Darren Farber
Appearances
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so what's going to happen when a non-state actor, choose your flavor of the month, gets access to these kinds of things? And we've been building a force exclusively to fight a near peer in China or something like that. And so... It's just a big world with a lot of different kinds of threats.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I'm not as convinced that I need to just get rid of every enterprise class carrier, every submarine, every frigate. There are true failures like the littoral combat ship, and we should turn it off, and they're doing it. These enterprise carriers are $11 billion, and they take forever to build. And so we're going to need a better paradigm there. So...
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
To be responsive to your question, one is process of how we get the stuff out. That needs to be improved. And then the other thing is curating the portfolio. It's both. But I wouldn't say exclusively. It may sound like I'm dodging the question to a certain extent, but do we still need enterprise carriers? I would suggest we do. What the Israelis did with five F-35s was pretty much knock out 100%.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
of Iran's aerial defense. That was five pilots. That's a pretty mission-capable plane. And I know that the autonomous logistics and the cost of the aircraft hasn't been great, but also the way detractors have marketed that, it's not totally fair. It's a joint strike fighter by definition. So what does it mean joint is that if you're the Navy and I'm the Air Force, we're
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We all have one strike fighter now. It's joints, this F-35. And so it's taking away many other programs. That's why the program volume is so high. But we have it to sub 110 million a copy. And when a Gulfstream 800 is 85 million a copy, you say to yourself, OK, this is getting reasonable. There's some convergence here, but.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The cost of logistics and these things need to get better over time, but these are actually very well-run businesses. And if we work to change the incentives for these companies, which I think is very important, then you'll see fundamentally a change. The CEO of Lockheed Martin is a world-class capital allocator.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I don't know if we've ever talked about it before, but Jim was the CEO of American Tower. It had like $2 billion market cap. When he left, it was $100 billion. So 10 years, 50X. This is not someone who doesn't understand capital allocation or return. But when the incentive structure is to let the department figure out what they want and then give you a very complicated requirements document.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And then in the requirements document, they're asking you to push the limits of engineering, right? then what's the most appropriate way to compensate someone that's pushing the envelope of physics or technology? Historically, you had businesses that would leave the ecosystem because they're like, this is too tough. I don't want to take the risk on balance sheet.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so that's how we came up with Cost Plus. We said, look, you're going to take this kind of risk and I'm going to find a way to make it good enough business for you that you don't want to abandon the effort. Cost Plus. And cost plus by contract volume is only 15% of the department. It's about 30% of the budget now because we have programs moving into something called LRIP.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
That's when a program like grows up and pushes out. And then as it crosses into this mainstream production line, we go to firm fix. Sometimes the artifact stays too long because we're constantly pushing the envelope of the technology. And so you leave... cost plus in to make it meritorious for a business. But I think a lot of people think the budget's 100% cost plus. This is not true.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the super majority of contract volume is lowest price technically acceptable. And so I work for a lot of people who drilled it into my brain of every contract that I would sign would be LPTA, lowest price technically acceptable. So In a budget so big, when the buffet is so big, it's very easy to point to these sides and say how inefficient it is. And there's a ton of inefficiency.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And this effort by Doge is extremely meritorious and it happens in defense about every 20 years. So for people to say this is unprecedented, it's bunk. There's precedent everywhere in the department. It's a necessary extinction event. We also have to be able to manage these other contingent activities and we need to modernize. And this happens over and over again.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so it's just more exposed this time. There are tweet storms about it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Well, doctrine would say it was our ability to fight two continuous wars at the same time of near peers all over the globe and maintain world order. And look, it largely worked. It's an amazing run at enormous expense to the U.S. taxpayer, enormous expense. If you look at the rest of the G20 and you add up their contributions.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And then you look at what the United States spent in order to protect the free world, which is really what it did. And the G20 got a huge peace dividend. What's the peace dividend? Well, outside of the United States, in the G19, education is largely free and health care is largely free. And you can do that when you don't have to protect the free world.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I believe the American taxpayer funded all of that. to enormous effect for these countries. And look, they didn't live up to the contract that they signed. At what point is it no longer the U.S. 's obligation in order to maintain stability? Now, there's a classical thinking in Washington that if we don't lead what fills the void is, could be complete chaos.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And it's totally possible, but we've reached the guns and butter moment in terms of how big the deficit is. And so you have this perfect storm of
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
You have an executive that's tired of freeloading, plus a balance sheet that can't afford to do it in the same way anymore, and a technological shift, which is actually the perfect opportunity for these people to go ahead and give it a try and take responsibility for their own backyard. I mean... The aid that the Europeans have provided the Ukraine, don't get me wrong, is very important.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It is peer or near peer to the United States. The United States defense complex has gotten a huge benefit from it because they've been buying mostly American gear. But the Europeans gave a loan guarantee. They expect to get paid back. We gave the money no strings attached. So our Jess is expected at infinitum. And it's a very difficult moment, and I view it as a very necessary moment.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I think a lot of people have problems with the form, but the substance is absolutely meritorious. You just can't argue with it. Because I live in suburban Washington. I'm blown away how the narrative of... Government's inefficient has totally captured the zeitgeist of the entire Beltway. And six months ago, no one was talking about it. No one.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
No one was talking about the general inefficiency of government. And now both sides of the aisle agree that the broader government's extremely inefficient. And so that's amazing to me how the social zeitgeist can just change and move in this direction. But I think these are very necessary events. I think it's a good thing.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's really a function of what our allies will be able to construct and build. We have a line of sight to this in the AUKUS partnership that we have with Australia and New Zealand. We're going to maintain... an entire nuclear capability in Australia. And it's clear that that's the bug out point for a war with China. It's not going to be Guam.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I was in an unclass briefing the other day in the Pentagon. The stockpiles that China has, Guam is not a... It's insufficient standoff in order to be protected. We can't project enough force from there. And so Australia becomes the new jump off point. The battle plans have been set and we've given the Australians this huge capability and we expect them...
