The Big, Bad Contractor?
Still, while acquisitions are nothing new, they certainly seem to be taking place more frequently these days. In September, SAIC pointed to acquisitions as one reason for deciding to go public; and that's after already acquiring Object Sciences some four months earlier. Also, CACI acquired National Security Research (NSR); Lockheed Martin acquired Coherent Technologies; General Dynamics acquired Itronix; and Northrop Grumman even acquired a software company, Tucana Technologies, which specializes in using semantic technologies to integrate enterprise information. That's just to name a few in the past year. And for companies that think it's just the little guy that could end up a target, General Dynamics recently purchased Anteon for more than $2 billion, while Lockheed Martin and three equity firms went after Computer Sciences Corp. (CSC) for $10 billion just a few months ago. CSC managed to fight them off, demanding $65 a share as a starting point for negotiations.
Of course, acquisitions are a surefire way to impress Wall Street. And particularly for the government market, they enable large systems integrators to accommodate agencies' increasing need for full, enterprisewide solutions. More specifically, contractors figure that by pulling more under their own umbrellas—from commodity hardware to networking, security technology to wireless, and RFID to biometrics—fewer bucks need to get passed on to niche players. And integrators also want an alternative to subcontracting, particularly with the Levin bill getting nods on the Hill, potentially reducing primes' ability to pass associated overhead on to the customer.
Whatever the reason, the flood of acquisitions could result in some fallout. Obviously, smaller solution providers—particularly the successful ones—will have to watch their backs. Solution providers at Input's FedFocus conference questioned analysts and government panelists more than once about the impact acquisitions have on buying trends and the market as a whole. Nobody really offered them a concrete response, but there definitely was an air of concern. While an acquisition doesn't generally happen without a company's consent, it's certainly not always the intended direction.
Even those solution providers that remain in the clear may suddenly see the number of subcontracting opportunities shrink as systems integrators take on the work that normally would require partnerships. Those that do find themselves on contracts will probably be more niche-oriented than ever. That alone will be a marked change.
As for the government agencies themselves, they may be the worst off in the long run. For one thing, while the convenience of one-stop shopping is initially attractive, agencies could find small-business requirements a bigger challenge than ever to meet. Granted, many agencies don't do due diligence in meeting those mandates, but indifference suddenly combined with a shrinking pool could exacerbate the issue. More harmful still, agencies that rely on one integrator to meet all the needs of a given project could see the end result suffer somewhat. With capabilities available in-house, integrators won't be inclined to seek out the most able and appropriate subcontractor. "Best value" will suddenly be determined by companies' providing the best of their own portfolio, rather than a combination of superior skill sets that results from a competitive market. That could hit the integrator squarely in the pocketbook, as future contracts are lost and reputations suffer.
None of this is to say that acquisitions are all bad. It's not even to say that the aforementioned acquisitions were poor decisions. When appropriate, they can bring about new capabilities for companies, enhance services offered to the customer, and keep a small struggling company afloat, albeit under a new allegiance. And to those worried about getting gobbled, chances are the trend won't continue. Any fallout that happens from overdoing buyouts will likely in turn solve the problem—stabilizing the market and, perhaps, teaching some companies and agencies alike a few hard lessons about shrewd business tactics.