Elbit Systems’ 1.8 billion shekel ($520 million) acquisition of state-owned IMI Systems, announced Sunday, has aroused a lot of concern about how the deal will strengthen Elbit’s hand in its dealings with the defense establishment. The merged company will become the army’s dominant supplier of land-based equipment and a major player overall.
But the debate missed several important perspectives on the deal. They include the cost to taxpayers of the government’s retaining control of a failed company like IMI with too many people on its payroll or one that’s characterized by persistent corruption, like Israel Aerospace Industries. Will the deal improve the chances of IMI employees all keeping their jobs?
In addition, there’s the buyer’s perspective to consider, namely whether Elbit — Israel’s biggest privately-owned defense contractor — can generate significantly more foreign sales from IMI’s proven research and development capabilities. That could square the circle by generating more jobs. Another question is whether the deal really turned Elbit into the Defense Ministry’s biggest contractor.
Another important factor that has been missing from the debate is that the global defense industry gives considerable advantage in terms of costs, marketing and R&D to the biggest players. In the last year, Northrop Grumman has announced plans to buy Orbital ATK for $9 billion in cash and debt and United Technologies bought Rockwell Collins for $30 billion in cash and shares.
The cost of financing R&D and marketing is one of the reasons that IMI, formerly known as Israel Military Industries, has been unable to translate its technology assets into sales exceeding $560 million a year. As well, it has suffered an absence of synergies between its products.
Both factors play a role in the prospective merger, which still has to clear antitrust approval and the completion of a final agreement.
Here are three reasons why Elbit is prepared to pay 1.8 billion shekels for IMI:
- Highly classified Israeli army systems revealed online
- Elbit ready to buy Israel Military Industries without its missiles business
- Israeli defense firm Elbit signs major contract to support U.S. Army aircraft fleet
1. Complementary product lines
IMI’s product line complements Elbit’s and will better enable the combined company to build complete weapons systems, such as those that can perform all the tasks from identifying a target to firing at it.
Elbit, which has been a maker of artillery and mortars for ground forces since it acquired Soltam Systems in 2010, will now be able to offer artillery rockets with ranges of 40 to 300 kilometers that can be launched from a truck or a tank. IMI brings to the table a 300 million shekel, several-year contract to supply to the army its Extra and Predator Hawk rockets, with ranges of up to 300 kilometers.
2. Platform upgrade for land forces
The two companies collaborated on a 2002 contract worth $700 million to upgrade the Turkish army’s fleet of M-60 tanks, just one example of how the two companies complement each other in this area.
Elbit makes turret control systems, command and control systems, sights and air-conditioning systems for tanks while IMI makes transmission systems through its Ashot Ashkelon subsidiary; reactive shielding systems for armored vehicles that protect them from anti-tank missiles and its Iron Fist remote interception system for rockets or missiles.
Until now the Israeli defense establishment has preferred Rafael’s Trophy system over IMI’s offering. The IMI system is designed to protect tanks against rocket propelled grenades, anti-tank missiles and other threats using sophisticated technology that makes use of radar developed by RADA Electronics Industries and infrared sensors manufactured by Elisra.
3. Next-generation ammunition
Elbit believes that the combination of the ammunition IMI makes for tanks and mortars and Elbit’s electronics could form the basis for the next generation of more precise ammunition.
Together with these three assets, Elbit also gets IMI’s payroll of 22,700 people, as well as the company’s long history of losses amounting to billions of shekels and negative equity of 160 million shekels as of the end of 2016. Taking over IMI will boost Elbit’s revenues by just 17% and it will have to invest considerable money in new production facilities and in retaining key employees.
Then there’s injecting money into the business and investing in marketing and R&D, all with the hope that in three to five years IMI’s operations can reach the same level of profitability as Elbit.
The risks and costs involved could explain why, Elbit shares, which had rallied on the news of the deal a day earlier, fell back 4.3% Monday to end at 475.80 shekels.