Finmeccanica Purchase Of DRS Technologies Looks Smart As Market Fundamentals Shift

On March 16, I had the opportunity to address the senior management of DRS Technologies at its annual leadership conference in Florida. DRS is a well-positioned domestic supplier of defense electronic systems and other military items that was acquired by Italian technology giant Finmeccanica in October 2008. Under the leadership of charismatic CEO Mark Newman, DRS is pushing to exploit the synergies of being linked to one of Europe’s premier technology enterprises.

Frankly, I didn’t understand the appeal of such a combination two years ago when DRS disclosed its plan to be acquired. But during the intervening period, it has become increasingly clear why a transatlantic merger would pay big dividends to both sides. That the Italian parent would benefit from owning a well-anchored participant in the world’s largest military market was obvious enough, but as overseas sales become increasingly important to U.S. defense companies, the ability of DRS to tap Finmeccanica’s global relationships looks more and more valuable.

Although DRS is a best-in-class developer of tactical sensors and other advanced technologies, it generates almost all of its sales in the U.S. market. That implies a big untapped potential for selling its technologies abroad to U.S. allies and other pro-western countries. By linking to Finmeccanica before the decade-long runup in U.S. defense spending leveled off, DRS got a headstart on competitors in positioning to expand its foreign offerings. Unlike the North American operations of most other European defense companies — which exist mainly to sell European products into the U.S. market — the Finmeccanica-DRS combination should be equally adept at marketing U.S. products overseas.

That’s a simple but powerful idea in the emerging defense marketplace. People have been talking about the globalization of defense markets for some time, and Finmeccanica already manages to generate half of its sales outside the three countries it considers home markets — Italy, the United States and the United Kingdom. But beyond purely military considerations, the Obama Administration has launched a campaign to double U.S. exports over the next five years, and companies like DRS Technologies have an important role to play in that effort.

When you’re a world-class producer of key military technologies but generate almost all your sales in one country, that suggests that there is a lot of potential upside in other markets. Once DRS and Finmeccanica work through the intricacies of developing marketing synergies while assuring the integrity of security provisions to protect sensitive technologies, they could find themselves uniquely positioned to serve a rapidly changing global market. They saw where the market was headed before many of their competitors did, and now are poised to reap the benefits of moving early to adapt.