Turning the Arms Industry's Scraps into Gold

When Jon B. Kutler left investment bank Wasserstein, Perella & Co. to start a defense-industry merger boutique from his Bel Air (Calif.) living room a decade ago, clients said he was nuts. There was no prospect of mergers among the defense titans, they said. Kutler, a 10-year Navy vet, thought otherwise. He saw a rich niche in the scraps of a consolidating industry.

Turns out Kutler, 46, was right. Quarterdeck Investment Partners LLC (WB ), is now considered the top matchmaker of aerospace, defense, and government info-tech companies in the $25 million to $500 million range. There's no letup: The industry keeps consolidating, and increased defense spending sparks new interest in its offshoots. Quarterdeck expects $27 million in revenue this year from 25 deals, vs. half that amount from 15 in 2001, a weak year.

The firm has pushed into new areas since Jefferies & Co. (JEF ), a small investment bank, bought a 16.7% stake in 2001. They have formed a joint venture that handled Orbital Sciences Corp.'s (ORB ) $135 million note sale and info-tech company ManTech International Corp.'s $132 million initial public offering this year.

It's a tough niche. Assets are hard to price. Deals can founder on environmental liabilities or uncertainties over Pentagon contracts. Quarterdeck also has competitors, including Wachovia Corp. (WB )and Los Angeles-based Barrington Associates. Meanwhile, big banks, such as Credit Suisse First Boston (CSR ) and Merrill, Lynch & Co. (MER ), now keep the small deals they once sent Quarterdeck.

Industry execs say the firm's insider status is its edge. Staff includes ex-defense company CEOs, engineers, and lawyers. Take last year's sale of information-systems company BTG Inc. to Titan Corp., another info-tech shop. BTG hired Quarterdeck to write the fairness opinion on the deal it had negotiated. But Quarterdeck told BTG's then-CEO Edward H. Bersoff that the price was too low. Titan upped its offer. Months after the deal closed, Bersoff went to work for Quarterdeck.

Even those who sit opposite Quarterdeck speak well of it. "[We know] we're going to get a realistic approach to life and not a lot of used-car salesmen," says Frank C. Lanza, CEO of L-3 Communications Corp. Quarterdeck is representing Northrop Grumman Corp. (NOC ) in a sale of two divisions to L-3 (LLL ) (table).

Last year, however, the firm hit shoals after Kutler cut back his role in daily operations. So he took the helm again this year. Kutler says he could double Quarterdeck's size overnight. But then he would have to cut back when the cycle turns down. "I'm not looking to be a master of the universe," Kutler says. It makes for smoother sailing.

By Stan Crock in Washington

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