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Shrewd Acquisitions Grow Business

July 2003
By Michael A. Robinson

Information systems group takes lead in company traditionally known for tanks, turrets and transmissions.

Ken Dahlberg sometimes likens his burgeoning high-technology business to a high-speed ride at a Disney theme park. No, he is not being sarcastic—far from it.

In just six years, Dahlberg’s information systems and technology (IS&T) group at General Dynamics has become one of the largest and most respected outfits selling technology services to the nation’s defense and civilian agencies.

Although General Dynamics is better known for its emphasis on ships, aircraft and munitions, the company has turned its IS&T segment into a $4 billion a year business. That, says Dahlberg, the executive vice president in charge of the group, makes IS&T the parent company’s top revenue generator, accounting for more than 25 percent of revenues.

“And you know, it’s been kind of stealthy,” Dahlberg says. “When you think of General Dynamics, you think of ships and tanks. And now we’re seeing there’s a significant other leg. It’s this whole information systems and technology business. I think history will decide that General Dynamics, and in particular our chief executive officer, Nicholas D. Chabraja, had a good vision, a solid vision of building an information technology group long before it was in vogue. We’re now reaping some of that benefit.”

IS&T is one of four key divisions at General Dynamics, which is headquartered in Falls Church, Virginia, and has 54,000 employees. The company had revenues of $13.8 billion in 2002, up 14.7 percent from the previous year. Although IS&T is the top producer, the combat systems group is a very close second and could actually take the lead this year in revenue, company officials say.

Dahlberg forecasts internal growth of 7 percent to 10 percent per year for IS&T for the next five years, meaning the group could double again to an $8 billion business in as little as seven years. More than likely, however, it will grow even bigger faster.

After all, General Dynamics would like to acquire other business units devoted to high-technology services and infrastructure and fold them into IS&T. Dahlberg confirms the company is always shopping, but Dahlberg cannot predict when the next acquisition will occur nor say what the target might be. But if the division’s brief history is any guide, it will almost certainly buy another unit within the next two years.

The division did not even exist until 1998 when IS&T was created as a high-technology unit that would go after lucrative government contracts. U.S. defense officials clearly wanted better technology, more commercial systems that could be purchased off the shelf and increased outsourcing of key projects to lower the long-term costs of development, operations and maintenance.

Against this backdrop, the commercial information technology market was undergoing dramatic change, and companies sought to gear up for large contracts or exit the space if they could not generate sustainable growth or high profit margins.

Eyeing these trends, General Dynamics started buying other companies in 1997, making nearly $1 billion worth of acquisitions during that year alone. The company bought Defense Systems from Lockheed Martin for $207 million, Advanced Technology Systems from Lucent Technologies for $267 million and Computing Devices International from Ceridian for $504 million. In 1999, it acquired GTE Government Systems for $996 million and in 2001 picked up Motorola Integrated Systems for $825 million.

These were highly profitable acquisitions that added significant stockholder value because, all told, when some smaller acquisitions also are included, General Dynamics paid roughly $3 billion for approximately $4 billion worth of business. That is like buying a mansion in California for the cost of a fixer-upper in Kansas City.

The sprawling global technology division remains firmly entrenched in government sales. In fact, contracts from government agencies account for nearly 97 percent of revenue. Dahlberg says the company would like more commercial accounts, but the downturn in corporate information technology business likely will limit growth in that market for the next few years.

“We’re positioning ourselves for when that turnaround comes,” Dahlberg says. “We have strategic alliances with those companies that we think have good balance sheets and good market strategies going forward so that we can participate in the commercial telecommunications turnaround when it occurs.

“Where we have carved out our niche is in the defense business. We have tremendous process, subcontract management, software development and radio frequency design. We’re able to turn jobs in a lot faster than other companies and with very high quality. Cash generation and time-to-market are vital to that supplier base, and they continue to choose us.”

The combat systems segment maintains a product line that includes a full spectrum of armored vehicles–from main battle tanks and amphibious vehicles to lightweight, wheeled assault vehicles. It also supplies suspensions, engines, transmissions, guns and ammunition handling systems, turrets and turret-drive systems, and reactive armor. The division produces high-performance weapon systems for application on virtually all U.S. front-line fighter and rotary-wing aircraft, and it also is a leading manufacturer of large- and medium-caliber munitions and ball-powder propellant.

