Defense Ventures Blog FeedDefense Ventures Bloghttp://defense-ventures.com/blog/2013-01-28T10:38:29ZSquarespaceDefense & Government Services 2012 Year in Reviewhttp://defense-ventures.com/blog/2013/1/28/defense-government-services-2012-year-in-review.htmlDPM2013-01-28T10:16:27Z2013-01-28T10:16:27ZThe McLean Group has published an overview of M&A trends in 2012 for Defense & Government Services, including representative transactions, index performance, and some general industry news.

McLean's Mitchel Martin was also quoted in a Nov-2012 article in the Washington Post talking about the pressure on the Governemnt Services sector and the need to be "very selective" on what to bid in an environment of low-price-technically-acceptable.

 “...more companies going after smaller opportunities and lower-level work. You’re competing with Lockheed Martin now where you didn’t have to before.”

Of course, this highlights a central issue discussed here on Defense Ventures, of how defense contractors will remain competitive under price pressure and in (mostly) unfamiliar commercial markets. ManTech CFO Kevin Phillips says, "...we've done this before" and that they know "when and where to diversify," implying this is a regular cycle in the defense industry.

That may be true. Low-price acquisition in DoD seem to come and go, usually ushered out by the creep of poor quality and inevitable, expensive contract failures that LPTA tends to engender. Eventually the Lockheeds flush out the little guys through a combination of cash, patience, and aggressive lobbying.

However, a most dangerous trend for the biggest industry players would be a convergence of low price with increased commercialization. That is, what if the wars of the future don't need the defense industry (as much)?

What if, more likely, adjacent commercial markets in security, networked communications, public services, healthcare, big data.... don't turn out to be fertile growth grounds for top-heavy, monolithic corporations better suited to big weapons programs and 10-year backlogs?

What if the Government figures this out?

]]>10 "Future" Defense Technologieshttp://defense-ventures.com/blog/2013/1/25/10-future-defense-technologies.htmlDPM2013-01-25T06:34:39Z2013-01-25T06:34:39ZBack in Nov 2011 National Defense Magazine listed 10 Technologies the US Military Will Need for the Next War. 

  1. Faster, Quieter, Safer Helicopters
  2. Weapons That Don't Kill
  3. Inventions that Lighten the Soldier's Load
  4. Ultra-Light, Super-Survivable Dune Buggies
  5. Unmanned Mini-Submarines
  6. High-Speed, Bulletproof Power Boats
  7. Anytime, Anywhere Communications
  8. Robots That Think For Themselves
  9. Cheap Liquid Fuel
  10. Persistent Wide Area Surveillance
An interesting, creative list and one that in some areas is coming into being faster than might have been expected just a year ago.

 

 

]]>How Global is Defense?http://defense-ventures.com/blog/2013/1/20/how-global-is-defense.htmlDPM2013-01-20T10:46:36Z2013-01-20T10:46:36ZLooking for comments and feedback:

How global is the defense industry?

We know it's big and pervasive, but how interconnected is the industry worldwide? 

Clearly US defense spending dominates the global total. Does that hamper or facilitate innovation?

What are example of truly international defense companies, outside of the biggest, top-10 firms?

Are foreign firms (unnecessarily) excluded from doing business with US DoD?

Very intersted in feedback, links, references. Comments here are open and/or email me direct: patrick@defense-ventures.com

I plan to publish some consolidated views on this subject and will post here soon. THANKS.

]]>DynCorp vs KBR on Strategyhttp://defense-ventures.com/blog/2013/1/14/dyncorp-vs-kbr-on-strategy.htmlDPM2013-01-14T06:09:57Z2013-01-14T06:09:57ZHere is a rather sober analysis on DynCorp's latest quarterly results. Reasons for concern and "negative" outlook:

  • 75% of revenues derive from US operations in Iraq and Afghanistan
  • Delays in approving the FY13 defense budget which could hold up orders on current and new contracts
  • Further potential cuts to DoD budgets under sequestration 

Although contract win rates have increase over the past couple years, operating margins sit at around 5%, suggesting that DynCorp may be cutting costs on its bids to maintain a healthy backlog during tighter times.

This raises a fundamental question about diversification for defense contractors, particularly for those in the Defense & Government Services and Logistics sector. Is it better to be a USG or DoD specialist or to diversify those programs with commercial work? The market has a habit of punishing diversification -- ITT and L3 both spun off businesses that had successfully grown into emerging industrial sectors. The former Chairman of Lockheed Martin once commented that "the record of diversification in the defense industry is unblemished by success." So why is DynCorp getting a negative outlook for specializing?

In a vote for diversification, consider DynCorp's close competitor, KBR. In Q3 KBR had revenue on the LOGCAP contract of just $156M, compared to DynCorp's $438M. Clearly, KBR has been on the losing side of many recent DynCorp advances on market share, and they are fighting to stay relevant in a shrinking, crowded environment for USG logistics & infrastructure services.

However, looking at the bottom lines of both companies, we find operating profits (for 9 months through Sep 2012) of $126M derived from KBR's two Government units (North American Government & Logistics, and International Defense & Support Services), compared to $114M for all of DynCorp for the same period. At KBR the defense business is probably less than 20% of the total, most of which comes from a Hydrocarbons business that produced over half KBR's turnover for Q3. 

I think KBR benefits in their Government work by having a diversified portfolio of related commercial work. They’ve protected margins better by making resources compete for returns across many different markets. DynCorp, on the other hand, with its concentration in DoD and State, has to cut its margins and low-bid everything in order to drive revenues/backlog. 

]]>More on the Internet of Droneshttp://defense-ventures.com/blog/2013/1/4/more-on-the-internet-of-drones.htmlDPM2013-01-04T12:35:05Z2013-01-04T12:35:05ZYesterday I mentioned a blog post by John Robb at Global Guerillas describing the “Internet of Drones” as the next very BIG thing. While Robb’s example looks at the fascinating implications of commercial uses for drones – namely, “short haul logistics” – I think it’s worth considering the potential ramifications a step back into the defense & security sector.
As pure thought exercise, imagine the following:
  • A massive, globally distributed network of commercial drones at a scale of the internet, in fact, connected directly into the internet
  • A powerful and/or autocratic Government or regime that has access to this network, in addition to or integrated with its own militarized network of drones – for the collective purposes of surveillance, reconnaissance, tracking, and weapons system delivery
  • A rogue or otherwise aggressive regime or terrorist force conducting a strike on US territory – similar to the cross-border strikes by the US against terrorists
  • Ground forces that can be covertly inserted somewhere and then entirely supported logistically by invisible, disposable drones for very extended periods
This is part sensationalism and free association, but still a lot of this scenario is entirely possible within a relatively short period of time and with (mostly) current technology. Start to combine this internet of drones with other emerging trends like 3D printing and robotics, and it’s easy to imagine a global security environment that very soon looks much different than today.
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