The Playbook Behind a $78 Billion Aerospace Empire

Editor's note: It isn't easy to rebuild a lost monopoly. Today, Joel Litman from our corporate affiliate Altimetry shares the story of an industrial company that lost its hold on the defense sector... until two executives split off and changed its focus. In this issue, recently published in Altimetry Daily Authority, Joel explains how their strategic pivot pulled this business out of the ashes... and turned it into a market behemoth.

Nick Howley and Doug Peacock turned their looming job loss into a $78 billion opportunity...

Howley and Peacock were senior executives at a small conglomerate called Imo Industries. Imo owned a handful of aerospace businesses during the twilight of the Cold War.

It used the junk-bond market to fund several major purchases that boosted its offerings... like power-transmission supplier Incom, and Varo, which made night-vision equipment.

This acquisition strategy helped Imo triple its revenue between 1987 and 1991. For a while, it seemed like the good times would never end.

Then the Soviet Union collapsed.

With the Cold War over, the U.S. no longer needed such a robust defense budget...

That meant Imo's biggest customer just wasn't buying like it used to.

The company went from its heyday to an all-out panic. Revenue was shrinking... right as bondholders came knocking. To make matters worse, the company was facing roughly 7,000 lawsuits alleging that it was responsible for asbestos-related injuries.

It looked like it might be the end of Imo. But Howley and Peacock weren't ready to give up. Today, I'll explain how they turned what looked like a dying company into an industrial giant...

Buyouts Turned the Business Around

The duo worked in Imo's aerospace division. They oversaw businesses like Wiggins Connectors, which made fluid system fittings... Adel Fasteners, which produced clamps and fastening systems... and Aeroproducts, which supplied pumps and power-control components.

These aerospace segments were still profitable. But as defense spending fell, they'd been receiving less and less attention. Imo's management team was focused on scraping together enough cash to pay off its mounting debt.

Nobody at Imo had time for the shrinking aerospace industry anymore.

Nobody, that is, except Howley and Peacock.

They led a leveraged buyout of Imo Industries' aerospace businesses for roughly $56 million...

Imo got enough cash to keep the lights on. And Howley and Peacock's business got a second shot at life.

The pair named their new company TransDigm (TDG). They set out with a simple, if ambitious, business model...

TransDigm would gobble up other small, unloved aerospace suppliers.

It focused on companies that had already received approval from the Federal Aviation Administration ("FAA")... meaning aircraft makers pretty much had to buy from them.

Getting FAA approval is a long, complicated process. Some parts take years to get approved. So aircraft operators rarely change suppliers once a part is approved. It's just too much hassle.

That creates a huge opportunity... if you know how to take advantage of it. Suppliers like TransDigm enjoy decades of "replacement demand" after their parts are installed. When an old part gets worn down, customers generally buy a replacement from the original supplier.

Now, TransDigm's acquisition strategy started small...

Its first "major" deal came in 1999, when it spent $41 million on Adams Rite Aerospace. That was about one-third the size of TransDigm's entire business.

Two years later, it dropped $160 million for Champion Aerospace.

By 2007, it could afford to spend $442 million a pop on acquisitions.

And just three years later, in 2010, it bought a business called McKechnie Aerospace for a cool $1.4 billion.

All told, TransDigm has scooped up more than 100 smaller players since Howley and Peacock struck out on their own in the 1990s. It grew from a handful of orphaned part-makers into a $78 billion industry giant.

TransDigm's rise was never really about aerospace. It was about a formula – find a supplier with a captive customer base, buy it cheap, and let the replacement demand do the rest.

That buyout formula still works today. Watch for strategic acquirers rolling up niche, regulatory-approved suppliers with locked-in customers.

That's the exact setup that turned a $56 million buyout into a $78 billion behemoth.

Regards,

Joel Litman

Editor's note: The Cold War-era defense buildup sent Lockheed Martin and General Dynamics soaring 47,000% and 13,000%, respectively. Today, Joel sees a new boom emerging. President Donald Trump has proposed amassing a $1.5 trillion war chest to rebuild the U.S. military... And on September 24, Joel will explain why he expects a short list of little-known defense suppliers to shoot up as much as 23-fold.