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
to start spending and we're sending our subs there and they're going to maintain them. And so part of it can be maintenance of a capability we already have, and then they contribute to that activity. And the other part is de novo capability. So look, aircraft carriers, nuclear subs, The three-prong nuclear deterrent, those things take a long time.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I suspect we're going to keep a lot of that capability. But smaller stuff like anything autonomous in the water, hypersonics, these kinds of things that have a new development tail where the per unit cost for development is lower. I see the Europeans doing a lot there because they can manage the full life cycle of that. Nuclear subs, huge effort. But look, the Brits have nuclear capability.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The French have nuclear capability. But until they actually have a cooperative agreement for how they're going to run a joint military, I think it's hard to pinpoint. They can build tanks, small caliber munition. Look, all the sidearms for the U.S. Army historically were European guns. Beretta, Sig Sauer, they weren't even American guns. So the Europeans on a per unit basis will do a lot.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I just think when the system becomes very pristine and big, it's clear that if it's still needed in the doctrine of force structure, that we're probably going to have to do it.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Yeah, massing is just the quantum you can produce in order to win the war. And so America won World War II by virtue of its enormous industrial capacity. And so... I always say, if America galvanizes on something, it's unbelievable to me what it can produce. But China has built a stockpile of conventional weapons that it would take us decades of production in order to build.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
They have 250 times our naval capability in construction. Today, you're not possibly going to catch up in any legitimate timeframe. And so... I think we're going to win through technology. I also think that capitalism is this huge advantage that we have here in America because we call on the capitalistic system in order to deliver the goods to the department.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The department really doesn't make anything. It's buying it from companies. And so the dynamism in the American capitalistic system is the edge and that we can tap into forever. private markets and the commercial market in order to do adaptation of these technologies. And then also we're creating a profit incentive for people.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Look at all the Chinese generals that have gone to jail over and over again because they check the ICBMs and they're filled with water because no one in that Industrial complex has a financial incentive in the same way. And what's interesting is I was with a prominent Chinese businessman a few weeks ago and I asked him, I said, there's been this shift here in the U.S.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
where young people want to go into defense technology outside of the five-sided building, as we call it. Is there an analog in China? He goes, oh, no. He goes, Chinese entrepreneurs want to tap into the American market. They want to be able to sell their product. It's so funny. The young people there are just as capitalistic, but the incentive structure in the PLA is not there.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so I think that's a huge edge for us. I also think our ability to fight joint warfare. is a huge edge for us for now. Describe what that means. Every war we fight is joint in that it's all the services together integrated, working together. And it's widely regarded that the PLA and their setup, there's an enormous lack of trust up and down the chain of command.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
There's a worry about corruption. And so Even in the vertical of the individual chain of command, let's say in their army or in their air force, it becomes even harder when you have to have a joint operation. And we went through this here in the United States.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We had this thing called Goldwater-Nichols, which said, if you're going to be a commander in the military, 06 or above, you're going to get a joint assignment. We're going to make this service joint so we can fully project the power of each branch of the service. And we work in concert together. We're not competing with each other. The Chinese have never fought a joint war.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
They have these branches of services. They built all this technological capability, but their ability necessarily to exercise in this joint concept is very unclear, especially when there's low trust in command and control. So the flip side to that is I could see a scenario where the Chinese hand over command and control to an AI to overcome
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The institutional resistance and the lack of trust up and down and across the branches of services, because that thing would be dispassionate and would start tasking it. And I actually think that they have a much stronger incentive to push the bleeding edge there of adaptation, of planning the war with AI, because they're fundamentally less joint. They're not trained in a joint way.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Because they have to rely on it more, that adaptation may happen faster. Whereas we have a very successful joint capability. And so maybe we'll be less inclined to change. That's what I worry about now is this new capability of a thinking machine. But maybe it can overcome the institutional weakness of their military.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think it's going to be extremely hard for us to stop the Chinese from a Taiwanese invasion. And I asked a former secretary of defense probably two or three months ago, I said, do we have a moral obligation to defend Taiwan? Not... Can we do it tactically? Because that's always an engineering problem and a massing problem and a planning problem.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And ultimately, we can run the simulations and maybe there are these outcomes where we can make a dent in it. And I believe that the moral will of the country actually drives all that other activity. I'm not giving it away because it's only been male secretary defenses, but his answer was, I don't know. And I was flabbergasted by it because I thought I understood his politics.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
What it tells me is, is that I think the vast majority of both sides of the aisle don't view it as the moral obligation of the United States to protect Taiwan. It's interesting because I wonder if it's the case because people think we can't win. We can't win in a conventional sense. And if it was a cakewalk for us to win, would we just do it? I happen to believe the latter.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
If everyone believed that we had the ability to stop the PLA from crossing the Taiwanese Strait, it was a nothing burger for us, we'd do it. Of course, we'd have the will because it's an easy win. And it's the tough win. It would just be too hard for us relative to the quantum of capability that they've been stockpiling through the express purpose.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But we've learned a lot in counterinsurgency over the years. How long did the Afghan contingency take for us to win the war part? Two weeks? What was the Iraq part? One week? Supply chain. Yeah, it was the nation state activity after. China can bomb Taiwan into oblivion.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But if they want to take it over and they want the vast majority of people to stay alive, well, the terrain of Taiwan is spectacular for insurgency. And one of the most compelling plans I saw was the Taiwanese look at America and go, America can never be overtaken because there's anywhere from three to 600 million guns in the country. How would you take over the country functionally?
