Acquire and Assemble a Spacebound String-of-Pearls

"How do you make money? Spinoffs, split-ups, liquidations, mergers and acquisitions- Mario Gabelli


With each day, the time I spent working on Wall Street recedes further and further into the rear view mirror. Of course, I absolutely love my role on the SpaceX Finance team, but the sort of analysis I do now is very different from the finance I did in investment banking: I haven't read an SEC filing, built a DCF (discounted cash flow) model, or calculated WACC (weighted average cost of capital) in over a year! But in keeping up with the aerospace industry, I still get really excited whenever I read about IPOs or M&A deals where I can draw from my experience in banking - it makes all those all-nighters I pulled a little more worth it...

Recently I stumbled across a fascinating company named Redwire. They're an innovative provider of a whole suite of space infrastructure solutions, everything from payload adapters to in-space manufacturing. I saw they'd just acquired Deployable Space Systems, a company that makes deployable solar arrays, but what really surprised me was that this acquisition was their 7th purchase in the past year, when the company was first bought out by AE Industrial Partners, a private equity firm that specializes in the aerospace, defense, and government services markets. Immediately I could tell that AE's strategy was to build Redwire into a diversified platform via roll-up acquisitions, known in business jargon as assembling a "string-of-pearls". So what does this mean, and how does it work?

A Roll Out Solar Array built by Deployable Space Systems being tested on the ISS in 2017

Back when I was a student at the University of Texas, I once gave a lecture to the freshmen of my investing org on why companies pursue M&A. The ultimate goal is quite simple: create a combined company that's worth more than the sum of its parts due to the synergies of the partnership. Of course in practice the results are often mixed: Disney/Pixar did it well, as did Facebook/Instagram. AOL/Time Warner, well... that's a different story (it was a total disaster). The thing about these well-publicized mega-deals is that they're risky, since the acquiring company is probably writing a huge check to buy out a well-established asset at a hefty premium, and then there's the challenge of integrating such a large purchase into the existing company

A great summary of M&A rationales from Breaking Into Wall Street. My old modules from back when I was training for investment banking

Now apart from the few dozen mega-deals that make it to the front page of the Wall Street Journal, in reality tens of thousands of smaller acquisitions like Redwire buying Deployable Space Systems happen every year. And while less flashy, there are certain advantages to pursuing these smaller "tuck-in" acquisitions, namely that they're often cheaper (not just on an absolute basis, but relative to earnings) and easier to integrate. In the case of Redwire, AE Industrial Partners takes it one step further - rather than just opportunistically acquiring good companies as they come along, Redwire's fundamental corporate strategy is to consolidate the disparate players in the space manufacturing industry in a quick acquisition spree. Assembling a string-of-pearls works best in a fragmented sector with many small players, and space manufacturing fits the bill perfectly with the explosion of startups all trying to take advantage of the increased access to orbit we've seen in the past decade. The hope is that a consolidated technology platform with economies of scale and stronger capital backing will be worth more than a bunch of startups all struggling to compete and stay afloat

Timeline of Redwire acquisitions

Of course, attempting to build a string-of-pearls is not without its risks. To succeed, the company must quickly identify multiple well-run and cheaply-priced targets, otherwise the premiums paid on so many acquisitions will eat into the return on investment. And post-acquisition, the management team needs to be adept enough to run the various and potentially dissimilar business segments. Otherwise, a poorly executed rollup won't leave you with a string-of-pearls, just a hodgepodge of misfit assets all bundled together. The assets that AE Industrial Partners has cobbled together in Redwire certainly look solid, so I'm excited to see how the company develops! Hope you enjoyed learning about corporate acquisition strategy!


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