As the defense industry faces a declining defense budget, defense companies big and small are rethinking their portfolio and considering mergers and acquisitions.
Some analysts believe the recent defense industry climate is similar to the 1990s when a withering defense budget sparked widespread consolidation in the industry and corporate giants were formed: Lockheed Corp. and Martin Marietta became Lockheed Martin, while Northrop Aircraft and Grumman Aerospace became Northrop Grumman. During this period, the number of companies able to serve as a prime contractor for tactile missle programs decreased from 13 to three, according to a Government Accountability Office report.
“That means that at least one of the big players will have to exit if we are facing a similar downturn in the years ahead,” said Defense analyst Loren Thompson.
Last September, Boeing defense chief Dennis Muilenburg announced he would not rule out the possibility of a large-scale merger. Boeing recently bought Argon ST, which had lingered on the market for about six months. Other moves include Lockheed Martin divesting its Enterprise Integration Group, which provided systems engineering and integration services; and 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.
Yet the current defense climate is different than in the 90s, as the Pentagon simultaneously adjusts to a lower defense budget and plans for growth. As a result, defense companies are seeking to reorient their businesses, sell off units that are not core to a company’s operations and buying businesses that are considered growth industries like cybersecurity, health IT and cloud computing.
“This is neither the ’90s nor the last decade; it’s different,” said Pentagon acquisition chief Ashton Carter. “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.”