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the Taiwanese have a very good healthcare system and safety net to prevent, derange people from getting firearms. And my view is, is that A firearm culture there may be already taking hold. And if every adult had a long rifle, I don't know how the Chinese would take over that island. But it wouldn't be warfare like you and I are thinking of. Generals sitting at tables. It would be insurgency.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
small groups, exactly how the Taliban ground us down, hiding in plain sight. And that terrain, by the way, is just as hard. It's very mountainous, very lush. So if the Chinese are committed to killing everyone on the island, well, then there's something to defend. They can liquefy the island and they can roll in after the nuclear fallout and they can figure it out.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But if they want to take it over and the Taiwanese are prepared to fight, I think it's a perfect setup for insurgency. We spent 20 years getting ground down with enormous military capability against a completely underfunded insurgency. And so if the population is prepared, how are you going to separate someone that's for the PRC from someone that isn't in Taiwan? Forget it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And if the population supports the activity, I think you could see something very interesting. Obviously, supply lines would become a big challenge and there's a ring that you can create around the island over time or starve it out.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I don't think in terms of binary outcomes. Obviously, there's the one outcome where it's some combination of a false flag activity. It's saying, oh, Taiwan, through an inadvertent exercise, sunk a frigate of ours, and we're bringing in a cooperative peacekeeping force to ensure that this doesn't get out of hand and then surreptitiously take over the government or something like that.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think they're much more inclined for an activity like this where it's ambiguous as to what's happening. I think that really works in their favor. I think something that's just overt command and control war wouldn't be in keeping with their strategy. I mean, they could do that probability distribution as well. I don't think it's as likely.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And then there's one theory that's gaining more traction is that the Taiwanese government can be co-opted successfully, right? And so a bullet doesn't need to be fired. A lot of Taiwanese have second passports and places to go. So the question is, what's left as it gets hotter and hotter? And could the political structure be co-opted with a combination of a carrot and a stick?
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And that branch of thinking seems to be gaining more popularity. It may not even be a shot fired. It may be Hong Kong-esque. They've agreed we're a separate system. It's no problem. And then it's a slow degradation of whatever system that was previously there. And so it ultimately comports with Beijing.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Well, that war is always a combination of old and new. John's clearly right in that token, in that I think the Ukrainian contingency is a love letter to the American defense industrial base for all of its faults. When we make something, it works well. I mentioned to you some of those. I'm going to be in the Baltics in about two weeks, and I know what those meetings are going to be.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Get me more Javelins. Can you get me more Javelins? And every time I sit down, how come I can't get more Javelins? So Javelin's an anti-tank missile at the end of the fire. Forget anti-tank missile. And why do the Baltics want it so badly? Because they have this vision of Russian TU tanks storming across their border and taking positive control.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And places like Lithuania and Latvia and Estonia in particular really feel that sensation. And so for them, it's give me javelins. The transcripts that have been captured in signal intelligence of the Russians talking to each other on the battlefield is they have American stuff down there. Be careful. They have the American stuff.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the Taiwanese just got a delivery of HIMARS, which is our mobile rocket launching system. And so ATACOMS goes inside of it. Gimler's goes inside of it. And these are medium and long range ground to air or surface to surface missiles.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
medium range missile systems these things work man i get it they're expensive let's get some more mass into it so we can drive the cost down let's sell a whole bunch more to everyone that wants them run out the production let's create a series of incentives for these primes with these industrial bases to blow up production they'll respond to the incentives you just change the incentives
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think that's part of it. I think, too, I see this parallel to a deep seek and what's happened there in the Ukrainian contingency. There's a lot of new fangled drones that we introduced into those theaters that were completely unsuccessful. And they were coming from next generation companies. But they didn't work because the nature of that theater was evolving so fast.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And of course, now the fact that Ukrainian drones, this little printed thing that they do themselves and they're running the software and they just need to shape charge and they're printing it. I think what it shows is that when you're on the leading or bleeding edge, the franchise isn't that secure, even if you're the first there, or even if you've done something new and novel.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And that's the analog to DeepSeek is that I think that was a shot across the bow. Hey, maybe there's a different way to do this. Thing is that new technologies, the phase shift or the sigmoid curve can be really, really quick in a war. It can be much faster than a commercial environment. And so we're seeing that too. I also think that It's a love letter to some of the old stuff.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And these missile systems get cooperatively upgraded. It's not like the Patriot missile from 91 is not the Patriot missile of today. And we've cooperatively upgraded it with the manufacturers a hundred times. So I think there's lots of technological capability. You have to remember, before the wall fell, two thirds of the world's scientists worked in defense.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Everyone was working on these problems. Jim Simons at Renaissance worked at the Institute for Defense Analysis, which is around the corner from the Pentagon. So it was actually pretty difficult to have a huge preponderance of scientists working in these technologies and capabilities. Wall comes down, last supper at the Pentagon, merging... all these defense businesses.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And it's no coincidence that you get an internet revolution on the back end of this, a biotech revolution on the back end of this, because we let loose this technical ability all over the country and really all over the world. And so now there's a little bit of, we're going to suck some of this capability back in here and it's going to manifest itself in some new businesses, which is wonderful.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But I think the lesson learned is going forward, it's going to be a combination of old and new.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think it could be accurate and fall down. I actually think it's a false choice. So in the opening skirmish of the drone swarms fighting each other. OK, one drone swarm wins. Let's just say the casualties are 75 percent. What's next? Do you want to kill everyone in that theater of operation? Should everyone be dead or do you need to take it over?
