Mergers and spinoffs shake up the defense industry
When Fairfax-based information technology contractor SRA International canceled on short notice its presentation at a government IT conference in Washington last month, the rumors started circulating. Was the company, which generated $1.67 billion in revenue in 2010 and has more than 4,000 local employees, considering a major change?
SRA spoke up last month, acknowledging that, after receiving multiple questions about whether it was accepting offers, the company had hired a financial adviser. It cautioned, however, against viewing the move as an indication that the company "is or should be for sale."
The firm's stock price surged nonetheless as SRA became the latest government contractor to get caught up in the swirl of merger and acquisition activity reshaping the local economy.
Companies big and small have been rethinking their portfolios and buying and selling accordingly. Locally, Boeing bought Fairfax-based Argon ST -- which had lingered on the market for about six months; Lockheed Martin decided to divest its Enterprise Integration Group, which provided systems engineering and integration services; and White Plains, N.Y.-based ITT Corp. announced it would separate into three pieces: a manufacturing business, a water technology firm and a McLean-based defense and information solutions firm.
The shake-up is likely the most significant since the early 1990s, when reductions in defense spending forced widespread consolidation. That was the era when today's contracting behemoths were formed; Lockheed Corp. and Martin Marietta became Lockheed Martin, while Northrop Aircraft and Grumman Aerospace became Northrop Grumman. The number of companies able to serve as a prime contractor for tactical missile programs, for instance, fell from 13 to three, according to a Government Accountability Office report.
This time around, the corporate moves suggest the industry is working from a different playbook.
"The previous wave of consolidation of the defense industry reflected a collapsing threat and the willingness of policymakers to lead sector consolidation," said Loren Thompson, a defense industry consultant at the Lexington Institute. Today, "threats may actually be growing and the Pentagon isn't all that eager to see further consolidation."
That helps explain why the recent flurry of buying and selling seems more strategic in nature. So far, at least, the industry has shied away from any blockbuster deals.
"This is neither the '90s nor the last decade; it's different," Pentagon acquisition chief Ashton Carter said at a June briefing. "It's an environment in which we're going to have slow real growth, and our senior managers and our partners in industry need to manage accordingly."
As a result, companies are seeking to reorient their businesses, selling off units that pose potential conflicts of interest or are not core to a company's operations and buying businesses in what are widely considered growth industries like cybersecurity, health IT and cloud computing.
Whether it's Northrop Grumman's decision to likely spin off its shipbuilding business or McLean-based ATS Corp.'s recent declaration that it is pursuing strategic alternatives, the moves have at times been unpredictable, leading to a feeling that there's little consensus in the industry on the best way to adapt.
Companies have "got to be prepared to go every direction, and that makes it very hard right now," said David Berteau, senior adviser and director of the Center for Strategic and International Studies' defense-industrial initiatives group.