Is It Time To Play Offense or Defense with Defense Stocks? September 16, 2006 American Association of Individual Investors (DC Chapter) Kevin P. DeSanto, Vice President Houlihan Lokey Investment Banking Services Aerospace •Defense • Government Group 1800 Tysons Blvd., 3 rd Floor McLean, Virginia 22102 703.847.5225 Los Angeles New York Chicago San Francisco Minneapolis Washington D.C. Dallas Atlanta London Paris Frankfurt
Table of Contents AAII Washington DC Metro Chapter Introduction ............................................................ 1 Budget Perspectives ................................................ 2 Industry Perspectives.............................................. 3 M arket D ynamics Aerospace........................................................... 4 D efense .............................................................. 5 Government ....................................................... 6 H omeland Security ........................................... 7 Summary................................................................. 8 2 Houlihan Lokey
Disclaimer AAII Washington DC Metro Chapter Houlihan Lokey Howard & Zukin and Houlihan Lokey are trade names for Houlihan, Lokey, Howard & Zukin, Inc. and its subsidiaries and affiliates which include: Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a California corporation, a registered investment advisor, which provides investment advisory, fairness opinion, solvency opinion, valuation opinion, restructuring advisory and portfolio management services; Houlihan Lokey Howard & Zukin Capital, Inc., a California corporation, a registered broker-dealer and SIPC member firm, which provides investment banking, private placement, merger, acquisition and divestiture services; and Houlihan Lokey Howard & Zukin (Europe) Limited, a company incorporated in England which is authorized and regulated by the U.K. Financial Services Authority, which provides investment banking, restructuring advisory, merger, acquisition and divestiture services, valuation opinion and private placement services. Houlihan Lokey gathers its data from sources it considers reliable; however, it does not guarantee the accuracy or completeness of the information provided within this publication. The material presented reflects information known to the authors at the time this presentation was written, and this information is subject to change. Houlihan Lokey makes no warranties, expressed or implied, regarding the accuracy of this material. The views expressed in this material accurately reflect the personal views of the author regarding the subject securities and issuers. Officers, directors and partners in the Houlihan Lokey group of companies may have positions in the securities of the companies discussed. This presentation does not constitute a recommendation with respect to the securities of any company discussed herein, is not intended to provide information upon which to base an investment decision, and should not be construed as such. Houlihan Lokey or its affiliates may from time to time provide investment banking or related services to these companies. Like all Houlihan Lokey employees, the author of this presentation receives compensation that is affected by overall firm profitability. Any public companies included in the Houlihan Lokey indices are companies commonly used for industry information to show performance within a sector. They do not include all public companies that could be categorized within the sector and were not created as benchmarks; they do not imply benchmarking and do not constitute recommendations for a particular security and/or sector. The charts and graphs used in this report have been compiled by Houlihan Lokey solely for purposes of illustration. This presentation mentions a number of companies; however, none of these companies is the subject of this presentation. The companies mentioned include Houlihan Lokey financial restructuring and other financial advisory clients, as well as companies involved in transactions where Houlihan Lokey has provided these services to other participants in the transactions. This material may not be reproduced in any format by any means or redistributed without the prior written consent of Houlihan Lokey. 3 Houlihan Lokey
Introduction