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The second you need to take over an environment with people. Well, guess what? Old stuff. Here comes the old stuff. We're going to need some of the old stuff. We're not thinking much about the Gaza contingency as a place to learn stuff. There's tons of stuff to learn of what's happening there. One is how to hide from a vastly superior force is clearly go subterranean. There's a whole tactic there.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the other thing is some of the most capable things the Israelis have in that theater are up-armored bulldozers, bulletproof bulldozers. These are the unsung hero of the Gaza contingency and tanks following right behind it. I think when you're clearly outmatched, you're going to revert to this form of insurgent behavior where you're going to bed in the population.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
If they want to take over the population and not kill the population, we're going to need to move to some hybrid of old and new. Look, the Israelis have tons of technology. And don't get me wrong, the drones and the technology were very important. I don't know if you saw the Senoir video of that drone just hovering. So super important.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But tanks and bulldozers and troops in Gaza were pretty damn important, too. And so I just think the phase of the warfare will ultimately lead to using some old stuff at some point. I just don't think it'll kick off in the same way anymore.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Yes. The fact that there's this interest going back to that conversation with the Chinese industrialists. Oh, no, no one would go into this thing. Well, I remember no one wanted to go into this. I remember protests in Mountain View at Google's campus that they shouldn't be doing work for the Department of Defense. And I feel like that is wholesale gone. Yeah, that was not long ago.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Yeah, it wasn't that long ago. So that's pretty good, man. I'm pretty happy about that.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
You would call next-generation defense. I think it's going to be very challenging. And I worry about that, too. I worry about capital leaving the system. I'm old enough, 99, 2000 is not an ancient memory for me. And so the technologies that came out of that push were absolutely meritorious. And the capital structure for a lot of these businesses didn't work.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think at the limit, maybe a global crossing or something like that. But global crossing built was so important and we still use it every day. And the recognition by capital markets that this was extremely important and that it would fundamentally change our life was right. It was a good directional view. It was a very bad weighing machine in terms of
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
rate of return of capital, how much needed to be deployed, how much you would get back. There was a lot of carnage on the back end of that. So I worry about that in these next generation defense rounds, because you have to understand how the budget is built. The budget is not built 3G style and zero-paced budgeting. We look at the previous requirements for the year.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We look at these different colors of money that Congress appropriates to the Pentagon. So in a synthetic attempt to control the way the Pentagon spends, We give it types of money, operations and maintenance, research, development, and technological evaluation.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
For many years, there was something called GWAT, Global War on Terror money, Commander's Emergency Response Program, which Dave Petraeus was very important in creating a form of money that allowed him a more permissive environment for a theater of war. He co-authored a manual called Money as a Weapon System, how they would use it in a theater. So those colors of money
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
drive to dictate spending to a certain extent. And so when you set up the budget, it's largely allocated. You know who's going to get the money. It's not like people look at the last year's NDAA and say $858 billion without any black ops or special appropriations in it. And that's my damn. I'm like, whoa, whoa, whoa. These programs are accounted for.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It goes on this multi-year contract or this or this or this. And so to grab market share takes much longer than a conventional market. And I think the investors in this ecosystem have to understand that. You're not going to take over a market in 24 months unless it's fundamentally a brand new requirement and we haven't run the competition yet.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
So that's where I think these next generation defense businesses are uniquely set up because if the requirement's new, there's no incumbency advantage. You don't have to dislodge an existing program. It's not a gerrymander into a district, all these kinds of things. So if it's fundamentally new and novel, then there's a much greater opportunity, obviously.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But if it's trying to display something existing and the Pentagon's built the requirement, they're saying, this is what I need. Well, it's going to be an enormous capital lift for someone to spend investors' dollars to say, you're wrong, and my taste is better than your requirement. By the way, I don't view that as necessarily a bad setup.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think this is a whole separate line of the conversation, this concept of a responsible party. And we have that in the nuclear navy, and we should talk about that. But the net-net is, in terms of capital allocation, the manner in which the market behaves is
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the fact that we have these pre-existing capabilities that we're still connected to is going to require a major change in acquisition, a major change in requirement activity. And I believe the big change that should happen should be, quote unquote, the responsible party who gets to own all the fame and the blame for an activity in order to move it forward. And that's because...
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
What we call riptoa and the transfer of authority, you're typically in a job for 24 months when you wear a uniform. You don't get to see the fruition. The guy that started on Joint Strike Fighter didn't deliver Joint Strike Fighter. We've gone through a slew of flag officers. And so Admiral Rickover...
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
invented the nuclear navy this is a guy from world war ii and is the longest serving flag officer in american military history served until his late 70s or even his 80s and never wore a uniform by the way was total iconoclast is that he's like we have to have a responsible party and so the job is going to be eight years for the guy running the nuclear navy we don't have that anywhere else in the service and by the way the navy declined to promote this guy over and over again
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the Senate and Scoop Jackson said, no, you're gonna make him an admiral. Now you're gonna make him a two star. You make him a three star. You make him a four star. And so the institution fought back tooth and nail to stop this. But that's a wonderful gift he gave the Navy to create. We've never had an incident in our nuclear Navy.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
running reactors that move with tons of kinetic stuff around it all over the world. It's an amazing statement of, we have to create responsible parties. These billets have to be responsible for the delivery of the program. If we take someone and say, you're responsible for drone's 10-year job, well, I think we'll see some major change.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so if it's a way station along the way, then the current system will crowd out the ability for these new businesses to be successful.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Part of it is so much of this is history of the way we've set up the rotation of how we train people. All of these things come from good places, by the way. I should say that there are very intelligent, motivated people in the armed services and everyone goes into that building wanting to do the right thing. And so this came from the concept of a well-rounded leader is going to do a lot of jobs.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Think about it in a corporation. OK, you can do finance, can do operations, you know, be in marketing. You're going to understand the enterprise that you manage. And so in a limited life, can't leave someone in the gig for eight years or 10 years or something like that.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But in these engineering disciplines and where the hybrid of science and engineering is extremely important to build technological superiority, it's clear we need more responsible parties in the nuclear Navy shows that it absolutely shows it. So.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think we're going to have to recognize that our only chance of technological superiority is going to have to change the paradigm of the way we've done it in the past. And we can do that. We've changed it before. We'll change it again.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
