Jon Kutler, president of aerospace/defense investment banking firm Quarterdeck Investment Partners, assesses the industry under Bush Administration Jon B. Kutler Title:

President

Company:

Quarterdeck Investment Partners Inc.

Born:

Queens, N.Y., 1956

Education:

B.S., U.S. Naval Academy; MBA, Harvard

Career Turning Point:

Becoming a Naval officer handling communications, anti-submarine warfare, weapons and serving as an aide to a Navy admiral who commanded the Pacific Fleet.

Most Admired Person:

Capt. James Cook, an 18th century British navigator

Hobbies:

Skiing, travel, anything Hawaiian

Personal:

Married; two children

There aren't many aerospace/defense investment bankers in Los Angeles, which makes Jon Kutler something of a rarity. Odder still is that Kutler founded his Century City-based company, Quarterdeck Investment Partners Inc., in 1993 just as the local aerospace industry was in meltdown mode.

But the timing was no accident Kutler correctly anticipated that mega-mergers would occur among the major defense contractors and that would trigger a corresponding flurry of M & A; deals among L.A. subcontractors. As a result, Quarterdeck has thrived by advising L.A.'s multitude of small and medium-size defense, aerospace and information technology companies on issues related to mergers and acquisitions.

While many of those mergers have taken place already, Kutler says plenty more are ahead, extending through this decade. And having been in the aerospace/defense trenches during the painful consolidation, Kutler has a unique perspective on how the action will unfold in the months and years ahead.

Today, Quarterdeck has offices in Washington, D.C. and London, and manages 30 to 35 mergers and acquisitions a year, ranging in value from $15 million to $500 million. Kutler's subsidiary company, Quarterdeck Equity Partners Inc., owns six defense companies valued at between $10 million and $100 million.

Question:

What is biggest problem facing the aerospace/defense industry locally.

Answer: Unfortunately, Southern California lost its prime contractor advocates in this whole consolidation process. We had a number of local names like Rockwell, McDonnell Douglas, Lockheed, Northrop, that were headquartered here, which meant the subcontractor base here naturally got some preferential treatment because people like to be able to deal with subcontractors that are close. You can visit them more easily. In the mergers that took place in the '90s, a lot of those names disappeared. Boeing bought the Rockwell defense business and McDonnell Douglas. Northrop ceased to be an aerospace prime contractor. And Lockheed merged with Martin Marietta and is now headquartered in Bethesda. Without the prime contractors, you now have Southern California primarily composed of small to mid-sized subcontractors that generate $50 million to $100 million per year in revenues. Certainly Northrop is in the multibillion-dollar range, but that's the exception to the rule.

Q: Is recruiting and maintaining technical talent a problem?

A: Very difficult. Although it has loosened up a little bit since the dot-com bust. But traditionally, at least when I was growing up, people were attracted to aerospace/defense because it was the leading-edge technology. Up through the '80s that's where you wanted to go if you were patriotic or wanted to work with the latest and greatest in technology. Not so anymore. With the exception of some advance technologies that are more in a research stage, the technology is more likely to push the edge of the envelope on the commercial side more research dollars are spent there. An aerospace company can work one aircraft design for 50 years. Whereas, the life cycle of products on the commercial side may be 18 months. So it is hard to attract that new engineer for the same reasons that people in my generation and the generation before me were attracted. The big, big problem is this drain of talent.

Q: You were chairman of the White House Small Business Task Force on Defense Conversion. What ever came of it?

A: A number of recommendations in terms of how government could pursue dual-use technology. In other words, lowering their cost of procurement by having certain systems be able to have commercial and military applications obviously not at the missile level but at the component level as well as things that could be done in the procurement process to facilitate the growth of small to mid-sized companies. There are some items that are already commercially available that may solve 95 percent of a problem at a tenth of the cost and available in a tenth of the time especially in information technology, where the commercial marketplace has leadership positions. The Pentagon is often notoriously bad in software development. Because the procurement process is extremely cumbersome, by the time many weapons systems are actually deployed, they're out of date because it may take 10 to 15 years to field the system, yet technology may be changing every 18 months.

Q: President Bush has vowed to increase defense spending by $45 billion over 10 years, but Defense Secretary Donald Rumsfeld has stated he does not think the it needs to be that high. What will the final outcome be?

A: Unfortunately, a lot of people in Southern California are looking at this new administration and holding their hands out, waiting for the spigot to open and it's not going to happen. Traditionally it does during a Republican administration. But there's a couple of differences. Certainly we need to spend money. The question is, how do we spend it efficiently? I think this administration is trying to say, "We're not going to just throw money at the problem; we'll figure out where the money's going." We're under-spending based on our current model of operation, but since the end of the Cold War, we haven't challenged our underlying assumptions. Should we be geared to fight two major wars at the same time, or are most of our battles going to be Desert Storm kind of problems, or fighting computer hackers? You spend differently based on what your threat is. At the end of the day, there will be increased defense spending just not nearly as much as people anticipate. Also, the president is enamored by this missile defense program, which I happen to disagree with. I think that program will suck a lot of dollars out of the (local) defense industry.

Q: So do you think Bush's proposed $60 billion missile defense shield will fly?

A: No, I think logic will prevail at the end of the day and there will be a fair amount of money spent on research. I do hope it doesn't get deployed prematurely. It has the ability to suck dollars out that could be useful (if spent on other programs).

Q: Where do you see the major threat?

A: I see the major threat as being more Desert Storm-type, Third World challenges. We also need to spend a lot of money on figuring out how we fight battles against people we can't see: terrorists, both in terms of bombs, but also terrorists that can use the Internet or information backbone or take down space assets electronically to harm the country. We are so information-and communication-dependent that that is one of our weaknesses. The U.S. military is not geared right now to fight them. We're still geared to fight a land battle in Europe. And I think if you look at the next 20 years, that is a lot less likely scenario.

Q: So international terrorism has replaced the Cold War as the defense challenge of the 21st century?

A: Yes. Some of it will be state-sponsored the question of the have and have-not countries. The reason why d & #233;tente worked with the Soviet Union is we used to have this program called "mutual assured destruction." You don't launch your missiles at us, we don't launch our missiles at you, because we know that no one wins. When you're fighting a Third World threat, that's not the same logical bet. They have a lot less to lose.

Q: Ultimately, what do you think will come out of Bush's restructuring of the Pentagon's spending priorities?

A: I think there is tremendous savings by restructuring the Pentagon. It served its purpose during the Cold War. It needs to be reengineered for the 21st century. But the reality is, as someone who has worked in the Pentagon, unless President Bush has four terms, which he can't do, he won't fix the problem. It's just such a big issue that it will take many terms of different presidents to do. There will be some start of changes. All it will be in the next couple of years is perhaps some tweaking of program management or how you procure weapons and what you buy. But to the outside observer, it may not even be recognizable.

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