The word among investors is that the federal services sector, particularly the defense segment, is consolidating. That’s one way of looking at it. Another way is to observe that several of the biggest military contractors are exiting the space, and others may too if profits don’t improve. After years softening demand and deteriorating contract terms, companies that have alternatives are beginning to vote with their feet by pursuing other opportunities. The biggest move came last month when industry leader Lockheed Martin said it would divest service lines generating $6 billion in revenues annually. A similar announcement was made by BAE Systems in April, and by other big Pentagon suppliers earlier. With some of the best-run federal service providers only generating 7% operating margins, it isn’t hard to see why big system integrators might think their future lies elsewhere. I have written a commentary for Forbes here.
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