De­fense con­tract­ing

The Washington Post - - FRONT PAGE - BY AARON GREGG

sec­tor merg­ers and ac­qui­si­tions ap­pear poised to keep pace in 2019, with two ma­jor deals an­nounced dur­ing the past week.

Merg­ers and ac­qui­si­tions in the de­fense con­tract­ing sec­tor ap­pear poised to keep pace in 2019, with two ma­jor deals an­nounced in the past week.

Cal­i­for­nia-based de­fense con­trac­tor Par­sons an­nounced Jan. 7 that it would buy Vir­ginia-based gov­ern­ment con­trac­tor OGSys­tems for an undis­closed sum. On Thurs­day, the hard­ware man­u­fac­turer Tex­tron Sys­tems an­nounced its pur­chase of Howe and Howe Tech­nolo­gies, a Maine-based man­u­fac­turer of ro­botic mil­i­tary ve­hi­cles.

Both ac­qui­si­tions fol­low two years of mod­est in­creases in U.S. de­fense spend­ing un­der a Repub­li­can-con­trolled White House and Con­gress. The Pen­tagon has said in of­fi­cial strat­egy doc­u­ments that it would de-em­pha­size coun­tert­er­ror­ism in fa­vor of com­pet­ing with China and Rus­sia for global mil­i­tary dom­i­nance, step­ping up new weapons pro­duc­tion ef­forts in ar­eas such as ar­ti­fi­cial in­tel­li­gence and hy­per­sonic weaponry.

De­fense con­trac­tors have piv­oted their busi­ness ac­cord­ingly. Tex­tron Sys­tems Se­nior Vice Pres­i­dent Ryan Ha­zlett said the Pen­tagon’s shift in fo­cus has en­cour­aged his com­pany to in­vest in the mar­ket for ground-based ro­bot­ics.

“We have seen over re­ally the past 18 to 24 months a pretty sig­nif­i­cant change in the geopo­lit­i­cal en­vi­ron­ment in the world to­day, as well [within the De­fense Depart­ment] a change from a coun­terin­sur­gency strat­egy to re­ally more of a fo­cus on peer-topeer con­flict,” Ha­zlett said. “When we looked at our busi­ness and how to po­si­tion our­selves to as­sist our U.S. mil­i­tary cus­tomer, we iden­ti­fied a gap. . . . Be­fore this we re­ally haven’t had an op­por­tu­nity to ex­pand into the ro­botic ground mar­ket.”

Tex­tron gets ac­cess to ro­botic ground ve­hi­cles the Army is in­ter­ested in. Howe and Howe makes a tracked ro­botic load-car­ry­ing ve­hi­cle called the IMET, de­signed to drive along­side de­ployed Army pla­toons and carry heavy ma­te­ri­als.

The com­pany’s ro­bots also can be used for more peace­ful en­deav­ors. It makes a ro­botic fire­fight­ing ve­hi­cle called the Ther­mite RS1-3 that is de­signed for in­dus­trial fires and those in­volv­ing haz­ardous ma­te­ri­als, which might be es­pe­cially dan­ger­ous for hu­man first re­spon­ders.

In buy­ing OG Sys­tems, Par­sons hoped to ben­e­fit from its ex­per­tise in ar­eas in­clud­ing geospa­tial in­tel­li­gence. Both com­pa­nies help U.S. de­fense and in­tel­li­gence agen­cies with com­plex data and cy­ber­se­cu­rity work.

The two re­cent merg­ers are the lat­est ex­am­ple of grow­ing con­sol­i­da­tion in the de­fense con­tract­ing in­dus­try.

In 2017, Northrop Grum­man bought Or­bital ATK, a Dulles, Va.-based con­trac­tor fo­cused on the de­fense and space in­dus­tries, for $7.8 bil­lion. United Tech­nolo­gies bought the air­craft parts man­u­fac­turer Rock­well Collins for $30 bil­lion.

Last year, Gen­eral Dy­nam­ics bought mid­size IT con­trac­tor CSRA for $9.7 bil­lion, and Re­ston­based Sci­ence Ap­pli­ca­tions In­ter­na­tional en­gi­neered a $2.5 bil­lion deal with the IT con­trac­tor Engility. In Oc­to­ber, L3 Tech­nolo­gies and Har­ris un­veiled plans to merge in a colos­sal $33.5 bil­lion deal, thought to be among the largest for the sec­tor.

Bob Kipps, manag­ing di­rec­tor of the aero­space and de­fense-fo­cused in­vest­ment bank Kipp­sDeSanto, said he ex­pects to see even more mar­ket ac­tiv­ity in the next year. In a sur­vey of ex­ec­u­tives in the aero­space and de­fense sec­tor by Kipp­sDeSanto, more than 75 per­cent of re­spon­dents thought merger-and-ac­qui­si­tion ac­tiv­ity would stay the same or in­crease in the next year.

“We’re ex­tremely bullish on 2019,” Kipps said. “We re­ally think it will be a record year.”

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