Canadian space technology firm MacDonald, Dettwiler and Associates (MDA) finally completed its US$875m acquisition of US satellite manufacturer Space Systems Loral in early November.
The transaction has been widely hailed as the stand out…
Canadian space technology firm MacDonald, Dettwiler and Associates (MDA) finally completed its US$875m acquisition of US satellite manufacturer Space Systems Loral in early November.
The transaction has been widely hailed as the stand out transformational deal in satellite sector this year and has given MDA a significant presence in both the commercial and governmental markets.
SatelliteFinance’s Jason Rainbow spoke to MDA CEO Dan Friedmann about the strategy behind the acquisition, and where he plans to take the combined company in the future.
Jason Rainbow: What was the main strategy behind the acquisition?
Dan Friedmann: Our main objective is to grow our company. So this acquisition is all about bringing two very good companies together to make more than the sum of the parts. We are of course very focused on the commercial communications market, which SS/L is the leader in and which MDA plays a role in today.
We see some synergies there because we basically have different strategies. SS/L is focused on the commercial operators, and MDA has been more focused on the emerging country opportunities – so we see synergies in going after those two together.
The other key thing, which MDA has been after for a long time, is to have a real strong capability in the US with which to pursue government work. We do a lot of work with the US government, and have had in the past Canadian and US government agreements. But we would like to do a lot more work directly, and what we need is a strong set of engineering skills and facilities in the US in order to bring those technologies. SS/L provides that, it’s already going after the US government market in communications. We have a little bit too, but we want to bring more of our robotics, surveillance and intelligence capabilities to the US government.
So it’s those growth objectives that drove us. We’re also trying to balance out some of our government work with the commercial, and by getting together with SS/L we’ll get a significant increase in our revenue from the commercial side of the world.
JR: How long has MDA been looking to increase its presence in the commercial market and find this balance? Was the expected fall in government spending a deciding factor?
DF: No, at MDA we have a long history of trying to gain access to US government work, going back to the mid-2000s. It is the largest market for our capabilities.
We had a commercial division that was sold a couple of years ago, and since that time we have also been trying to gain back some of our revenues from the commercial market.
So the US initiative has been around for quite a while, the commercial push has been there for a little less time. Getting together with SS/L actually deals with both of these objectives. It’s been going on for quite a while, and not related to any government decisions.
JR: While aiming to achieve these goals, you planned a merger with ATK which fell through back in 2008. After that, was SS/L the only company that fitted your cause, or did you review other potential acquisitions along the way?
DF: You know, even pre-ATK we’d been looking at different ways to gain more access to the US market. We looked at selling, buying, joint venturing, and we looked at organic growth. We’ve tried all kinds of different approaches, and of course we’ve been partially successful. We have some presence in the US, but it’s mostly in the geospatial services area and not in the satellite and defence side.
JR: You spoke about the importance of gaining SS/L’s engineering expertise and facilities. How does this enable you to compete for US DoD contracts specifically?
DF: The key thing is that we’re already a pretty strong supplier to the US government, on robotics for example. We also supply a fair amount of radar-related intelligence imagery. And what’s been made very clear is that there is a lot more jobs we could get if we were doing the work in the US – to the satisfaction of the US government from a security and an economic point of view.
So we needed a partner in the US that is able to understand our technology and produce it in the States. We know that what we do is in demand, and it’s needed and being used, but we need to make it there. So we need the physical facilities and the technical expertise to do that. And building that from the ground up is very difficult because it’s a slow process. It’s a bit of a chicken and egg problem. We have done some building from the ground up, and it’s been slow and partly successful, but we think this will be a much bigger push.
It’s a matter of having the capability the US government wants available in the US for its citizens. That’s what we’re able to do now going forward.
JR: You have stated that the deal will be immediately accretive, what kind of wider synergies do you expect?
DF: Like I said, this is not about two companies doing the same thing, and now doing the same thing with less. It’s about companies that do very different things, have complementary skills, geographies and strategies, and putting those two together, making one plus one equal three. So it’s about the US government discussion we’ve had. It’s about expanding in the communications market place to areas where we can do things better together than we could separately. It’s all about increasing the top line, it’s not about decreasing costs.
JR: How does the acquisition help you compete more effectively with your rivals?
DF: I think SS/L on its own is a very competitive company in its marketplace, and MDA on its own is a very competitive company in its marketplace. We compete against some of the same people. But together we now have a much broader breadth of capability and offerings that we can bring to new markets that we couldn’t do before.
We are competitive already. We take on the big guys in many areas. We are now just able to do that in some other markets that we weren’t doing it in before.