In the venture side is that if you were to draw it as a tree diagram, it's like we were talking about a large institutional LP that we both know. And I thought, I bet they have more GP relationships in defense venture than they actually have defense venture investments because they're all flowing back into the same deals. And so I actually believe that to be true.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It seems like the capital aggregators, the ones that are getting the enormous capital, will probably be able to live out any design or economic cycle here to be able to ultimately come out the other end and be okay. And so I think resources really matters. And I think that's what you see happen in these valuations is that accumulating more resources is a form of industrial power.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I don't think it's surprise that after Andrew's latest raise, they announced a million square foot facility. They're building industrial capacity. That's part of aggregating lots of resources is becoming so important from an industrial standpoint that we got to keep it alive.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And there's a lot of businesses like that that have existed for 50, 7,500 years within the country that support the department. So you can see that. Those guys win. And the ones that aren't well capitalized, irrespective of their technology, won't survive because it's not about making one new widget. It's about making millions of widgets at scale. And so I see what Andrew is doing.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I'm like, OK, I think they're thinking about this correctly. You've aggregated these resources. You must build the industrial capacity because when push comes to shove, it's going to be the ability to produce X number of whatever at scale.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I never say never, because maybe there's someone so brilliant that's figured out how to turn apple juice into rocket fuel or something like that. There's a huge technological phase shift. But if I'm betting defense venture dollars, I'm going to the largest rounds, the largest raises, the largest balance sheets, almost separate from the technology.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think the balance sheet of these businesses is so important, how big they get, because they will be able to survive and then hopefully some of them will be able to thrive. That's it. There's a ballooning effect to the big firms that can write these big checks and be there to support them.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Some of these primes are very impressive to me. Northrop Grumman's business is remarkably impressive and the executives know their business. So I don't, the nation's only maker of missile fuel for a number of years. It's the only maker of the intermediate chemicals too, which is actually very important. I've seen some business plans that they're going to make.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I'm like, yeah, but where are you getting the derivative chemical? India here. So it's like the concept falls down. the whole concept of Fortress America is that you're self-contained. And so the counterparty sitting across from me in these negotiations knew 100% of what my margin was, knew exactly the technology. These were brutal negotiations of them managing costs.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Because they're managed almost in a public markets way quarter to quarter, and their incentive structure right now is to make sure that they are passing along costs to that they bump into in the development of a program. They really can't take this multi-quarter bet without the government showing up.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And what you see these next generation guys doing is they're taking huge bets based on their taste. They're betting that their taste is greater than the requirements process of the Pentagon. And in some cases, that's true. And in some cases, it isn't. And I would say, the second there's an incentive for these primes to comport with, just give me your best.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Someone says, go ahead and give me your best bet whatever you think it is, screw the requirement. I think they can produce enormous technological stuff. Look, Lockheed is like a top five patent owner on earth, on the whole earth. There's enormous technology in these businesses. And we have 50 years of the world's best scientists working in these businesses.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And there's still a tradition of that engineering talent and capability. These guys can do a lot, man.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
They've been compounding at 50% for 25 years.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
These are broadly diversified conglomerates. And there are things inside of both of them that I want to own. And I think highly of those management teams. The margin tells the story a lot in these businesses in that Transline probably has, what, $3 billion of EBITDA, give or take, right now. And it's 50% EBITDA margins. Very sporty. And so when you look at it and say to yourself, good grief.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
How do they do this? And if you talk downstream, not to all their customers, but let's say some, some of their big customers, they hate these guys. And so that's a very tough paradigm to grow from. And actually, I think it's evidenced by the kinds of businesses that they're buying today. Like they bought CalSpan, which it's not really an aftermarket product.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's like a wind tunnel testing activity. Boeing and Airbus. Boeing was so big at one point, it moved 2% of GDP by itself. And so if you're the elephant walking around the jungle and there's a bunch of peanuts on your back and some birds are eating it, okay, it's fine. It's de minimis relative to my share. I think the challenge now is the law of large numbers, that they're getting big enough.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And think about their business. Who owns the type certificate of these aircrafts? It's the designers. It's the Boeings and the Airbuses. They own the design. And so if it becomes so expensive to move through the supply chain, then it's going to incentivize a verticalization in certain areas. And by the way, before Dennis Mullenberg was fired, that was his plan. He had two things. He had...
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Boeing Business Services, which was to control some of the activity in the aftermarket. And then also what he called partnering for success, which was, you're not going to make this margin on me anymore, the supply chain. I'm not going to design you into the next generation. You're going to be off the list if the toilet seat goes to $800. you're not going to be in that fulcrum.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I think the business model works beautifully when the downstream customer is so immense, they almost don't notice the difference. I always joke, the optimal business for Transdime is owning the cup holder in the Joint Strike Fighter. It's like, that would be amazing for them. You're not going to requalify that thing. It's craziness. So I just think there's a limit to how big you can do that.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And look, the institutional shareholders are In the primes, like the Boeings of the world and the T-Rows that own Boeing and stuff like that or Capital or whoever, they're going to management at these primes and going, you guys do all the design and these guys make all the money, two and a half times the margin. Tell me how that works.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so, look, at some point you kick the bear long enough or you pick the elephant's food off long enough and the paradigm will change. And so what's that number? Yeah. Is it $5 billion of EBITDA? I don't know, but you're seeing competitors already. And so that quantum of profit is also attracting competitors into the system. And that's meaningful.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so when you make that much money for that long, and look, Laura went public, obviously, in a pretty spectacular way. That used to sit inside of JLL. It's a private equity firm. And so it went public at about $150. 30 some odd million of EBITDA. And it trades at 50 times because there's a general expectation that off of a smaller basis, it's easier to run the TransLine playbook over again.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And just, I think it's going to be harder at a certain size, but when you're Pluto and the market is Jupiter, it works. I just don't know how long it works for. And if Boeing continues to get smaller and that quantum of profit gets more and more meaningful, I think it's going to be harder.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I remember this conversation.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I wish it was more complicated. Then maybe it could justify my existence a little bit better. So what I want to see are structural impediments for you getting into my business. Why was I able to buy the nation's only maker of missile fuel? Think about it. We're like eight people in a house plant in an office park in suburban Washington, D.C. Why do I get to buy that capability?
