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Global Terror and the Defense Industrypresented to the

International Institute for Counter Terrorism's

7th International ConferenceSeptember 2007

Global Terror and the Defense Industrypresented to the

International Institute for Counter Terrorism's

7th International ConferenceSeptember 2007

Joshua Yeres Senior Defense Industries Analyst for Giza Singer

Even Economic and Financial Consulting Ltd

www.gse.co.il

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� Largest and leading private, independent economic and financial consulting firm in Israel , with over 20 years of consulting experience.

� Involved in the largest and most complex transactions in Israel (over 6 Billion NIS in 2006 and exceeding 7 Billion NIS by mid-2007).

� Global business relationships with leading American and European investment banks.

� Vast experience in defense , high-tech, energyenergy, retail telecommunications, transportation and manufacturin g.

� The GSE comprehensive solution: Financial Advisory, Transaction Services, Financing (equity and debt) and Anti-trust Consultancy.

Giza Singer Even Ltd

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Specific Market and Company Characteristics

Market:

• Volatile market

• High level of government involvement (diplomatic relations, international scrutiny, licensing)

• Structure of Conflicts (Symetric vs Asymetric)

Company:

• High R&D expenses

• Technology driven supply

• Weapon System Producer vs Sub-system producer

• Complex and long marketing processes

• Critical mass of about $2Billion revenues/annum required due to low profit margins (avg. net profit 5%) – GSE assessment

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Success Probability

Specific Characteristics & Issues

1.Negotiating:

• Complexity of contractual agreement: Buying Customer (off-the-shelf product) vs Developing Customer (tailor made)

• Negotiating simultaneously with several potential customers

Initial sorting

Secondary sorting

Initial Negotiations

Advanced Negotiations

Closing

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Government

Commercial

Joint

Specific Characteristics & Issues

2. Pipeline of orders

3. Financing and Guarantees

4. Inventory: LCC (Life Cycle Cost) Model, Spares

5. Ownership

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World Military Expenditure ($B)

Constant 2005 dollarsSource: Sipri 2007

700

750

800

850

900

950

1000

1050

1100

1150

1200

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

B$

25%+ growth since 2001

AgreementsAgreements

7 Source: CRS

Arms Agreements Worldwide ($B)

• Developed Countries: US, Russia, W. Europe, Australia, New Zealand, Canada, Japan

• Developing Countries: the rest

Arms Agreements:Leading Indicator

Total Market - over $40 B

Developing Countries - 33% of total

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Arms Agreements – by Supplier ($B)

Source: CRS

Arms Agreements:

Leading Indicator

Increasing market

diversification

In billions of constant 2005 dollars

U.S. Russia

Major West European All Others

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CustomersSuppliers

USA

Developed Countries

Developing

Countries

USA

companies

Companies in Developed Countries

Third World

Companies

)Israel(

Map of Worldwide Competition

1. Is the Developed Countries Market large enough to justify development of advanced weapon systems by advanced producers in ot her countries ?

2. Will the advanced producers successfully compete in the “low tech market”against less advanced producers based in Developing Countries ?

3. Where can Israeli companies get the most leverage from their advanced and “battle proven” technology ?

The Challenge for Israeli Defense Companies

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Market EnvironmentEarly ’90s: end of cold war (cuts in defense budgets)

• attempts to transform to civilian uses (tanks to tractors) –unsuccessful

• rise in refurbishment (of existing main weapon systems)

Late ’90s: LIC in / HIC out

• insurgency threats to be dealt with by “Police Actions”

Since 9/11: War on Global Terror

• weapon-systems for war (HIC)

• continued needs of fighting insurgency

• increased outlays for homeland security

Future: Return of Cold War (?)

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Defense Industries - Capital Structure

Early ’90s: Government owned

Mid ’90s: Privatization and Consolidation

Late ’90s – early ’00s: Corporate structure, increased involvement of Start-up’s

Government Budget

Corporate Finance

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Battlefield Requirements – Customer Demand

1. Total War “OUT” / Local Conflicts “IN” – but ….

2. Increase work load of police actions in foreign countries (not defending homeland)

3. Urban setting / Asymetric warfare (Fanatic insurgency coupled with increased lethality of weapons)

4. Shift of struggle from battlefield to international media (TV/web)

5. More Technology (Increased sensitivity to casualties)

6. Increased sensitivity to “collateral damage”

7. Demand for total solution (total knowledge, total control, unification of sensors/weapon sights)

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Defense Industries 2007: General Trends*1. Diversification (technologically and geographically):

• More technology

• More nuanced products (less-than-lethal, protection/body armor, communications)

• More intra-industry (accessing traditionally off-limit markets) and cross border integration (by M&A and or JV)

2. Modernization and Professionalization – from conscript to professional forces (soldier systems and components, C4I, more flexible force)

