Details on L-3 Activist

There's a good article from Reuters on the activist investor targeting L-3 Communications. Relational Investors has accumulated a nearly 6% stake, making it the largest L-3 shareholder. They are seeking a break-up that includes shedding not just the Government services division, but also its aircraft modernization and maintenance (AM&M) business. As the article points out, these divisions account for significant revenues but are substantially lower margin.

The services and aircraft divisions both had operating margins of just above 8 percent in 2010. In comparison, the electronics division's margins exceeded 14 percent, while the intelligence unit saw 11.6 percent in margins.

This case is different than ITT, which was about separating the defense business from unrelated businesses in water technology and industrial components. But with L-3, Relational is going after a company that has tried to diversify across product lines that are all still (tightly) defense related. 

There could be some gain if L-3 were split into multiple divisions and those units would then get acquired at a premium by rivals in a two-step process, some sources said. But what are seen as most attractive takeover targets -- electronics and intelligence divisions -- are where the company wants to focus its growth.

Instead, L-3 would like to do a small divestiture within the services division at this point, separating the labor-intensive military support business while keeping the high-end intelligence and cyber-focused part, people familiar with the matter said.

Relational might have a harder time with L-3, particularly considering that the shares still trade at a better-than-industry-average premium. So inevitably they will have to come forward and offer more details about their strategy.