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Why does the prime buy it? Why don't they verticalize? On the cover, that business was very low growth. It didn't seem terribly interesting to someone. The margins weren't transline margins, let's just say. And so business has imputed growth of 100 basis points. It has huge contingent risk. The largest non-nuclear explosion in U.S. history was the former plant.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
There's a Discovery Channel episode on this thing. The blast threw planes off the tarmac at McCarran. And the department's like, yeah, we're going to move this factory to the Utah desert. And so our view is we want to own the defense annuities. But when we analyzed the factory and the cost to replace it, we said, oh, it's $2 billion. That was our number.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Now, there's a group in the Pentagon that does this for a living, cost assessment and program evaluation. This is a good use property. of taxpayer money and those should not cut this because this is an analysis of our industrial capability to produce at scale to fight contingencies globally. So there's a real thinking that happens in the Pentagon there about this thing blows up.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We're in a very topical moment right now, just by virtue of what appears to be this decoupling from this ultra longstanding relationship that's existed since immediately after World War II, which is to say borders did not change in the Western world through force for the last 80 years. And we're seeing that paradigm change.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
How much do we need to invest in order to create another source of supply? And by the way, the defense establishment is littered with monopolies because the defense market is the opposite of a monopoly. It's a monopsony. It's one customer, many suppliers. And so if you have one customer in a business, how much capital are you going to deploy into your factory?
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
You're going to try and just mirror match it. So there are a lot of natural one-of-one suppliers to the department by virtue of who the customer is. And so our analysis of the factory is there's no alternative. There are ways for us to improve it. Technologically, the business is unbelievable. It's a national asset because of the quality of what it produces.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
So if the Pentagon's own number was between two and two and a half billion, so I'm saying to myself, I can buy it for a very small fraction of that value. It is guaranteed to make money as an annuity. It can hold an enormous quantum of leverage because it's a 10-year set of take-or-pay contracts, getting paid no matter what.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And, oh, by the way, there's an embedded option value in this in that if all of a sudden it gets more dangerous... consumption goes way up. You can't build a financial model that has a toggle in it called war, base case, upside, war. No one does that. But that's actually a huge benefit to us because look, the world is dangerous.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We know something like that will happen and we don't model it in, but we tell ourselves we're getting an option value in here that we know exists, but you can't logically price it. And so seller can't expect you to pay for it. But you know, if you have duration, No, world's pretty dangerous place. It seems like every couple of years something happens. You're going to get paid for that as well.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so that coupled with things like commercial off the shelf, we made sure when we bought that business, we started selling commercially. To what? To commercial space launch, to next generation suppliers. What happened there? Ultimately, the value was recognized and we sold it probably too early. We always sell too early is my refrain.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
You're going to do really well owning a one of one business that costs 20 times your purchase price to replace that can, by the way, hold nearly infinite leverage in it. That purchase looked like an LBO from 1975. It looked like American Greetings LBO. It's like very little equity put up relative to the total quantum of leverage.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
So I think it's really recognizing replacement cost, how important it is to a downstream system, how we train and equip the forces, right? How important is it to the projection of force? And my goal is I want to be a supplier to everyone. We own a set of businesses right now where Andrel's a customer. Northrup's a customer. I want to get as close to the physics that won't change.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
That way I'm not choosing size. I'm not making a value judgment on the future because it's hard to change the physics. Ergo, get closer to the molecule. My top of the mountain is to be as close to the molecule as possible. There may be new molecules, but the reality is it's usually engineering. It's usually engineering downstream.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so if I can be close to the molecule and have some value-added engineering around it, especially if I'm in the front office of the department, there's tons of money that's been made in the back office, in the business mission area. Tons of money. There are private equity firms that focus on that complex that have aggregated 100 billion of AUM. It's amazing to me.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And that are doing the non-kinetic activities. I understand that if you view yourself as an asset gatherer, you won't do anything that will infringe on your ability to gather assets. And so there's a whole host of pension plans and endowments and all these things all over the world, especially in Europe, that will not give you money if you make anything that ultimately kills someone.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But we've never been confused about the front office for the back office. And I want to be as close to the front office as possible because the back office at some point always needs to get modernized or changed or automated or whatever.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so that's a pretty big change, but I completely understand why we're going through it. And so let's say you and I have a contract. I'm going to mow your lawn for the next 80 years and you're never going to pay me or you're going to pay me sporadically. So if you don't pay into the system, then who's invalidated the contract?
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I still remain the chairman of the largest manufacturer of firearm accessories to Western militaries based here in the United States. Wonderful business. That business can produce 100,000 magazines for military weapons a day. Its scale is so enormous. So...
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
By us reinvesting in the enterprise and taking market share and defending its patents worldwide all over Europe, all these historical European vendors that would push their products into the U.S. Defense Department, we've taken all that market share from them. And what have we done? We've lowered the price point. So we went from 60% market share to 90% market share.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And we verticalized the business. We're the largest consumer of a certain kind of nylon in the United States for that business now. And what we were able to deliver to the department in Western Allies is this wonderful, very capable product where the previous generation product would jam after 3,000 rounds. Ours went for 300,000 rounds and they just stopped the test because they ran out of ammo.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so... If you can make a series of investments where you can ultimately become the sole source supplier in the activity, then you can actually deliver a better value proposition to the government and you can have a wonderful annuity-like business. So pink diamonds, why was I even talking about pink diamonds? Well, the only source of pink diamonds- Was mine, right? It was running out.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so I was like, okay, that's very interesting to me. There's no other source of pink diamonds. What is the cost of trying to find another resource of pink diamonds? Well, forget it. It's impossibly expensive. And that's the way I think about all these businesses. Can we own a very important business to a market? And can I expand the moat by reinvesting in the enterprise?
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's just really everything connected for the purposes of situational awareness. So the drone knows what the ship and the soldier is doing. Everyone has full situational awareness of all of these connected devices. Most expensive war game in U.S. history showed that if you knock out the network, everything turns into nothing. I think it was called MCO2.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And the actor they had on the opposite side was the retired flag officer who's like... I'm just going to knock out the network and I'm going to win this war game. I'm going to use smoke signals and I'm going to use all these things. And this guy just won the war game over and over and over again because his goal is just knock out the network.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so in a network-denied environment, think about how important connectivity is for all of these systems and how dumb some of them may become in the absence of connectivity. And so... Get ready. The network denial will be the first fulcrum of a full scale near peer war. I mean, look at the contingency in the Ukraine. They wouldn't dream of criticizing Elon because what's their network?