3. Merging of Defense and Homeland Security Requirements (increase of market size)

4. Increased Competition

5. Increased Sensitivity to Costs* Based on Jane’s Strategic Advisory Services

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Trend in Defense M&A’s Source: Jane’s Strategic Advisory Services

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Defense Industries – Looking to the Future

1. Defense Spending to increase

2. Shift in development business model from in-house R&D to start-up acquisition

3. Accelerated diminishing government involvement –companies must seek sales worldwide

4. Blurring of lines between technology companies and defense industries

5. Shift from governmental budget to corporate profitability (including financing by share or debt public offer)

Bottom Line:

Defense industry more and more dependant on capital markets

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1. USA: US DoD FY 2008 budget ($17B) reflects double 2001 spending (Janes Feb 8 2007);

2. Russia:

• Putin looks to double military aircraft production by 2025 (Janes Aug 13 2007),

• Putin aims to up Russian helicopter production – aim to corner 15% of market by 2025 (Janes Aug 30 2007),

3. Japanese MOD requests budget hike for 2008 (JanesAug 31 2007),

4. Georgia to boost defense budget by 33% (by $200m to $600m) – (Janes Aug 30 2007)

Defense Spending to Continue to Increase

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From gov. budget to corporate profitability

1. Indonesia looking to foreign banks to fund Sukhoi deal,

2. Rosoboronexport says companies may hold IPOs by 2012 (Janes Aug 22 2007),

3. US Bank of West and General Atomics Aeronautical Systems form $300m credit facility (Janes Aug 28 2007),

4. Curtiss-Wright establishes $425m credit facility (Janes Aug

13 2007),

5. PLA increases outsourcing of logisitics to private sector (Janes June 6 2007)

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How Do Capital Markets Rate Defense?

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Investor Growth Expectations

Comparison of Sales Ratio of non representative sample of Defense companies shows increase of appr. 20%between end of 2004 and end of 2006.

Enterprise Value % EV Revenue % Revenue Sales Ratio Revenue based EV basedElbit 1,035 2% 899 2% 1.15 0.02 0.02 Tadiran 407 1% 328 1% 1.24 0.01 0.01 Alliant Techsystems 3,276 5% 2,366 5% 1.38 0.06 0.08 Armor Holding 1,356 2% 771 1% 1.76 0.03 0.04 Ceradyne 598 1% 152 0% 3.94 0.01 0.04 General Dynamics 24,328 41% 19,044 36% 1.28 0.46 0.52 Northop Grunman 29,037 48% 28,958 55% 1.00 0.55 0.48 Total 60,037 100% 52,518 100% 1.14 1.18

2004

Enterprise Value % EV Revenue % Revenue Sales Ratio Revenue based EV basedElbit 1,864 2% 899 2% 1.22 0.02 0.03 Tadiran 372 0% 328 1% 1.44 0.01 0.01 Alliant Techsystems 4,935 6% 2,366 5% 1.53 0.07 0.09 Armor Holding 3,414 4% 771 1% 1.45 0.02 0.06 Ceradyne 1,520 2% 152 0% 2.29 0.01 0.04 General Dynamics 36,508 44% 19,044 36% 1.52 0.55 0.68 Northop Grunman 33,431 41% 28,958 55% 1.24 0.68 0.51 Total 82,045 100% 52,518 100% 1.36 1.41

2006

Weighted Average Sales Ratio (2004): 1.18

Weighted Average Sales Ratio (2006): 1.41

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Comparative Yield Analysis: Strong Growth

0

100

200

300

400

500

600

700

08/1

995

12/1

996

05/1

998

09/1

999

01/2

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06/2

002

10/2

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03/2

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07/2

006

12/2

007

Defense Index Nasdaq Dow Jones

09/2001

GSE Defe

nse Index

Nasdaq Index

Dow Jones Index

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Aerospace and Defense - Product & Services

Source: Nasdaq

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Comparative Yield Analysis

0

100

200

300

400

500

600

700

08/1

995

12/1

996

05/1

998

09/1

999

01/2

001

06/2

002

10/2

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03/2

005

07/2

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12/2

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Defense Index Nasdaq Dow Jones

09/2001

• Comparison of Market Index (Nasdaq index) to a synthetic weighted index of Nasdaq listed Aerospace & Defense Comp.

• 300% higher return than Nasdaq during last 5 years

• Presents “hedging” characteristics against “bad times” (like gold)

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Some Words Of Caution

0

100

200

300

400

500

600

700

08/1

995

12/1

996

05/1

998

09/1

999

01/2

001

06/2

002

10/2

003

03/2

005

07/2

006

12/2

007

Defense Index Nasdaq Dow Jones

09/2001

1. Indicative of trends over time

2. Doesn’t represent any specific company

3. Includes civilian aerospace activities (were hurt after 9/11)

4. Does not take into account non-public companies (The defense industry – more than any other sector – is characterized by a significant number of government and/or private companies)

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Thank You