NEWSMAKER-Stone Key drives defense technology dealmaking

Mon Feb 14, 2011 12:36pm EST

* Advises on $11 billion of deals since mid-2008

* Listening to Pentagon crucial in defense dealmaking

By Soyoung Kim

NEW YORK, Feb 14 (Reuters) - In a dealmaking world where big Wall Street investment banks rule, Denis Bovin and Michael Urfirer show that small can be beautiful.

The former Bear Stearns bankers, who helped create the world's top defense contractor Lockheed Martin Corp (LMT.N) through two mega-mergers in the mid-1990s, are now driving dealmaking in the so-called "cybersecurity" arena where defense meets commercial technology.

Since setting up the boutique advisory shop Stone Key Partners a little more than two years ago, the duo has advised on some of the most hotly contested auctions in defense technology, including the sale of Argon ST to Boeing Co (BA.N) and the two-part sale of biometric identification maker L-1 Identity Solutions ID.N to Safran (SAF.PA) and BAE Systems (BAES.L).

Those transactions followed Stone Key's first big deal -- the $5.2 billion sale of U.S.-based DRS Technologies to Italy's Finmeccanica SpA (SIFI.MI) in 2008, the second-largest defense deal of the past decade, globally.

At Bear Stearns, Bovin and Urfirer helped develop an acquisition strategy to transform DRS into a defense powerhouse from a company with annual sales of $20 million headquartered in a New Jersey shopping center.

"When they decided to sell the company, it was just when Bear Stearns was collapsing," Bovin, 63, said.

"And the CEO basically called us up and said, 'Look, you've gotten me here. This is the most important transaction in my life. I don't care where you are but you've got to get set up so you can help me."

"And then we did a very complicated cross-border transaction. That was hard."

Bovin and Urfirer were joined at Stone Key by former Bear Stearns colleagues later that year, soon after the investment bank's forced sale to JPMorgan Chase & Co (JPM.N).

"Six of us worked from home for a year," Urfirer, 51, said. "We didn't even have an office."

"When we needed to get together, we got together," Bovin added. "We were pretty effective during that timeframe."

The pair were interviewed by Reuters at the Harvard Club of New York, where they frequently convene for food or meetings. Both men are Harvard alumni.

"You're sitting in the Stone Key conference center, and the Stone Key dining room is downstairs," Bovin joked. "We're very formal people, as you see."

NEW KIDS ON THE BLOCK

In the two years since the DRS transaction, Stone Key has brought in eight more bankers and has been involved in deals worth $6 billion -- roughly half of the $12 billion in global aerospace and defense deals in 2009-2010, according to Thomson Reuters data.

When Urfirer and Bovin got together at Bear Stearns in 1994 -- Urfirer came First Boston and Bovin from Salomon Brothers -- defense sector dealmaking was dominated by Goldman Sachs (GS.N) and Morgan Stanley (MS.N).

So when the duo scooped the $5.2 billion sale of Martin Marietta to Lockheed during their first year together, "It was sort of, 'Who are those new kids on the block?'" Urfirer said.

They then embarked on a series of major transactions that winnowed the top tier of the defense sector down to five players: Lockheed Martin, Raytheon (RTN.N), General Dynamics (GD.N), Boeing and Northrop Grumman (NOC.N).

Their deals in the mid-to-late 1990s included Lockheed Martin's $8.76 billion acquisition of Loral's defense business, Raytheon's $9.5 billion buy of Hughes Aircraft, and General Dynamics' $5.4 billion purchase of Gulfstream.

"Our strategy was, we would get to know the customer better than our competition, and as well as our clients. So if you're selling to the government, we set out to understand the government. I spend a lot of time in Washington," said Bovin.

Reading the tea leaves from the Pentagon is key when it comes to defense dealmaking. Last week, the Pentagon said it would welcome industry M&A amid tighter budgets, but not consolidation among the biggest contractors. [ID:nN09153404]

Bovin's connection to the movers and shakers in Washington was so deep that he was tapped for the post of secretary of the Navy during second term of President George W. Bush.

"At the very last moment I asked my name to be withdrawn," he said, without disclosing the reason.

NOT JUST DEFENSE

Bovin and Urfirer became so well known for their role in 1990s defense industry consolidation that they sometimes have to remind others that they know technology, too.

Bovin, for example, counted the likes of Hewlett-Packard Co (HPQ.N) and IBM (IBM.N) as clients as chairman of Bear Stearns' technology, media and telecoms group until three years ago.

Defense technology has become an area of intense dealmaking as arms manufacturers seek to address security threats targeting the nation's computer networks, power grids and infrastructure systems. The Pentagon has 15,000 computer networks that link more than 7 million machines.

Meanwhile, software companies like HP, IBM and Symantec (SYMC.O) are eyeing takeover opportunities in defense as they seek to sell more to the government.

"But you really don't know how to do that. It's just not like sending a salesman to see President Obama," Bovin said.

"We're the guys who have a foot on both the government and commercial sides of the technology, so either side wants to know what we know about the other," Urfirer said.

"There's a common theme that runs through a lot of these transactions -- those deals are on the cutting edge of where the government marketplace is going. It's not like two shipyards combining." (Reporting by Soyoung Kim; editing by John Wallace)

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