76 - 400 Transactions and What They Taught Her w/ Anita Antenucci Founder of 3Wire

Speaker A: Are you working?

Speaker B: What kind of work do you do?

Speaker A: In a world where disruption is the norm, brands don't just compete, they reinvent. And in a marketplace where everything has become a commodity, brand and digital experience are what truly drive differentiation. Welcome to Digital Doorways, the show where leaders unpack the creative digital and go to market strategies that help companies adapt, differentiate and break through. Hosted by BlueTech's founder, Jason Segal, uh, a creative strategist and three time exiting founder whose board and lead agency leadership has helped drive more than 100 successful exits, this is Digital Doorways. Step inside and explore the ideas shaping tomorrow's most powerful brands and the go to market strategies that get them there.

Speaker B: Welcome to another episode of Digital Doorways. I'm, um, Jason Segal, founder of BlueText, a B2B branding agency in Washington D.C. where we work with defense, aerospace and government contractors, including companies preparing to transact. And today's guest is a partner at Three Wire Partners, independent merchant bank focus exclusively on the aerospace, defense and government markets. She co founded Quarter Deck Investment Partners, led Houlihan Loki's AVG practice as a senior managing director and sat on its board before their IPO. Her team is advised on more than 400 transactions totaling over 50 billion in value. She is a Henry Crown Fellow at the Aspen Institute, holds a BA from Northwestern and an MA from Hopkins, and has built one of the most respected careers in the sector over three great decades. On another episode of Digital Doorways. Anita, thanks for joining us on Digital Doorways.

Speaker C: Jason, thank you for having me. I'm excited to be here.

Speaker B: Excellent. Let's jump right into it. So you've been both on the buy side and on the sell side across hundreds of transactions. Where do most deals fall apart and is it usually a people problem or is it actually a numbers problem?

Speaker C: I would say that most deal failures, whether before they happen or after they happen, probably come back to the nexus between people and numbers, which is they either fall apart over alignment, uh, or they fall apart over expectations. Maybe those are two sides of the same coin. But for example, if someone says, I'm highly confident I will deliver this set of numbers, and whether before or after the deal, it becomes very clear that that confidence is not shared. Um, a deal will fall apart, um, if someone thinks that evaluation is at one level and the other doesn't see that, uh, at all, um, you know, it's going to fall apart eventually. The best deals are going to come from people who are aligned about how hard or how easy or how to do something and share uh, in the upside of that outcome as opposed to, you know, the black and white zero sum game of once I buy the company, you have no more upside and I'm going to try to buy it for the lowest price possible.

Speaker B: Super interesting. You know, you're in the defense specialist category and we do a lot of the same work but obviously more on the brand and position side. And when we're working with our clients we often stress, you know, there's a lot of little details that matter from the right haircuts, the right fatigues, making sure if you're a, uh, US Uh defense company that you don't have Russian planes in the background. All sorts of unique little details that really show your kind of commitment to the market. Now Defense M and A has a lot of, a lot of layers of complexity that most sectors don't, including CFIUS reviews, security clearances, customer concentration and government contract transferability. How do you prepare a company for that reality before a deal goes to market?

Speaker C: Well, you've described a lot of the ways that uh, industry banking approach, industry approach to investment banking, uh, suits defense, uh, and aerospace and always has because it is so unique in so many ways. There are so many uh, technical uh, differences in how companies in this market deal uh, with their customers, deal with their accounting, uh, deal with all the regulations. And uh, it's one of the reasons that someone like me who set out with more of a policy background, uh, working. My degree is in strategic studies and I was working on understanding how the industrial base was changing as a result of policy changes and I wound up so sucked into investment banking. Because there's a real connection between both the uh, very many differences you highlighted as to how these companies do business, but also the policy reasons that those pol, that those things exist. They're not just there to make doing business harder. They're there because of um, the real national security importance of many of the things you said. Whether it's keeping healthy industrial base, protecting our intellectual property, protecting our country's ability to operate at war by having control over um, certain assets. So the answer is how do we prepare companies is very specific to understanding how all of those things are going to relate to their uh, objectives. If their objectives involve bringing in someone new, an investor. Is that a US Investor? Is it a foreign investor? A buyer? Same question. Uh, an ability to uh, integrate a capability with uh, a new partner, whether that's an acquisition target or a buyer, involves understanding all of those things and the limits of the policy rules that surround the industry. And to some Extent, the limits of the uh, strategic applications of technology. And we can talk more about that in specific circumstances. But you know, there are uh, not necessarily laws that tell you that it doesn't make sense to vertically integrate all of the capabilities in a platform that's going to last for 25 years, that you might want to keep competitively open to new bidders. But there certainly are practical realities, ah, that shape deals around that topic.

Speaker B: One of the brilliant things about this conversation is the perspective that you bring across. Hundreds and hundreds of working with defense founders. Um, a lot of Defense and GovCon founders that we've uh, interacted with before a transaction have this mentality of a little bit of underinvestment in brand and market positioning before transaction. They're often thinking about maybe cutting expenses, expanding ebitda, because that's going to get the most value for them. But the truth is that if you position and tell the right story, your valuation can get many more, um, multiples higher. How much do you believe the story a company tells about itself actually affects their enterprise value?

