Market Watch: Wake up, America

Jerry Grossman

Increasingly, some industry observers, analysts and investors are expressing concern about emerging risks that may derail the strong operating and stock market performance of government services companies.

They identify as most worrisome the ballooning federal deficit, the upcoming elections and the costs of overseas military operations ? all potential catalysts for deflating defense spending.

For the 11 pure-play federal information technology companies, nearly 75 percent of their collective revenue flows from the Defense Department and intelligence agencies. Accordingly, an acute sensitivity to federal spending priorities is logical.

However, unless our citizens and national leadership lose their way, defense and homeland security will remain high priorities well into the future.

Bear with me for a few moments while I set forth a few observations that underline my view. We must come to grips with the following facts.

First, the United States is at war with a worldwide network of terrorists and fanatics supported by tens of millions of sympathizers. Although these discontented people are predominantly in the Middle East, they live in most parts of the world, including the United States. Their fanatical and suicidal nature, fostered by years of anti-U.S. teaching, eliminates nonviolent solutions such as bargaining, reasoning or appeasement. A military solution is the only answer.

Second, the dispersion of these individuals and their willingness -- sometimes eagerness -- to die while killing civilians clearly show that our campaign to eradicate this menace will be long and complicated. The threat from their use of biological, chemical and nuclear weapons adds urgency to our actions.

Third, the federal government has many competing priorities, but none of them matter much if its first priority -- national defense -- is not executed effectively. While the magnitude of potential human suffering in the United States is grasped by most, it seems the enormous economic impact of the terrorist threat is not discussed sufficiently.

We have already seen the disruption to our economic system caused by Sept. 11. Our daily lives are just not the same. This is not a problem that will go away if ignored.

Moreover, this is not something that any other country is going to solve. We are the only country that has the military strength, technology, resources and, most importantly, national will to see this through to victory. It's also clear that Americans have the most to lose, most significantly our freedoms, our values and our way of life.

Our federal government must stay focused on this problem and set its priorities for spending in view of what is at stake. Our federal IT and defense companies, along with other engineering and security firms, will be at the forefront of mobilizing technologies and human resources to support our military and intelligence efforts.

Companies involved in network-centric warfare, C4ISR [command, control, computers, communications, intelligence, surveillance and reconnaissance systems], secure communications, unmanned aerial and armed vehicles, nanotechnology, robotics and a host of other technologies will continue to serve a growing priority market.

Most defense services providers will have solid opportunities in support of this lengthy anti-terrorist campaign. These companies can continue to grow and prosper, providing returns to their shareholders while serving their nation's interests.

Whether the presidency or control of Congress is in the hands of Democrats or Republicans should not alter these priorities. There is no alternative strategy, no greater priority. Period.

Jerry Grossman is managing director at Houlihan Lokey Howard & Zukin in McLean, Va. He can be reached at jgrossman@hlhz.com.

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