Houlihan Lokey Overview Introduction AAII Washington DC Metro Chapter Premier Middle Market Investment Bank # 1 Advisor on Middle Market M&A Transactions # 1 Provider of Fairness Opinions # 1 Financial Restructuring Practice 700+ people, in 11 offices worldwide, allow Houlihan Lokey to provide clients in-depth global exposure and end-to-end advisory solutions Senior officers in the US and Europe have strong Wall Street credentials and serve more than 1,000 clients annually, ranging from closely-held companies to Fortune 500 Corporations Partnered with ORIX Corporation (NYSE: IX, TSE: 8591), a leading integrated financial services group headquartered in Tokyo 5 Houlihan Lokey
Background of Kevin P. DeSanto Introduction AAII Washington DC Metro Chapter Mr. DeSanto is a Vice President in the Aerospace • Defense • Government (“ADG”) investment banking group in the Washington, DC office of Houlihan Lokey. His responsibilities include overall engagement management and execution for corporate finance assignments, primarily mergers and acquisitions. In addition, Mr. DeSanto coordinates the ADG Group’s defense and government services industry coverage efforts and has been quoted in publications including Washington Technology , Government Corporate News and Fortune Magazine . Regarding mergers and acquisitions experience, Mr. DeSanto provides clients both sell-side and buy-side transaction support. Select clients have included bd Kevin P. DeSanto Systems, L-3 Communications, Development Alternatives, Manufacturing Technology, Impact Innovations Group, OAO Vice President Technology Solutions, Eagan, McAllister & Associates, kdesanto@hlhz.com Quality Research and Radian. In addition, he participates in a variety of financial advisory engagements including T: (703) 714 – 1710 transaction fairness, solvency analysis and recapitalization strategies. F: (703) 760 – 4864 Mr. DeSanto earned a B.S. in business administration with a 1800 Tysons Boulevard, concentration in finance from Georgetown University’s Suite 300 McDonough School of Business. He is licensed with the NASD as a General Securities Representative (Series 7, McLean, Virginia 22102 63). 6 Houlihan Lokey
Introduction Discussion Summary AAII Washington DC Metro Chapter Develop Framework for Analyzing the Publicly-traded Defense Companies Perspectives on Key Trends in the DoD Budget Overview of Critical Industry and Company-specific Factors Assess Current Pricing on a Relative Basis Identify the Multiple Avenues Available to Invest in “Defense” Answer Your Questions (When I Know the Answer) 7 Houlihan Lokey
Defense Industry Pyramid Introduction AAII Washington DC Metro Chapter $30 Billion $30 Billion Primes & major subs Primes & major subs $1 Billion $1 Billion Few remaining Few remaining mid-tier Suppliers mid-tier Suppliers $200 Million $300 Million $300 Million Military technology Military technology n n n o o o i i i industrial base remains industrial base remains t t t Diversification Diversification a a a c c c of customers and of customers and i i i fragmented among fragmented among f f f i i i s s s technology more technology more r r r thousands of small thousands of small e e e v v v common in >$50 common in >$50 i i i D D D suppliers suppliers million companies million companies Pure-Play Niche Pure-Play Niche 8 Houlihan Lokey
How to Play in Defense Introduction AAII Washington DC Metro Chapter Opportunities to Benefit From Diversified Business Aerospace Models in a Recovering Market that has Meaningful Defense Exposure? A Bevy of Options for Capitalizing on Key DoD Defense Themes and Strategies – Where Will the $ Flow? Services Companies Supporting High Priority Government Initiatives Within the DoD – How Low Can They Go? Where is the Value - Smaller Pure-plays, Homeland Security Traditional Defense/Government Contractors or Diversified Industrials? 9 Houlihan Lokey
Introduction Other Ways to Play in Defense AAII Washington DC Metro Chapter State and Local (e.g., Maximus, Affiliated Computer Services, Tyler Technologies) Engineering & Construction (e.g., Jacobs Engineering, Fluor, Tetra Tech, URS) Diversified IT (e.g., CSC, EDS, Perot, Unisys, Wireless Facilities) Foreign (e.g., VT Group, Serco Group) SPACs (e.g, Good Harbor, Federal Services Acquisition Corp.) 10 Houlihan Lokey
Why Investors Play in Defense Introduction AAII Washington DC Metro Chapter $500 Billion Strong Investment Market Returns (Revenue and EV) $70 Billion Unused Revenue & Margin Debt Capacity Visibility ADG ADG Liquid Leverageable Private Market (1,500 transactions Assets since 2000) Supports Identifiable National Long-Term Priorities Growth Drivers 11 Houlihan Lokey
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