General Dynamics

"First, Kapnick initiated a series of three special dividends to shareholders totaling just under 50 percent of the company’s equity value. Because of the large percentage of General Dynamics’ overall business that had been divested by Anders, these dividends were deemed “return of capital” and were, remarkably, subject to neither capital gains nor ordinary income taxes. As a next step, Anders and Kapnick announced a gigantic $1 billion tender to repurchase 30 percent of the company’s shares (as we’ve seen, share repurchases are highly tax efficient versus traditional dividends, which are taxed at both the corporate and the individual levels)."

"Chabraja was also an aggressive repurchaser of General Dynamics’ stock. Belying his legal background, he thought like an investor, continually comparing the price of General Dynamics’ stock with its intrinsic value and acting aggressively when he saw discrepancies. As Ray Lewis said of the Chabraja era, “We bought heavily when we thought we could take advantage of market mistakes in pricing our stock.”13"

"In 2009 a new CEO, Wes Bush, took over and announced a dramatic strategy shift that featured the sale of noncore assets, a new emphasis on return on equity and share repurchases, and a significant reduction in corporate head count. Sound familiar? As one Wall Street analyst said, “The steps being taken at Northrop Grumman . . . are reminiscent of the changes taken by General Dynamics in the early 1990s . . . [and] are at odds with the typical behavior of defense companies, which have historically tended to overemphasize [revenue] growth . . ."

"This strategy rested on three key tenets: 1. Anders, borrowing a page from his former GE colleague Welch, believed General Dynamics should only be in businesses where it had the number one or number two market position. (This was strikingly similar to the Powell Doctrine of the same era, which called for the United States to only enter military conflicts that it could win decisively.) 2. The company would exit commodity businesses where returns were unacceptably low. 3. It would stick to businesses it knew well. Specifically, it would be wary of commercial businesses—long an elusive, holy grail–like source of new profits for defense companies."

"The Anders years (only three in total) can be divided into two basic phases: the generating of cash and its deployment. In each phase, the company’s approach was highly idiosyncratic. Let’s start with cash generation. When Anders and Mellor began to implement their plan, General Dynamics was overleveraged and had negative cash flow. Over the ensuing three years, the company would generate $5 billion of cash. There were two basic sources of this astonishing influx: a remarkable tightening of operations and the sale of businesses deemed noncore by Anders’s strategic framework."

"His turnaround strategy for General Dynamics was rooted in a central strategic insight: the defense industry had significant excess capacity following the end of the Cold War. As a result, Anders believed industry players needed to move aggressively to either shrink their businesses or grow through acquisition. In this new environment, there would be consolidators and consolidatees, and companies needed to figure out quickly which camp they belonged in. Anders outlined his strategy in his initial annual and quarterly reports and proceeded to aggressively implement it."