Israel Matzav

Buyout of American defense contractor may expose Israeli military secrets?

Textron Inc. is a large American defense conglomerate. Founded in 1923, it has grown into a network of businesses with total revenues of $14.2 billion, and approximately 42,000 employees in 28 countries, serving a diverse and global customer base. Headquartered in Providence, Rhode Island, U.S.A., Textron is ranked 202nd on the FORTUNE 500 list of largest U.S. companies. Textron owns brands such as Bell Helicopter, Cessna Aircraft, Kautex, Lycoming, E-Z-GO and Greenlee, among others. It actually started as a textile company in the Boston area.

Despite bleak financial results, Textron shares have been rising for the last week on rumors of an Arab buyout at more than double last Wednesday's closing price. This is from a report from last Thursday.

TXT was up as much as 89 percent in early pre-market trading on heavy volume of about 2.1 million shares. It has since pulled back but is still trading up at $13 in the first 10 minutes of the regular session, some 42.6 percent above yesterday's close of $9.11.

The stock has been rallying back from its $3.57 low last month. Textron saw heavy stock and options trading Monday as traders speculated on a purchase by a larger U.S.-based firm such as Lockheed Martin. Options trading yesterday totaled 29,334 contracts, almost triple the 20-day average.

Investors from the United Arab Emirates would offer $21 a share for Textron, with plans to sell off its military businesses, according to a report in Kuwait's Al-Watan newspaper. The maker of industrial products and aircraft had lost more than four-fifths of its value in the previous year on concerns about its finance division.

To put this in perspective, Textron traded at $65.52 as recently as May 30, 2008.

The JPost reports on Friday morning that the Israeli defense establishment is concerned that the sale of Textron to UAE investors would jeopardize Israeli defense contracts and military secrets. That's likely even a greater concern given those investors' plans to sell off the military businesses (to whom?).

The Israeli defense establishment has strong ties with companies owned by Textron. Bell Helicopter for example, manufactures the Cobra attack helicopter and still assists the IAF in its upkeep and maintenance.

In 2004, the IDF purchased several Dingo 2 armored cars for urban operations from Textron.

This relationship culminated last year in the signing of a multi-year, $1 billion contract between Textron subsidiary AAI and Yavne-based Aeronautics, Ltd. to market the Orbiter Mini-UAV (unmanned aerial vehicle) system jointly to US and select international customers.

Under the terms of the agreement, AAI will lead marketing activities for the Orbiter Mini-UAV system in the US as well as other foreign military sales.

...

"This is not simple for Israel," explained one defense official. "There are many projects that we develop together and if the company is bought, then a lot of classified information will be exposed."

While Israel has nonofficial diplomatic ties with the UAE, officials said it was concerned technological specifications on some of its hardware would be revealed, and possibly even transferred to hostile elements.

I actually do these kinds of contracts for a living, although I haven't done that many in the defense industry. My guess (I checked the SEC web site and did not find it there, so I assume it was not publicly filed - no surprise there) is that the last contract - which is more than a purchase order - has what's called a 'change in control' provision, which says that Israel can void the contract in the event that a majority of the shares in Textron are sold to someone that Israel doesn't like (with or without cause - and there is plenty of cause here if Textron is bought by a group of Arabs). But there may not be a provision in the contract that allows Israel to 'claw back' its confidential information that is provided to Textron as part of the contract in the event that the contract is terminated. In other words, either no one on the Israeli side really considered the possibility that Textron would be taken over by a buyer with interests that may be hostile to Israel's or Textron refused to agree to such a provision in the contract or they decided there was no point to adding such a provision. And in any event, even if you could 'claw back' what's written on paper or stored in a computer hard drive, you cannot 'claw back' what's in people's minds.

Here's part of a press release that was issued when the deal was signed on September 29, 2008 (when the financial markets were already in trouble, by the way):

AAI Corporation, an operating unit of Textron Systems, a Textron Inc. (NYSE: TXT) company, announced today that the company has entered into a teaming agreement with Aeronautics Defense Systems Ltd. of Israel to market the Orbiter Mini-UAV (unmanned air vehicle) system jointly to U.S. and select international customers.

Under the terms of this teaming agreement, AAI will lead marketing activities for the Orbiter Mini-UAV (MUAV) system in the U.S., including foreign military sales to Israel, and in other countries to be mutually agreed in the future. AAI also will manufacture the Orbiter system at its Hunt Valley, Md., headquarters for select programs.

The Orbiter MUAV is less than 40 inches in length and designed for the rigors of intelligence, surveillance and reconnaissance missions. With an operational endurance of up to three hours, the Orbiter MUAV can fly as high as 18,000 feet. Its light composite construction and battery-powered operation allow easy portability to ensure a team of two fielded warfighters can quickly deploy, launch and operate the aircraft.

The Orbiter MUAV system is a leading competitor for the Israel Defense Forces Land Forces Command acquisition program that recently was launched, already having been selected and operationally deployed by a number of other countries including Poland and Ireland.

"This teaming agreement enables AAI and Aeronautics Defense Systems to leverage its collective strengths in the unmanned aircraft domain," explains AAI Vice President of Unmanned Aircraft Systems Steve Reid. "The Orbiter MUAV system is well respected for its robust capabilities in such a compact size; and AAI has proven expertise in designing, manufacturing and supporting both tactical and small unmanned aircraft and ground control technologies. Together, we can bring this product to new customers who will gain powerful mission capabilities."

The Orbiter MUAV system is currently being integrated into AAI's robust One System(R) Ground Control Station (OSGCS), a platform that is designed to meet NATO standardization agreement requirements for unmanned aircraft interoperability. In fact, all of AAI's unmanned aircraft are compatible with the company's OSGCS, One System Portable Ground Control Station, and One System Remote Video Terminal.

It sounds like the Israeli technology is already integrated into the US-manufactured UAV. If that technology can be reverse-engineered, that could already cause serious problems.

Given the sensitivity of both the US's and Israel's recent use of UAV's (Israel in Gaza and possibly in Sudan, the US in Pakistan that we know about), there's a possibility that the US government might be concerned about its UAV technology falling into Islamist hands and might act to stop or put restrictions on any transaction with buyers in the UAE (there are typically hoops you have to jump through to buy control of US government contractors to avoid sensitive information falling into the wrong hands). Oops - I forgot. George W. Bush isn't President anymore.

Any experts on the defense industry out there who can enlighten us?

posted by Carl in Jerusalem @ 7:42 AM