On Friday I posted a blog on the brutally difficult planning environment A&D strategists find themselves in. And as the blog was being posted the world’s third largest economy and a very close American ally, Japan, got swamped by a tsunami. This reinforces my view that it is time for the big defense companies to throw all their assumptions out the window and start looking carefully at the new world we find ourselves in.
This is an especially good time for Lockheed Martin, Northrop Grumman, BAE Systems and Raytheon to challenge their assumptions. Very high percentages of those company’s revenues are with the U.S. federal government. Much of their other business is with overseas governments that have equal if not worse debt financing problems. Those governments are going to look very different in a few short years. To take one stark example: look at what the United Kingdom is doing right now to its public sector, including its Ministry of Defense, because of pressures from the credit markets.
So for the remainder of this blog I would like to offer a radical idea that I know is antithetical and perhaps even anathema to the big A&D companies:
Now is the time for a more traditional conglomerate structure to be put under active consideration at these great companies. And I do not mean they should be looking for commercial synergies that parallel their existing government business. I mean, when the private economy is weak and struggling, this is the time to get into commercial markets like real estate, finance and energy when prices are good and prospective competitors are debilitated.
Those private markets have become more politicized in recent years as the power of the federal government has grown. And who knows better than Lockheed Martin or Raytheon the ins and outs of dealing with the Feds? And what companies more than Northrop and Lockheed need a hedge against the gyrations in the sovereign debt markets, and the roiling domestic and international political environment?
These companies have great cash flow, outstanding management, strong, conservative internal cultures, and know how to deal with the morass of legal, bureaucratic and political processes that characterize business in the modern world.
And imagine how refreshing it would be to be able to structure at least some of your business deals and award subcontracts based on best price and performance, without having to stitch together inefficient business coalitions based on political and international quotas.
It might, for instance, be a good time to get into finance when interest rates are low and the finance arms of competitors like General Electric have already been ravaged by the debt bomb, and the erstwhile titans of Wall Street are reviled by the political system. This IT-intensive business could be ideal for these federal contractors. Their subcontractors, overseas customers and partners, and any number of potential prospects will need conservative, fair, and transparent financing in this turbulent world. And they can avoid the insane bonus system that appears to be inbred in Wall Street’s DNA.
And what about real estate? The real estate sector right now has fantastic prices with a myriad of desperate sellers. Fannie Mae and Freddie Mac are probably going away, but some sort of government mechanism will replace them. Who better than an experienced federal contractor could help manage and contract for whatever new mortgage operation emerges here in the nation’s capital? And to mention just one other real estate play that beckons: What happens to all those fixed assets the U.S. Postal Service holds when that government “enterprise” finally goes under?
Finally, government and alternative energy are looking more and more like non-starters, as government energy subsidies start getting rolled back in fiscal austerity drives. Meanwhile, massive new finds of natural gas and shale oil are right under our noses here in North America. The giant American and global economies are going to need lots of fuel when a new expansion gets underway, and the commercial energy sector is one these companies should also consider diving into. And by the way, who would know better how to sell and deliver fuel to the U.S. military and U.S. government, as well as foreign militaries, than a big defense contractor? It is still early in the shale-gas boom. New technologies are being developed now that these technology companies could help refine. And natural gas in particular is more environmentally friendly than other fossils fuels, giving it an added lift in our heavily politicized age.
So radical times require radical thinking, and the big A&D companies have their work cut out for them. It is times like these that make me glad I am sitting comfortably in a think tank, and not running a large profit and loss enterprise. As the commander of Special Operations Command, Admiral Eric Olson says, all you really need for success these days is a program that is invisible, weightless and has infinite power.
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