Highlights from Wharton Aerospace 2007 Entrepreneurship Panel
April 27 , 2007
Founders and owners of leading aerospace and defense companies recently discussed how they create wealth during the 2007 Wharton Aerospace Conference held at the Wharton School of the University of Pennsylvania. Panelists included industry executives who have excelled at raising capital, running successful businesses and enhancing company values via liquidity events.
This insightful look at business lifecycles yielded valuable information.
From the moment these leaders created their companies, carefully guiding them through the initial launch into the expansion phase and finally positioning firms for the final days under their ownership, each stage presented them with its individual challenges and obstacles that had to be strategically addressed.
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Entry and exit barriers unique to the Aerospace & Defense market quickly spelled success or failure for start-ups. This sophisticated marketplace demands early directives and decisions that can greatly impact the bottom line.
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Flexibility proved vital for survival during the growth phase even with federal protections that created a more level playing field. Risk can equal reward if the business model makes it possible to quickly respond or rapidly change direction.
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Even the best managed business may be undervalued if the wrong liquidity strategy is implemented or it's not the right time to divest. Planning and patience will yield the best deal.
Sale to Strategic or Financial Buyers:
Price definitely matters but consider these conditions of the sale as well:
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Will you stay on? Under what terms & conditions?
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In the event of contingent payments (e.g., earn-outs), will you have the ability to influence outcomes under the new organization?
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How will these changes impact your customers?
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How will all the above affect the company you built?
Sale to the Public (Initial Public Offering):
Panelists had these very strong opinions about going public:
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"Don't do it if you don't have to. Capital is plentiful, but expensive, and equity is considerably more expensive than debt."
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"To go public is to go into an impatient, almost hostile environment, given the constant scrutiny of public markets and the increasingly burdensome oversight of government regulators. Sarbanes-Oxley, tax planning and the costs of compliance, simply take money out of your bottom line."
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"The ego boost of running a publicly traded company wears out quickly."
Sale to Employees (Employee Stock Ownership Plans):
One panelist's liquidity strategies entailed the sale of his company to employees under an employee stock ownership plan (ESOP). Since many of the audience members (including those from bulge bracket investment banks and corporate development M&A departments) were not familiar with ESOPs, this option drew considerable attention.
This panelist felt the benefits of an ESOP as an exit/liquidity event included:
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Flexibility concerning the structure and customized design of the transaction, including the ability to sell a portion of one's company or transition ownership over time
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The option of retaining operational control post-sale
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The ability to create an automatic market for the sale of one's company
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Significant tax benefits to owners and to the company itself
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The power to reward, motivate and instill an ownership culture among employees
Conclusion
Despite consolidation, entrepreneurship within the aerospace & defense industries is alive and well. High profile transactions like GE's recent $5 billion acquisition of Smiths Aerospace and Onex Corporation's $3.3 billion acquisition of Raytheon Aircraft may captivate the media, corporate and banking communities' attention, but middle-market companies - and the visionaries who founded them - are the real wellsprings of growth and innovation in this industry.
Should you have any questions concerning the “entrepreneurship in aerospace & defense” panel, Wharton Aerospace, or any subjects covered by the panel, please contact PCE at 621.2100.
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