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Pentagon interest in cybersecurity may ease contractors’ pain from cuts

By Chris Strohm and David Lerman,

Plans by the Pentagon to invest more in cybersecurity and space-based capabilities may ease the blow for defense contractors such as Northrop Grumman and Lockheed Martin that are facing cuts in other programs.

The Defense Department intends to beef up spending on computer network protections and satellite intelligence systems while targeting troops for cuts under a global strategy released last week. Funding levels, which were not specified, will be detailed in next month’s federal budget proposal.

President Obama is balancing the need to counter cyberthreats from China and give the military the latest technology with plans to cut almost $490 billion in defense spending through 2021. Contractors may look to expand cybersecurity and space businesses through acquisitions as the nation winds down two wars and buys fewer bullets and bombs.

“Large prime contractors who may be at risk of losing significant revenue from decreases in major weapon systems are looking to go where the dollars are,” said John Hagan, director of aerospace, defense and government services for BB&T Capital Markets in Reston.

Major contractors have about $40 billion available for acquisitions, Hagan said.

“You are seeing a lot of trans­actions taking place with regard to cyber and space because that’s where the growth is going to be,” he said.

The increased emphasis on cyber­security and space-based technologies is spurring the creation of start-ups, some of which will be acquired by established contractors, said Rodney Joffe, senior vice president for NeuStar, a Sterling-based data manager.

“When it comes to cyberspace, much of the innovations are occurring at small companies,’’ Joffe said.

High-growth arenas

Raytheon said Dec. 29 that it bought Henggeler Computer Consultants for an undisclosed amount, the 10th cybersecurity acquisition for the Waltham, Mass., company since 2007. CACI International of Arlington paid $61.5 million for Paradigm Holdings on Sept. 19 and purchased Pangia Technologies on July 1 for an undisclosed sum.

“Our mergers-and-acquisition program is accelerating our momentum in the high-growth ­cyber arena,” Paul Cofoni, chief executive of CACI, said in a Nov. 2 statement.

U.S defense cybersecurity spending totals $10 billion to $11 billion, Howard Rubel, an analyst at Jefferies & Co. in New York, said in an interview. That spending may increase faster than many other military programs, he said.

Increased reliance on satellites and drone aircraft may raise vulnerability to hackers and other disruptions that are expanding with technological sophistication. The United States will “invest in new capabilities to maintain a decisive military edge against a growing array of threats,’’ Defense Secretary Leon E. Panetta said in introducing the plan.

The National Counterintelligence Executive, an advisory panel of senior U.S. intelligence officials, blamed China and Russia in a Nov. 3 report for stealing sensitive U.S. economic and commercial data. The report said that the pace of cyberespionage is accelerating and threatening an estimated $398 billion in spending on research and development.

Northrop chief executive Wes Bush said during an Oct. 26 conference call that the Falls Church-based company considers cybersecurity important “because of the just ever-growing recognition of the threat and the ever-growing magnitude of the threat.”

Northrop is the Defense Department’s largest supplier of unmanned systems and the government’s biggest cybersecurity provider, spokesman Randy Belote said in an e-mail.

Both sides of the coin

Linking cybersecurity and space systems is “encouraging because it reflects reality that we need to be doing more on both sides of the coin,” said Roger Cressey, senior vice president for Booz Allen Hamilton, a McLean-based security and intelligence consulting firm.

The Pentagon requested about $10.2 billion this fiscal year for its space initiatives, including about $5.8 billion for satellites and $2 billion in launch costs.

Two of the space programs are being developed by Bethesda-based Lockheed Martin: the Advanced Extremely High Frequency satellite and the Space Based Infrared System, a network of satellites.

Another is the Evolved Expendable Launch Vehicle, a satellite system using medium- and heavy-lift rockets that the Pentagon requested about $1.7 billion for this year. It’s run by United Launch Alliance, a joint venture of Lockheed Martin and Chicago-based Boeing.

Increases in space-defense expenditures may lag behind those in the faster-growing cybersecurity area, said Mark Gunzinger, a military analyst at the Center for Strategic and Budgetary Assessments in Washington and former deputy assistant secretary of defense.

NeuStar’s Joffe agrees, saying the United States should create “what our enemy already has, really good offensive cyber capabilities. We should be able to get enormous leverage from investments in offensive cybersecurity.”

— Bloomberg Government

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