Elbit's Outgoing CEO Discusses Israeli Defense Industry's Biggest Missed Opportunity

'The crisis will come,' warns Yossi Ackerman, on the eve of his retirement.

Thirty-one years after he took his first job as an engineer at Elbit Systems, and 17 years after assuming the post of CEO, Yossi Ackerman will be leaving the company at the end of the month. With so many years at the helm, Ackerman is not only the public face of the defense electronics maker – he made the company what it is today.

When Ackerman took over as CEO in 1996, Elbit had annual sales of $286 million and a market capitalization of just $106 million. After a string of 40 acquisitions, during which Elbit took control of much of the non-government sector of Israel's defense industry, its revenue last year reached $3.9 billion and its market capitalization $1.6 billion.

When he leaves Elbit at the end of the month, Ackerman plans to spend a quarter of his time working on his olive grove of 1,200 trees, a quarter of his time studying, and another quarter doing community work, particularly with children with special needs. As for the rest of his time, he's still undecided.

"I want to step down before age 67 and I'm doing it at 64," he said. "I could have stayed on longer but I wanted to step down while I could make a successful transition and sit on the board of directors for a while."

What is the biggest difference between Elbit today and the company 20 years ago?

"When I arrived, 90% of sales were to Israel. Elbit was a sub-contractor," Ackerman said. "We would receive the specifications for a manufacturing order but we didn't define the customer's needs to provide a solution. We also didn't have any subsidiaries in foreign markets. The whole company was inside a single building.

"Today only 25% of our sales are to Israel. We have 40 subsidiaries and are present in 70 countries – and we are prime contractors. We're now a multicultural company that employs 12,000 people, so you can't manage the company without a lot of planning.

"Also, and this is maybe the most important change, as a prime contractor we sell to the final user, so we need to understand his needs, to define solutions and to provide a complete system. Developing this ability took us many years, as did learning how to sell overseas – in the United States, Austria, Brazil and India."

Elbit has been trading at the same market cap for the past four years despite many acquisitions. Even if you haven't diluted shareholders, you've opted for buying companies over paying bigger dividends?

"Mickey Federman, our controlling shareholder, and I believe Elbit is a company for the long term that has two goals – to contribute to the national security of the countries where we operate, and a return for our investors," Ackerman said.

"The defense industry is a long-term business. If we didn't buy the companies we did when the opportunity arose, someone else would have bought them. The company's balance sheet is weighed down by the cost of acquiring intangible assets; those costs will gradually go down."

Do you think Elbit fully maximized the potential of its acquisitions?

"From a strategic point of view, of defining research and development and creating a cross-cultural management, yes," Ackerman said. "But there is more potential for cost savings at Elbit Systems. I did a lot but we need to do more. I wasn't good enough at this."

Perhaps you're not suited to the Wall Street model, where you buy a company and fire a third of its staff?

"Every model has its advantages and disadvantages," he said. "Even the Wall Street model has a cost. You can fire whom you want to fire, but people you want to keep will leave too. Every decision has its price. I think that in the final analysis, our massive strategic undertaking took a lot of energy. As for the issue of efficiency, we'll do more about that in the next four years. If we had streamlined first and then made acquisitions, the situation would have been worse.

"Efficiency needs to be realized through growth without increased staffing, for example by natural attrition. I see companies that that fire people and then employ new ones at lower salaries. That's a mistake, in my opinion."

What do you regard as the biggest missed opportunity during your time as CEO?

"The biggest missed opportunity was that the Israeli defense industry didn't consolidate," Ackerman said. "In Israel it's a difficult process with government companies, not just in defense. Everyone says to me, 'What do you want? Everything is alright right now.' But the crisis will come and then there will be nothing to sell.

"When I left Israel Military Industries, it was a fantastic company, but it isn't any longer. You need to act now while it is still in good shape. Compensate the employees, ensure their financial safety, undertake a reorganization and see to R&D. I think that's the right thing do. No one asked me, but this was something that needed to be done, and during my time it didn't happen.

"Another thing we perhaps needed to do was to make another acquisition in the United States, because it's the world's biggest market. It didn't happen because we didn’t find the right candidate, even though we retained people to find one. But we could have done more.

"The third disappointment was every time an employee was forced to leave."

What are your feelings about the defense budget?

"I think, like with every public-sector system, more can be done to make it more efficient," Ackerman said. "But when we decide not to build another hospital or highway, we know the risks. If you choose to cut NIS 5 billion, you need to sit with the army and decide what we're not investing in."

And what about the claim that the strategic threats facing Israel have decreased in light of what is happening in neighboring countries?

"They have not decreased," Ackerman said. "Every decision involves risk. A decision not to invest in preparing for a threat on a particular front is a weighty one and a decision that lasts a decade. The government needs to relieve the army of some goal or another. It's facile to demand billions of shekels in cost cuts and still insist that the army must do everything."
 

Ayala Tal
Elbit Systems