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L 3: Hey, If It Worked For Loral...

The Corporation: STRATEGIES


Frank Lanza's new company is thriving with insights From the defense star

Frank C. Lanza has sat at one desk or another at 600 Third Ave. in New York for the past 17 years. First it was as president of Loral Corp., where Lanza helped the legendary Bernard L. Schwartz turn a floundering, small-time conglomerate started in the Bronx into a $7 billion defense power. After Loral was sold to Lockheed Martin Corp. in April, 1996, Lanza moved downstairs a couple of floors to serve as a Lockheed executive vice-president.

But in all those years, there was one seat Lanza never occupied: the chief executive's. That changed in April, 1997, when Lanza talked Lockheed's CEO at the time, Norman R. Augustine, into letting him buy out 10 electronics manufacturing divisions from Lockheed, launching L-3 Communications Holdings. "The thing that did excite me most was being No. 1, finally," says Lanza. "L-3 became my second chance. And I didn't think I'd get a second chance."

Two times seems to be a charm. Rather than easing into retirement, the 66-year-old Lanza now finds himself running one of the hottest companies in the market. Since its May 19 initial public offering, L-3 stock has climbed 73%, to a recent $46 per share. Half of that gain has come in the past two weeks alone, buoyed by a 68% jump in third- quarter earnings. At a time when better-known defense stocks are flat or down, Lanza has maintained investors' faith. "There are very few people out there who are the real thing," says Richard Perry, whose investment firm owns 1.4 million shares, "and Frank Lanza is the real thing."

Schwartz's right-hand man for 15 years, Lanza is quickly stepping out of his mentor's shadow. But he's hardly abandoning what he learned there. Staffed up with Loral graduates, Lanza hopes to build L-3 into a powerful new defense player through Loral-style acquisitions. He's also replicating the entrepreneurial operating style that made Loral a standout in the heavily bureaucratic industry--and on Wall Street. The formula clearly works: For the full year, Merrill Lynch & Co. analyst Byron K. Callan expects earnings to soar 53%, to $95 million. L-3's sales should well exceed $1 billion, up from $701 million last year.

Already, Lanza and President and Chief Financial Officer Robert V. LaPenta, another Loral alum, have established L-3 as an expert in two areas. One, specialized electronics, includes cockpit voice recorders and other devices sold to government and commercial customers. That and the second area, secure communications for military airborne, ground, and shipboard systems, are part of the fast-growing market for defense electronics, a market DFI International says will hit $57 billion this year.

Lanza hopes to boost L-3 into a top-tier supplier to the three major prime contractors--Lockheed, Boeing, and Raytheon. "They're doing Loral all over again, but with a different business environment, where the opportunities are among small to midsize suppliers to the Big Three," explains Lior Bregman, CIBC Oppenheimer Corp.'s defense analyst. Bregman also points out that unlike Loral, L-3 is tackling commercial markets.QUICK APPROVAL. Already close to retirement age by the time he got to Lockheed, Lanza had never lost his entrepreneurial itch. That made it hard to fit into the giant's slower-moving culture. "Loral was a hard act to follow," says Lanza, a straight talker who Schwartz says was so loyal to Loral he never once asked for a raise.

He got them anyway, of course, but Lanza believed so strongly in Loral that he initially lobbied against the merger with Lockheed. He reasoned Loral could one day rival the majors if it remained independent. But he finally bowed to the premium price Lockheed granted to Loral shareholders, even agreeing to Schwartz's request that he go to Lockheed and oversee the consolidation.

From there, he could easily have jumped with a golden parachute to the tennis courts, but within a year he was instead lobbying Augustine to part with the units he wanted to start L-3. "It took me less than half an hour to get a yes," says Lanza. "I said we can build a big company, and Norm agreed." Lockheed owns 25% of L-3.

To build the company, Lanza has re-created Loral's signature hands-off approach. He relies on weekly one- to two-page faxes from each division manager, then meets with them at least once every six weeks to keep up to date. In return, he regularly sends off handwritten notes on everything from industry rumors to strategic advice. "They say it's your business and you live and die by the sword. Good luck, and please call us for help," explains Steven Schorer, president of L-3's Ocean Systems business.ORPHANS SOUGHT. Years of operating experience--and 25 deals done at Loral--give Lanza an edge when shopping for acquisitions, which takes about a third of his time. "He's just very, very savvy," says Schwartz, now CEO of satellite specialist Loral Space & Communications and the owner of 50,000 L-3 shares. Lanza sticks to clear acquisition criteria. He buys technology leaders, either smaller independents finding it too costly to stay solo or isolated divisions of the defense giants that may not fit with a new parent's core operations after a merger. All purchases must add to L-3 earnings in a year or less. Lanza says he rejects 60% to 70% of the deals he looks at, but he has bought seven companies in the past 18 months.

Some things have changed from the Loral days. The bargain prices Schwartz paid for acquisitions in the 1980s and early '90s are history. Competition now includes a plethora of high-powered investment firms. Among them: Carlyle Group, headed by former Defense Secretary Frank C. Carlucci, and Global Technology Partners, financed by Donaldson, Lufkin & Jenrette Inc. and also run by ex-Pentagon leaders. "It's a lot tougher today than it was when Frank and Bernie Schwartz were first doing it," says Mark Ronald, head of Marconi North America, a $2.3 billion division of Britain's General Electric Co. and sometimes an L-3 rival. "[Values] have doubled. That makes it a heck of a lot harder to get a good return."

So far, Lanza has made it look easy. A prodigious worker, he is industrious even during downtime. He's a competitive tennis player and spends many weekends working on the six restaurants he owns with his three sons. Lanza, who remembers a career with lots of travel keeping him away from his kids, says running a business "brought our family together." Retirement from L-3, he insists, is at least 10 years away. "I grew up in this business," Lanza says. After taking so long to get to the top, he isn't in any hurry to step down.By Nanette Byrnes in New YorkReturn to top

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