Thinking outside the box: Why did Curtiss-Wright and Kontron both just buy systems integration houses?

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August 13, 2010

Acquisitions expand the two defense companies' value as they use more COTS hardware.

On May 21, 2010 Kontron announced that they were buying AP Labs for an undisclosed sum. Six days later, Curtiss-Wright said they were buying Hybricon. Coincidence? I doubt it. I first conceived the “COTS funnel” concept, which seems to be at play here, in 1997 at Dy4 Systems: As more military programs use open-standard increasingly commoditized COTS embedded hardware and software and thereby fall down the funnel, vendors are striving to add more value into the funnel through systems expertise at (and beyond) the box level.

Advanced Processing (AP) Labs has a strong COTS history as a $30 million systems house, par extraordinaire. Famous for their advertisements showing a monstrous cargo plane propeller motor “umbilicaled” to an AP Labs test rig, the 26-year-old company has, in the past seven years, moved into conduction- and liquid-cooled COTS chassis and systems. In the past three years, they’ve begun servicing the commercial aerospace markets with program wins in avionics and air-to-ground cellular and wireless communications. Actually composed of three business units – AP Labs, AP Avionix, and AP Parpro1 – Kontron is buying program backlog, systems integration and chassis design expertise, and a Mexican manufacturing facility.

Located just 5 miles from Kontron’s U.S. headquarters near San Diego, California, a spokesperson told me that “100 percent of AP Labs’ employees” will move into Kontron’s facility. Having toured Kontron on several occasions, they have plenty of engineering and prototyping space in the area formerly occupied by what was then the Dolch rugged computer group (sold off to Crane in 2007). AP Labs will complement Kontron’s 2008 “lucky buy” of Thales Computers, which added PowerPC VME and 2eSST rugged boards sold primarily into U.S. and French military programs.

Kontron needed Thales to be a legitimate player in DoD programs and to jumpstart the company’s anemic VME SBC business; you’re not credible in hardcore Aerospace and Defense (A&D) with just Intel-based COM and PC/104 boards. But Thales had let their SBCs languish too long with minimal investment from mother France, so Kontron also needed table stakes in systems integration to compete with GE Intelligent Platforms, Mercury Computer Systems, and Curtiss-Wright Controls Embedded Computing (CWCEC).

AP Labs is a “strategic acquisition” for Kontron, says Western Regional Sales Manager Michael Humphrey, giving Kontron a “force multiplier” that allows DoD primes to focus instead on their core competencies: system application software and platforms. Kontron’s military and aerospace group (“MAG,” following Intel’s nomenclature) is a double-digit and growing portion of the company’s worldwide revenue as Corporate in Germany focuses on “high-margin complete solutions.” Perhaps gone are the days of Kontron offering every conceivable module form-factor under the sun; I always wondered how the company could support so many sizes and processor flavors.

AP Labs’ services will be sold both by Kontron and AP Labs sales forces with continued “board-level agnostic” technology solutions. But I’m sure Kontron’s boards will be just a bit more equal than other vendors’ – especially with the company’s Premier Level partnership with Intel’s CPU road map: a truly powerful combination that CWCEC can’t match yet.

For $19 million, Curtiss-Wright Controls picked up packaging expert Hybricon, located in Massachussetts not far from Controls’ own “electronic manufacturing services” facility in Littleton (the former Lau Defense Systems in which I played a bit role in helping CW to acquire). At $17 million in revenue, Hybricon is primarily a military COTS packaging house that CW was using for VPX and OpenVPX chassis and storage architectures for the Dayton facility (formerly Systran).

Though CW also needs systems integration capabilities just like Kontron, the company’s Electronic Systems group (CWCEL, which is different from CWCEC) in Valencia, California is a “full service subsystems supplier,” says VP and GM David Dietz, and I know from firsthand experience that they’re already highly credible with design wins on Global Hawk, BAMS, and Bradley A3 (via Littleton)2. Instead, they needed Hybricon’s gigabit signal integrity and thermal design intellectual property – both essential with VPX-based systems.

Like Kontron and AP Labs, CWCEL (plus Hybricon) and CWCEC each have their own sales forces, possibly resulting in some customer confusion for now. And although AP Labs adds systems integration to Kontron’s board-focused businesses and Hybricon adds mechanical and electrical design to CW’s primarily board and systems businesses – each company emerges about at-par against the other. Kontron has a broader range of modules and that Intel connection; CW has more military stripes than Kontron could ever hope for. It’ll be interesting to watch these two titans compete … out of the box.

Chris A. Ciufo, Editor [email protected]

1 Fun fact: Back when AP Labs announced their Parpro organization, the industry watched in horror as the company’s financials tanked with a market downturn. Many of us believed that it was a bridge too far, excessively straining the company’s capabilities at a time when cheap manufacturing was instead moving to southeast Asia, not Mexico. Despite NAFTA, ITAR rules still don’t allow full military production in Mexico, so I wonder if Parpro will eventually go on the block.

2 Curtiss-Wright’s acquisitions are hard to follow, but I worked at VISTA Controls, which was acquired by Lau Defense. Lau acquired Dy4 Systems, where I also once worked. When CW bought Lau, they ended up with VISTA in Valencia, Lau in Littleton, and Dy4 in Ottawa, Canada.