That’s just the latest — and biggest — of a whole series of recent moves. Last month, McLean-based Science Applications International Corp. announced it is splitting its company in two. Last year, Falls Church-based Northrop Grumman said it would spin off its shipbuilding company.
Driving the changes are concerns about Pentagon spending reductions already in place as well as those yet to come, including a roughly $500 billion cut slated for January. But the companies are reacting in very different ways, each trying to game out what parts of the industry are likely to thrive in coming years. The result is a period of particular instability that makes it difficult to predict winners and losers.
Contractors’ decisions typically depend on the businesses they already have and the bets they’re making on what the government will need in the future. Some are cutting loose their less profitable units, anticipating that their companies will be better off with higher profit margins if not more sales.
“When military demand softens . . . companies rearrange themselves in preparation for the hard times,” said Loren Thompson, a defense industry consultant. “Each company is formulating its strategy based on where it was standing when the party ended.”
In the past, said Guy Ben-Ari, deputy director of the Center for Strategic and International Studies’ defense-industrial initiatives group, there has been more consensus on how to react. In the 1990s, for instance, the Pentagon pushed the industry toward consolidation.
“We had a series of strategies that the entire industrial base got behind, and now we’re really at a place where there’s not that big of an industrial base anymore and there’s not any agreement on the right . . . or most profitable strategy,” he said. “Everybody’s trying something else out.”
Many in the industry have been predicting that even as the government brings down spending on services and products related to the wars in Iraq and Afghanistan, there will be other areas where it will have to keep spending. Some companies are betting on cybersecurity as a growing focus — the military has established a new Cyber Command — while others are seeing a growing push for electronic medical records and other health-related technology moves.
To move more quickly into these areas, contractors such as Falls Church-based General Dynamics have been buying up smaller companies with strongholds in particular markets.
In late August and early September, General Dynamics announced three deals, including one to buy Fidelis Security Systems, a cybersecurity company meant to help its users see into the layers of their network and find breaches and threats.