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's Starlink. Starlink is the unsung hero of the Ukrainian contingency. For whatever you think about the proprietor, that contingency would have been lost already without Starlink. And that's a hard network that they can't crack. It's all their comms. It's all of their ability to navigate all of these different new UASs. So...
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
At its simplest form, it's just the ability for all these things to what we would call C4ISR or C5ISR. It's this command to control of these connected things. And we've designed everything to be connected. And I think the next iteration is going to be these things actually have to be autonomous systems.
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Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
and have to have inertial navigation and these other things that, assuming it's flying in the dark, it's not connected to GPS, it's not connected to something else in the ground, it's not connected to a mesh network, it's going to have to have its own situational awareness individually when a network is denied.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Just the ability to pump in an end goal for something to go prosecute it is kind of spectacular. I view it very similar to the paradigm of when we're going to let the Waymos drive us 100% kind of thing. Like, there's going to be this...
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
push and pull of who's going to grab the yoke on all these activities and i think something that doesn't have well-defined joint doctrine is actually going to do much better with ai because they're more likely to just give it over to them just tell me what to do as opposed to us where we have well-defined protocol and paradigms and we're not going to give over the steering wheel as easily that's harder the fighter pilot union if you will is going to fight pretty hard
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Should I have the reasonable expectation that you're going to honor your obligations if I refuse to pay into the system? And you have an administration that views that kind of contractual compact as meaningful. These are deal people, fundamentally. They come from business. And so... They view themselves as completely justified. You're breaking the contract.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
about what they do or don't give up. But I wouldn't give up on human ingenuity to hack a system, to screw up a system, to trick a system. I'm not saying we should exclusively rely on that.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
My greatest hope is that there's symmetry in the development of these technologies that functionally make them moot for adversaries and us to use, is that we end up in a new form of Cold War. So it's an arms race. It's mutually assured destruction. I think the amazing thing about the Ukrainian contingency is Putin has threatened nuclear activity. How many times? And he hasn't used it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so I say to myself, wow, he has this arsenal of nuclear capability and he is not prepared to cross it, even though he almost went through a coup, which Bellingcat accurately predicted. My hope is that if we can develop symmetrical capabilities over time and if one person pulls out too far ahead. then there will be this enormous temptation to flex.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so that's the challenge in a race to the future is you just can't be second. You just can't. You just can't allow it because the human temptation, war is a human endeavor. And by the way, I should say, I trust the United States, a democracy to be more measured than any other end user of something.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And my hope is that we pull away and that creates the new opportunity for Dayton because I think in an alternative scenario, it'd be a lot more dangerous. What about the other path? The worst is the march of technology puts more and more power in fewer and fewer people's hands.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
There are a lot of stories of we run these nuclear drills and then the missileer won't turn the key or something like that. There's a human. And so technology is removing people in a lot of these steps. And then it's also putting these capabilities and things that were exclusively the provenance of nation states. And now it's like it could be a company of 100 people. And so technology
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
There is a very credible path towards something extremely dangerous happening, and it kicks off a chain reaction that brings us to the precipice. Why are some nations that have resources nuclear and some others not? So ultimately, if you have enough smart people and you have resources, you get the capability. So I really worry about something like that.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I almost view something like that to a certain extent with the march of technology as... inevitable. And so we're going to have to go back to the physics of it and how we govern it. Like the molecule, that's why these things around it will have to be so important and controlled because if the substrates exist in the system, there'll be enough technology in order to build a capability.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
My entire experience is an acquisition. I don't come from the policy and planning world. I don't come from strategy and plans. And there are people in the building that spend their life thinking about these things. I come to it with a merchant's nose of like, what do you need in order to prosecute the mission? I think about it in terms of the long-term impact to our business.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so what's my general obligation to you? And I don't think they're incorrect. And so it leads to this real, very serious moment that we're experiencing right now. And so now the question becomes, the Europeans' defense capability is extremely limited. Their nuclear capability is limited to ICBMs, which is really end of the world security. nuclear weaponry. There's nothing tactical in that.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But what's amazing is how wrong the capabilities we impute into an adversary. Look, no one thought the result of the Ukrainian contingency would be this. No one. I forget who attributed the quote, but it says something to the effect of, Surprise attacks are so common, they shouldn't be a surprise. It's kind of like man makes plans and God laughs.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
So I feel like there's so much probability distribution in the way a lot of this happens. And the best insurance policy to wrap around all this is technological superiority. And that's why I'm so happy to see the level of energy investment that's going into it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I view my job as being a good steward of capital for the inputs into a lot of these systems and that we can continue to leverage the capitalistic system to make good returns and to create continuity of supply for the system.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
On the professional side, there are two people. So one is my former boss at the Pentagon, Paul Brinkley. And I mean, he was Doge part one, this guy. He just wanted to modernize the place and he didn't care about how much China he broke in order to improve it. And there are very few people like that in a bureaucracy. He accumulated energy off of it. And he wrote a book about it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It was published by Wiley a number of years ago. And then also Tom Pritzker, who really put me in business. I'd never bought a company before when I left the Pentagon. I don't have an MBA. I never worked at a private equity firm. I never worked as an investor in any kind of capacity. So here's a guy sitting across from you going, okay, you're smart. You can figure out business.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
He's like, we'll help you along. And if it wasn't, for meeting him in that environment that he creates. And they're really builders of companies. They've incubated so many businesses. You have to have someone to believe in you before you embark on it. And so I can tell you, when I started asking people for money, many people did not believe it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's that they have someone of that stature say, you can do this. don't worry about it, whatever, X number of years later.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
