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August 14, 2018 | International, Aerospace, Naval, Land, C4ISR

For IT companies, the secret to success in defense is all about big growth

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WASHINGTON — The secret to tackling the defense information technology market may be scale.

Looking specifically at the pure-play IT companies that landed on the 2018 Defense News Top 100 list, many of those that have doubled down in some capacity saw defense revenue increase during fiscal 2017. That came on the tail end of another trend among the largest defense primes, to get out of the IT business.

“The evolution started a couple years ago, where the large defense primes who had boned up on IT service work during the war [on terror] started to realize that for a variety of reasons they might not be able to compete as effectively, or extract the returns they want out of a business like that,” said Jon Raviv, senior analyst and vice president for aerospace and defense at Citi Research.

Divestitures followed, and pure-play IT companies were able to quickly scale up not just in size and their ability to support massive contracts, but also in capability set. The acquisition of Lockheed Martin's IT business transformed Leidos from a $5 billion company to a $10 billion company. That deal closed in late 2016, explaining how the company saw double-digit growth in defense revenue in both 2016 and 2017 — despite the buy actually making the company less defense heavy overall.

Similarly, CACI closed on the acquisition of L3 Technology's National Security Solutions for $550 million in February 2016 — three months before the end of its fiscal year. The associated revenue contributed to the 16 percent increase in defense revenue during 2017.

Leidos CEO Roger Krone, in an interview with Defense News in 2016 soon after the acquisition closed, pointed to “scale, but not scale for scale's sake” as a big factor in the buy — noting, too, the importance of balancing the portfolio and geographic distribution. He also pointed to sheer numbers — 15,000 employees specifically — many with security clearances.

The trend does seem to be continuing. CSRA chose to not participate in the 2018 Top 100 because its $9.7 billion acquisition by General Dynamics closed by the time data collection for the list kicked off. While General Dynamics is a top defense prime, its IT business functions as a largely separate entity, similar to the pure-play IT companies. The acquisition of CSRA, which reported $2.25 billion in defense revenue for fiscal 2016 — will add significant scale to GDIT. It is also likely to influence the company's Top 100 rank next year.

The future promises more cyber and IT-related merger and acquisition activity in the vein of that deal, according to Daniel Gouré, a vice president with the Lexington Institute think tank.

“Raytheon is still in acquisition mode with cyber, so it's an area that's still kind of churning,” he said. “I wouldn't be surprised to see some of these big players acquire some of the more defense-oriented cyber players.”

Unclear is what the sweet spot may be for those exclusively IT-focused firms.

“Where we sit right now, it's not clear what the right size is,” Raviv said. “GDIT and Leidos are about $10 billion in sales; SAIC and CACI and ManTech are lower tier. All of those companies say they are happy with scale but could do a deal. Whether they call it scale, or marrying capability sets — it's all marketing, I suppose.”

And there are other tactics that achieve scale without acquisition. Perspecta emerged on the 2018 Top 100, having launched June 1, 2018 through the combination of DXC Technology's U.S. public sector business, Vencore, and KeyPoint Government Solutions. As one entity, Perspecta reported $2.73 billion in defense revenue and ranked 37. To put that in perspective, Vencore ranked 67 in last year's list, with $886.59 million in defense revenue. And all of these pure-play companies are increasingly marketing themselves as conduits to the “nontraditional players” that the Pentagon is so keen to attract. Amazon Web Services, for example, will often partner with government IT companies on defense contracts to hand off some of the contracting morass.

That said, for all the potential, the bulk of the defense IT market is notoriously fickle. Services often set aside IT projects in an effort to preserve platform buys, and margins can be low. Agencies also struggle to balance upkeep of existing systems versus modernization efforts versus research and development into the next great technological marvel.

But as Raviv noted, it's all IT.

“Yes, there are companies working on high-end cyber, the ability to launch attacks through cyberspace or to harden the communication node on a new missile so it can't be hacked by, say, China. And while the word cyber came up a lot three or four years ago, now you hear a lot about AI, autonomy and machine learning. But it's all technology. And it's a lot of smart people working on a lot of advanced things many of us don't understand.”

https://www.defensenews.com/top-100/2018/08/09/for-it-companies-the-secret-to-success-in-defense-is-all-about-big-growth/

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  • Sorry, France: This Fighter Jet Is No F-35 Stealth Fighter

    October 25, 2019 | International, Aerospace

    Sorry, France: This Fighter Jet Is No F-35 Stealth Fighter

    It has a radar cross-section similar to that of a Super Hornet. That means it is nowhere near as stealthy as an F-35. by Sebastien Roblin In January 2019, French Defense Minister Florence Parly announced France would commit $2.3 billion to develop an F4 generation of the Dassault Rafale twin-engine multirole fighter. This would include production in 2022–2024 of the last twenty-eight of the original order of 180 Rafales, followed by the purchase of an additional thirty Rafales F4.2s between 2027–2030, for a total of 210. Since 2008, France has deployed land- and carrier-based Rafales into combat in Afghanistan, Iraq, Libya, Mali and Syria. Despite incorporating stealth technology, the Rafale (“Burst of Fire” or “Gust of Wind”), is not a true stealth aircraft like the F-35. True, the French jet's wings and fuselage are primarily composed of radar-absorbent composite materials and lightweight titanium. Other stealthy design features include S-shaped engine inlets, serrated edges and a channel exhaust cooling scheme designed to reduce infrared signature. These give the Rafale an estimated Radar Cross Section (RCS) of slightly above one square meters—comparable to peers like the Super Hornet and Typhoon, but orders of magnitude greater than that of the F-35 jet. Land-based Rafales are currently priced $76–$82 million per plane, only modestly cheaper than the F-35A which benefits from vastly greater economy of scale, though the Rafale's operating costs are likely lower. Paris particularly prizes maintaining an independent domestic arms industry and has never seriously considered purchasing F-35s. Instead, France is working with Germany and other partners to develop a sixth-generation Future Combat Air System stealth jet to enter service in 2035-2040. 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    May 19, 2020 | International, C4ISR, Security

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