JR: Do you plan to utilise the export credit agencies of both Canada and the US on future contract bids? Could both be used at the same time?
DF: Yeah, and that’s quite normal. If you have a bid that requires export financing, and the bidders are from different countries, it’s normal for the export agencies to cooperate and help the companies in their countries. We’ve done many Export Development Canada (EDC) / Export-Import Bank (Ex-Im) financed deals around the world in our surveillance business in the past.
As we go forward and we come up with a joint offering from SS/L and MDA, I’m sure we’ll be able to get the joint finance, which helps because these agencies are interested in producing employment in their countries. It’s always been hard for EDC to finance our US content, and it’s always hard for Ex-Im to finance a US company that is subcontracted to MDA with Canadian content.
JR: Are you concerned that we are reaching the end of the peak in demand in the cap-ex cycle and that future satellite orders will fall accordingly? Where will new areas of demand come from?
DF: I’m not concerned. We have an industry that has growth and a lot of demand. Sure there are cycles with major fleet upgrades and times without, but this comes down to a couple more satellites one year and a couple less the year after. Most of our satellites take over two years to build anyway so we smooth that out.
We see the market as reasonably stable at this stage, from the commercial guys, but that’s not where we’re looking for growth. Obviously we’re looking to do well in that market and continue to be competitive and win our fair share, but for our growth we’re looking at the emerging markets, from the US government, hosted payloads, and from bringing MDA technology into the US.
JR: When you talk about emerging markets, where specifically are you eyeing growth?
DF: Well, MDA has been particularly successful in Russia and the Ukraine. You know everyone says that the market is flat, but the Russians are buying several satellites next year, which are not considered in people’s view of the market of the normal operators as far as I can tell.
And there are a number of countries that have a similar desire. We want to go after and compete in those countries that are seeking to buy satellites.
JR: There does appear to be a growing trend of relatively small nations around the world aspiring to have their own assets in space. Is it these kinds of programmes that you are looking to get involved in?
DF: Absolutely, we already won a US$200m contract in the Ukraine a while back for their own communications satellite, which we helped them put together. There are a few others in the books right now. We saw the same trend in surveillance, where everybody eventually got their own ground segments for these surveillance satellites, and now they’re trying to build their own spacecraft.
So this is considered quite strategic and although people use the commercial availability they also have their own assets.
JR: Talking about tapping new sources of growth, back in January MDA and Intelsat scrapped plans to collaborate on a satellite in-orbit refuelling venture after being unable to secure key government commitments. What went wrong?
DF: What we did with Intelsat is we came out with a commercial solution to manage their fleet more efficiently by refuelling and repositioning certain satellites, but that venture relied on this becoming a commercial market.
It turns out that the US government was planning their own programmes and as these opportunities developed it became clear we should focus on them first.
I’m happy to report that we are having success. For example a key portion of the DARPA Phoenix program has come our way. So we have to shake all that out and see where the government funding ends up, and then go back to looking at the commercial plan. We couldn’t do that in parallel.
JR: So you could return to the Intelsat venture if the government programmes play out in favour of it?
DF: That particular idea related to a particular time and a particular set of needs that were upcoming in the next few years. When we return to look at the commercial opportunities for on-orbit servicing, I’m sure the world will have changed.
For the time being we are focused on the government market. Maybe the government will just continue to do all kinds of on-orbit servicing and it will be a government-funded programme, or maybe a commercial possibility will arise again.
JR: If that does happen and you decide to go into this commercially, would you consider going into it alone, or would you be looking for partners like Intelsat?
DF: Definitely if we were to start any kind of business that requires many years to build technology, costing millions of dollars, we will always be looking for an anchor customer to go forward. In effect, that’s what the government is at this point.
JR: MDA is involved in DARPA’s Phoenix programme, which aims to build a system for salvaging viable components from non-working satellites in-orbit. How does this relate to your earlier plans to refuel spacecraft?
DF: In terms of the business plan and the objectives, it’s different than the particular first commercial venture that we envisaged. But the process of going to space with a service vehicle that is able to dock with another satellite and do things to it, that’s technologically similar.
In our first commercial incarnation of this, we just happened to conceive a refuelling business because we thought that had more legs. DARPA is more interested in salvaging expensive components. It’s all in-orbit servicing, it’s a matter of whether you open your gas station to change tires, pump gas or to do tune ups first. But in the end it’s going to be a gas station that could do all three.
JR: Are there any other potentially new sources of revenue that we haven’t touched upon that MDA is evaluating at the moment?
DF: At the detailed level, yeah there is but the plans have to be firmed up. We’ve had very little interaction with SS/L during the regulatory process, so we’ve got our homework to get together and figure these things out in the next few months.