General Dynamics officials describe the company’s aerospace group as top-ranked in its field. In fact, Gulfstream Aerospace, a General Dynamics unit, is a global leader in mid-size intercontinental business jets. Since 1958, Gulfstream has produced more than 1,300 aircraft. Its fleet ranges from the Gulfstream 100, which carries four passengers and two crew members with a total range of 2,700 nautical miles, to the Gulfstream 550, which accommodates eight passengers and four crew members with a total range of 6,700 nautical miles.

Meanwhile, the marine systems segment is more than 100 years old and remains a top-ranked designer-builder of submarines, surface combatants, auxiliary ships and commercial tankers. The group also manages the military’s ready-reserve and pre-positioning ships and builds commercial vessels.

Currently, its unit—Electric Boat—is building the USS Jimmy Carter (SSN23), a Seawolf-class nuclear-powered attack submarine. With its teammate, Northrop Grumman Newport News, the unit also is constructing the first four Virginia-class submarines and continues to provide life-cycle support for ships of the Ohio and Los Angeles classes.

Reflecting the complexity of its operations, IS&T divides itself into four key domestic units and one overseas business. The Advanced Information Systems unit provides services, technology and systems for command and control, intelligence, surveillance and reconnaissance (C2ISR). It combines the C2ISR operations businesses to create command information, intelligence and surveillance solutions. The unit also provides joint, interoperable and integrated mission solutions.

In December 2002, the unit received a contract from the U.S. Navy’s Strategic Systems Programs Office for development and support of the new SSGN Attack Weapon Control System and the Trident Backfit Fire Control System. SSGN is a submarine configuration that offers multimission capability and optimizes for covert strike and special operations support. The initial award value of the contract is $90 million, but if all options are exercised, the value could rise to $221 million.

The C4 Systems unit offers secure command, control, communications and computers solutions that integrate custom-engineered and off-the-shelf products for military and commercial markets. This unit designs, integrates and supports strategic and tactical battlefield communications systems worldwide, including the U.S. Army’s Mobile Subscriber Equipment and Tri-Tac switching programs. It also provides distance learning and video-on-demand delivery systems to government and commercial customers.

Last August, the unit received one of two development contracts for the U.S. Army’s Warfighter Information Network–Tactical (WIN-T). The two-phase development contract has a value of up to $72 million. WIN-T is the Army’s next-generation warfighting communications system.

IS&T’s Decision Systems is an operation that delivers systems integration for battlefield management, communications, intelligence/surveillance/reconnaissance, information security, and advanced space and terrestrial-based communications systems.

Last March, the U.S. Army chose the unit as the prime contractor and systems integrator for a $19.9 million program to upgrade the Prophet tactical signals intelligence system. The previous month, the unit was awarded a $59.9 million cost-plus-fixed-fee contract to enhance the Army’s Land Warrior system. In September 2002, it received a $611 million contract to modernize the U.S. Coast Guard’s 30-year-old search-and-rescue communications system.

Network Systems is the fastest growing unit within IS&T. With 4,000 technical personnel, it provides design, integration, installation, operation and support services for wireline and wireless voice, video and data networks. General Dynamics Network Systems has been managing large-scale worldwide telecommunication projects for more than 40 years.

Last April, Nextel Communications Incorporated chose General Dynamics Network Systems to build cellular sites in Nextel’s northeast and midwest regions over the next two years. Earlier that month, the unit acquired privately held Creative Technology Incorporated, an information technology and consulting firm with approximately 300 employees holding high-level security clearances.

Abroad, General Dynamics formed its U.K. unit by the amalgamation of CDC Systems and Computing Devices Company. It has two manufacturing plants and a staff of 1,000 at eight locations. The company is one of the leading European suppliers of integrated avionics and mission systems and the second largest supplier of U.K. avionics equipment for the Eurofighter aircraft.

Last November, the unit was selected for the $450 million U.K. Defense Digitization Program. The U.K. Ministry of Defence chose General Dynamics to demonstrate, supply and support a digital battle management system for deployment throughout the United Kingdom’s ground-based defense forces.

Like the division he heads, Dahlberg is thoroughly immersed in the nation’s defense establishment. He joined IS&T as executive vice president in March 2001 from Raytheon, where he had served as executive vice president for business development and president of Raytheon International.

A native of Camden, New Jersey, with a background in electrical engineering, Dahlberg began his career in 1967 with Hughes Aircraft where he held a steady succession of senior management jobs until Raytheon acquired the company.

“I’ve been in the business for 35 years,’’ Dahlberg concludes. “I’ve been blessed with doing a lot of design and seeing that transition to production. Some of the systems that I’ve designed are still deployed. I get a kick out of it. I like the opportunity to use leading-edge technology to become more efficient and more decisive.”