "The concept that it's possible to stay as we are is anachronistic. It's impossible to invest in the marketing and sales and maintenance networks for just one product, which is why all the start-ups are acquired. Everything we buy today comes from multibillion dollar companies. There are no small companies any more. It will be a disaster if we dont do this, and saying, 'We told you so' won't help. There is no disagreement about the idea or the need; it's accepted. The problem is implementation. There's a lack of interest to begin the process, which is not easy."

Do you think that Israel's foreign policy toward Turkey, which has affected defense trade between the countries, is correct?

"There are victims to every correct decision. When you pave a road, there are victims. Before all of the defense industry, Israel should do what is best for it in terms of foreign policy. True, the defense industry paid a price, but that's not a reason not to make the right decision. Is Israel's foreign policy toward Turkey correct or not? I dont have all the data to decide. I want to hope it is."

Elbit Systems was one of the victims affected by this policy, when the Ministry of Defense cancelled the export license to Turkey for the Condor 2 aerial intelligence gathering system in the middle of the program. The cancellation cost Elbit Systems tens of millions of dollars in damage, for which the state has not compensated it.

Ackerman reiterated his road analogy, saying, "When paving a road, you compensate the people being evicted. We havent been compensated and we're going to court. What we didnt sell in advance - we have no claims. But in this case we were notified to stop in the middle of the program. We asked for compensation for damage and we thought it would be settled in negotiations, but we didnt reach an agreement."

Published by Globes [online], Israel business news - www.globes-online.com - on March 14, 2013

Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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