By Dana Hedgpeth and Tomoeh Murakami Tse
Washington Post Staff Writers
Friday, August 21, 2009
Northrop Grumman's attempt to sell its consulting unit is among the most visible signs yet of how companies are moving to address the Obama administration's efforts to crack down on the cozy relationship between the federal government and large defense contractors, analysts said Thursday.
Northrop is putting TASC, its Chantilly advisory unit, up for sale, people familiar with the matter said Thursday. Among the potential buyers are several private equity shops, including District-based Carlyle Group, said these people, who spoke on the condition of anonymity because the deal has not been finalized or they were not authorized to speak for their organizations.
Wall Street analysts, who estimated the unit's value at up to $2 billion, said it is unlikely that Northrop's competitors -- such as Boeing, Lockheed Martin and Raytheon -- will be potential buyers, given a new law President Obama signed in the spring. It requires defense contractors to set up clearer lines separating their work as advisers to the government and as sellers of hardware and weapons systems.
Los Angeles-based Northrop's decision to divest its advisory unit, instead of reorganizing it into a separate subsidiary, sets a precedent for other industry players that may also have perceived conflict-of-interest issues, Barclays Capital analyst Joseph F. Campbell Jr. said in a research note Thursday.
Howard Rubel, an analyst at Jefferies, said in an interview that "it's a question of being pragmatic."
"Some people worry about Chinese walls, and some people don't," he said. "But if the customer worries about it . . . sometimes you say, 'Okay, life's too short to be in a fight with an important customer.' The goal here is you want to make your customers happy."
Northrop declined to comment.
Several analysts said the move made sense, given the unit's limited growth prospects and its potential to get in the way of landing large government contracts. The government, for example, could no longer have TASC advising it on the abilities of a certain aircraft while at the same time that Northrop supplies the government with that plane, they said.
The relationship between defense contractors and the government has been shifting under the Obama administration. This spring, Defense Secretary Robert M. Gates, a holdover from the Bush administration, proposed a sweeping overhaul of military spending, including putting thousands of jobs that had been outsourced to contractors back under the government umbrella. It is a move that defense industry analysts say could cut into companies' profits.
"There's a different wind blowing in Washington," said Phil Finnegan, a defense industry analyst at the Teal Group. He noted that many programs in which defense companies served as both advisers and architects have run into cost overruns and other problems.
"What you saw in the past was a close relationship between government and industry," he said. "The idea was: Trust the contractor with the ability to come up with the overall architecture and implementation of systems because they have so much capability." But now there have been problems, he said. "There is a new attitude. There is not the level of trust of contractors you saw a few years ago."