Speaker C: Well, the answer is a lot and a lot more than it ever even used to. You know, coming out of call, uh, it 30 years of industrial consolidation. You can look back at some companies whose footprint and reach in the sector was actually bigger than their reputation. You know, we used to, you know, joke with a lot of our clients that they were the biggest company someone had never heard of in a space because that was possible if you had a unique position. But as the industry contracting procedures in the capital markets, um, become much more open to new companies and new entrants, the field is a lot more crowded. And the ability to get attention in that field and be clear about where you belong is all the more important. And we definitely talk to clients. Our preference when we're going to be working with clients who are selling is that we have a chance to work with them, ideally for a couple of years before the actual event. Um, I know that's true for your business as well. And we recommend that they think about their branding, their presence, their advisors on that topic so that they have an external recognition, uh, uh, for the things they want to be known about, just not the name itself, but for the message that they think tells their story before someone like us or a group of investors is trying to understand it in the context of valuation.

Speaker B: Very true, very true. Now these founders we both deal with every day. They've been building their baby for 5, 10, 20, sometimes 30 years. This is so much of their personal wealth potential is tied up in this asset of a business, what are the signals that you see that you look for in management teams that tell you that the company is genuinely ready to transact versus just interested and excited about the idea of this kind of a transaction?

Speaker C: The sign that somebody is ready to transact, um, is really that they've come up the learning curve of what their options are and how to design a process and find an outcome that meets all those objectives. And it is a learning curve. You know, you described a founder who might have been focused on building their business for 5, 10, or 20 years. They may or may not really have given any thought to what that next chapter looks like, uh, and what the various options are. Maybe they've seen a business that is like them transact and, uh, they understand that transaction, uh, maybe just the price, maybe the buyer, but they don't know what all their alternatives are. So I think the real sign that you're ready to transact is when you've thought those through. You thought through your alignment with the group that you're going to bring in. Are you looking for a buyer with the idea that they're going to have control from here on out? And they have their own, uh, timelines. Are they a family office that might want to own your business for the next three, three generations, or are they a private equity group that might want to own your business for only two or three more years, um, or are they a backer, um, who's really coming in to help your management team take the business to the next level? Those are different things, and they're all worth considering. And I think that the sign that someone's ready to go is that they have considered them, understand them, maybe not even decided between them, but understand them, um, whereas, you know, the sign they're ready to start talking about things, ideally that would be, you know, some months before they're looking to have, uh, an announcement or money in the bank. And they can give consideration to what the alignment is for them as individuals and the other stakeholders that are affected by this process, whether that's customers or, uh, other employees or shareholders in the business.

Speaker B: I want to shift the conversation to the market. Right now at, uh, Digital Doorways, we are constantly talking about change and how executives manage change with branding and positioning. And there is so much change going on in our core market of defense or defense and aerospace or defense tech. Um, we are seeing an abundance of brands just popping up every week. It's fascinating and, and I think a lot of this is happening because you've got These market leaders like Andrell, which are just changing the complete dynamics, they're also showing up like they're in Silicon Valley dealing with generals in their uh, in their uh, toe, toe sticking out shoes and sandals. Um, it's just a very big changing defense market. There's a significant amount of private capital that is chasing now these defense brands and these dual use technology companies. And that of course people are running where the money is. And if the private capital is uh, looking for more and more of these breakthrough brands focused on the defense market, that's where the brain power is going to go. How do you feel that this is changing the competitive dynamics of deals in your sector?

Speaker C: Well, let me start with uh, where I just finished. There are a lot more options in those um, private capital markets today because of all the interest you describe. I couldn't agree more. It's a uniquely dynamic market with much greater amounts of capital, but also much greater, call it colors of money. There used to be a time where there really wasn't such thing as venture funding in defense. Most successful venture backed companies in the government markets were accidents, right? They started doing something, they found a government customer and they went with it. Now there's an enormous market of venture capital, early stage, seed stage capital for defense. And um, uh, that's changed things. There's also a great deal more capital for very large buyouts, um, or very large capital, uh, investment projects, particularly in the space sector. So with all this different kind of capital available, um, you just have a very different range of outcomes for these companies.

Speaker B: AI and autonomous systems are reshaping what the Department of Defense, or now known as the Department of War, is willing to buy from, by and from whom. How is this shifting the M and A landscape for companies that were built around more of a traditional defense program?