That's only good when whatever video game scenario, it's the end of the world. In terms of the projection of force, Europe really doesn't have a lot. They've exclusively relied on the United States. And now I think they're having this moment where they realize, okay, maybe we exhausted the good offices here. And we need to power up and have our own capability. And it's going to take them a while.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's not going to happen overnight.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's warfighting. And so in the business mission area, the ball has moved forward, but not nearly enough in terms of where it needs to go in terms of the general efficiency of how we run the back office of the building. And in the front office, we have very pristine, exquisite weapon systems.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But some of the massing on the battlefield is going to be this very inexpensive, very permissive, autonomous capability that we're watching unfold in a live contingency in the Ukrainian theater. It's ironic because I had a whole series of dinners with Baltic ministers of defense, and they weren't asking me for drone technology from America.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I was at the National Security Council looking at a Ukrainian drone that was printed in their AOR, in their theater of war, and they're doing it for 150 bucks. And so I view a lot of what's happening in drone warfare as the arc of flat panel TVs is like they're very expensive and they just keep on dropping in price and the low cost. manufacturer is the leader today. It's why Walmart bought Vizio.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so I see a lot of that in the drone. And so the backend will be more important, like the software that coordinates it. The shape charge will be more important, just like modifying a grenade. But it's not clear to me that making the drone will be this fabulous profit center. And so I think
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The department does best when it lets dual-use commercial technology advance so it can adapt it and pull it in internally as opposed to trying to develop a technology exclusively for defense if there's an adjacent commercial development.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
I mean, I was part of a program in Afghanistan where we were trying to create handheld computing for the purposes of contracting officers being able to go outside the wire to be able to conduct commerce on the economy and do our counterinsurgency mission. So that's... We use this little parking ticket. It's called a standard form 44. It looks like a parking ticket.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's like in in triplicate and there's a carbon copy. It's exactly what you grew up with, a parking ticket. And that's how we give money. We procure resources on the economy in a theater or war. And so there's a special limit that we raise to a few million dollars. And one of my jobs was to clear these tickets into the accounting system in Kandahar.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I remember looking at one that's a two million dollars to cash ticket. I remember the field ordering officer, I said, what's this? So our general lack of visibility financially, I love to have some compute because for them to trace this route back to base, it's crazy dangerous.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And they're only coming back to meet the general obligation of how we need to clear these tickets in order to give them more cash. So maybe I can do it digitally over the air. And so we built this huge thing. It hung off your belt. It had a huge expensive battery on it. It had a thermal printer attached. It lasted two hours. It was horrible.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And then over a weekend, the first version of the iPhone comes out. A Marine builds an entire app over the weekend. He goes, why don't we use this? Of course, it's so much better. But you have to remember, the department is the largest organization of its kind on Earth. And for many years, it was the largest organization. The Army is still the largest operator of golf courses in the world. So...
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
The U.S. Army, everything it does is at the limit of size. And so it always thought that its internal requirements would drive the best solution because it could bring so much demand. I'm 47. I never contemplated trillion dollar balance sheet corporations that had In the iPhone, 90% global market share or something crazy for a phone above $1,000.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And so the technology in it, we do so much better doing adaptation of something commercial. And I happen to think that's what's going to happen in a lot of these new emerging technologies. The department didn't come up with its own flat panel TV. It bought it commercially. And if you go on the high side for all the cleared information, it's showing it on a Dell screen.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Yeah, it's not a custom screen that we made for ourselves. So... Then there are instances where in the Palantirs where they've crossed into the commercial domain, and this is wonderful for the department because you're getting more reps. So I happen to think a lot of the autonomy in the commercial world will ultimately be adapted into the defense department. What am I talking about?
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Joby and Waymo and Tesla. That commercial adaptation is going to be very helpful for a defense application. So I think there's a huge benefit where we should be kiting off of... the commercial side of industry. By the way, there's legislation to this. And so I was intimately involved in it because we owned a business that benefited from the real legislation and we advocated for it.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
But Palantir, it really turbocharged Palantir as a business. And so this was the National Defense Appropriation Act, where there was a line put in at a bunch of our behest to say commercial off the shelf first, if it already exists. That was a new feature of law. And it said, look, If the capability exists off the shelf, then you must try that first.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And at a minimum, if you decide not to use it or if you use it in some capacity, you can't treat it like a military system and demand P and visibility into cost and pricing and all these other things because it's commercially available.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I believe that piece of legislation was enormously helpful to Palantir because it was commercially available, although it didn't have the size of commercial business today. And the army was... creating a program at 5x the funding of Palantir to do it their own way. And they were attempting to literally just turn off Palantir, which would have been a huge cost to the government.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And I'm sure the system wouldn't have been as effective.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
It's so tough. This is a very tough question. Because in your mind's eye, you can say, I think this is where the world's going to go. But the department functions off of these plans, these operational views of how we integrate the force. So they're called OV-1s. And it's a visual concept of planning of how we plan the force.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
We haven't come to grips with what we do or don't really need for next generation warfare. The kind of nonlinear warfare may still require... a lot of the old stuff. John Spencer at West Point talks about war is really a combination of old and new. It's never all new and it's never all old. And if you think about the Ukrainian contingency, there are many World War II-esque-like components of this.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
155-millimeter shells, small-caliber munitions, bicycle bombs, mines. The minefield in Ukraine is about twice the size of the state of Florida now. Landmines. We're talking about old technology. And so... My concern is I think we're over-indexing to a near-peer threat, maybe, and not thinking about some of the capabilities we may need in, let's say, a nonlinear kind of threat.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
Like, what do I worry about? I worry about the ability for... People to make fissile material now with lasers and they don't require centrifuges. And a non-state actor can actually build a nuclear capability. That's pretty concerning. It was usually, oh, you needed these pristine alloys. You needed access to the molecule. That just made it so hard.
Invest Like the Best with Patrick O'Shaughnessy
Darren Farber - The Business of Defense - [Invest Like the Best, EP.417]
And it was exclusively the provenance of nation states. Now you can have... someone that's sufficiently capitalized with an alternative form of technology actually building a small tactical nuclear weapon. I'm not saying it's super easy, but the march of technology makes things easier.