Speaker C: So it depends on the kind of company. For companies that have been pursuing direct government contracts, it's largely shifting the contracting structure. They may have spent decades and decades supporting a customer through a uh, long running services contract, whether sole source or alongside other awardees. And now the government is looking for some form of performance based contracting, fixed price or even commercially priced systems. Outcomes based contracting. I think one of the ones that most clearly exemplifies this is the air traffic control, the contract uh, that Peraton just won where they took a significant haircut to their initial price and were forced to sign up to outcomes based, uh, pricing for others. That opportunity, uh, by the way, can very substantially increase their profit potential from something in the single digit operating margins to meaningful double Digit margins and in software cases often sort of 50 plus percent margins. So it really has changed how they're dealing with the government. For companies that are, call it in the middle level, they're subcontractors. Maybe merchant suppliers is a term I like for those that are delivering autonomy or edge computing or some other capability to the prime contractors. Um, they just have more customers, they actually have more routes to success. You know there are politics around um, the winning of the prime contracts that they are dependent on. They need to be teamed with the right people. And so they have to think about do I want to just team with legacy traditional contractors, do I want to team with the so called neoprimes, Can I team with all of them? And they also have to think about the risk that some of these contractors, especially on the newer neoprime category are vertically integrating. And so how do they design their business to be able to protect their unique value, add and shape the contracting opportunities in a world where those neoprimes are spending a lot of money to shape the same opportunities. But at the end of the day there are still more routes to success and um, back to what you do for a living. They may require being more visibly externally both to new participants in the sector and to the government for their role and their value added in a larger team.

Speaker B: Now this next question sounds like uh, it sounds like a trailer of an Ocean's Eleven flick. But you've been in the room with an extremely large amount of money and national security equities are both on the table. You have so much amazing experience. How do you stay grounded and clear headed in these high stakes environments like this?

Speaker C: Well, you're kind to describe my experience that way. I am lucky to have had this bird's eye view working with so many amazing companies and leaders now for 30 something years. And I've learned a great deal from everybody I've been in the room with. Um, I have some real mentors in the space such as Frank Lonza who's not with us anymore, who taught me a lot about how the government works and how M and A works. And um, you know, I can't think of anyone where you just say hey, what would Frank Lonza do? There's just too many different routes to success and great leadership examples. But I just consider my Lex lucky to be with these people making decisions about how to take their inventions, their capabilities, the teams they have assembled to suit their objectives. And one of the really rewarding things about working in this sector is the answer when someone's Laying out their objectives is rarely just I want to make a lot of money. Of course this is a capitalist sector and uh, money is the carrot that makes things happen. But they're usually also focused on other outcomes, including very much the impact on national security. The legacy for a lot of business founders or engineering teams is that the way they design technology is going to um, improve uh, the good guys ability to win a conflict or keep us safer. And uh, that, that really does shape their motivation. So I'm lucky to be able to support them in thinking through how best to do that.

Speaker B: I love the shout out to the mentors. Um, as a wrap up question, uh, I want to look forward with you. You know, one of the beauties of all this experience you have is, I'm sure you've said to yourself, it feels like history is repeating itself again. And as different innovation and then the whole business ecosystem wraps around it. For example, for me, watching all these AI consulting firms, uh, appear to disrupt businesses feels like when the first web design firms popped up on the, on the scene, it's, it's kind of fascinating. See it all happen again. So looking specifically at your space, the defense industrial base has a serious capacity problem. There's been decades of consolidation, leaving too few suppliers for the demand that the moment requires, which as we all know, the demand just increased $500 billion. How does that shape your investment thesis as you look forward into the future?

Speaker C: Well, I'd say the fundamental question of uh, how a monopsony customer, uh, makes a sufficient commitment to motivate investment in the capacity they're looking for has not changed. I'd say it's good news. We're all talking about it and we're all trying to find solutions and creative ones to bring in private capital to solve the capacity requirements. But at the end of the day, you're hearing it from everyone. The contracts have to be there. The confidence that the contracting scenario will stay sufficiently stable for someone to recoup their investment, that's still the same. And the beginning of your question, sort of the influence of AI, uh lends itself to a much more dynamic environment, not a stable one. So I think we're in just an unprecedented sector, uh, transition right now where contracting and technology and conflict are all changing drastically at once. And as an investor, uh, it's important to have a thesis as to where it's going to come out. And it's important not to be too wedded to reading patterns from the past because they're going to change. Uh, whether it's how you use AI and who uses it. Do they do it as a service? Do they do it in offering a commercially, uh, based product? Who funds the new factory? Um, these answers are hard to make long term projections of. And it's a dynamic and exciting time to be in the industry. Ah, making investment decisions.

Speaker B: Yeah, you've got all these new rules, you've got token consumption throttling, you've got so much new stuff. It's just governance. It's like, throw out the old books, start over again. It's a good time to be alive. I know it is scary for some, but it is definitely exciting. Um, if you've got the patience, uh, to sort of work through the ups and downs, I, uh, think it's a

Speaker C: really interesting time to take pattern recognition and experience from really seasoned people in the industry where they served in the forces or they served in government or their engineers, and combine that with all the possibilities of the new. And not everybody's up for that challenge, but if you can create a team that combines sort of the DNA of the old world and the DNA of the new world, uh, I think it's going to be very powerful.

Speaker B: Very, very powerful. This conversation has been powerful. And Anita, um, I want to thank you so much for coming to Digital Doorways and um, I hope you'll come on for a future episode.

Speaker C: Thank you for having me and keep up the good work in the, uh, in the digital, uh, media sector.

Speaker B: Thank you so much.