Defense Department Touts Globalization Movement

By Nick Wakeman Staff WriterThe Department of Defense is encouraging trans-Atlantic alliances, including acquisitions, as one way to address growing concerns about interoperability among technologies fielded by U.S. forces and their allies."We should be encouraging the trend toward globalization," said Jacques Gansler, undersecretary of defense for acquisitions and technology.Companies expected to be active in the U.S. market include British Aerospace and Daimler-Chrysler, sources said.In addition to addressing interoperability concerns, Gansler said trans-Atlantic alliances could help reduce U.S. defense spending and help control the proliferation of weapons to Third World nations.A General Accounting Office study found that the Defense Department has saved $2 billion in the past three years because of consolidation in the U.S. defense industry, Gansler said.It is doubtful that the Defense Department would support further mergers among key U.S. prime contractors or among domestic and European companies, he said. "There is not room for further consolidation at the prime level, but there is room at lower levels," Gansler said.While the Pentagon stopped Lockheed Martin Corp.'s merger with Northrop Grumman Corp., consolidation pressures continue to push companies to make acquisitions or to be acquired, as evidence by Computer Sciences Corp.'s recent $381 million acquisition of Nichols Research Corp. Deals such as England's General Electric Co. Plc acquisition of Tracor Inc. of Dallas, and the Netherlands' Getronics acquisition of Wang Global of Billerica, Mass., show there are signs the trans-Atlantic trend may have begun, industry officials said. Also, Alcatel, a French telecommunications and networking equipment maker, has made several acquisitions in the U.S. market in recent years which brought significant business in the Department of Defense including the National Security Agency, said Mike Paluzzi, Alcatel's director of federal business for its Internetworking Division. Richard Knop, a partner in the investment banking firm Boles, Knop & Co. of Middleburg, Va., said that in recent months, he has fielded inquiries from European companies looking for acquisitions, especially in the defense and intelligence area."The word out of DoD is that they are more encouraging, especially at the second-tier level," Knop said.The Department of Defense interest in trans-Atlantic deals also is fueled by a realization that "we just can't do it all," said James Hogan, president of Wang Government Services in McLean, Va., which is owned by Getronics."They are encouraging a lot of cooperation and partnerships, even acquisitions," he said."This certainly seems like a noble idea, given the fact that European forces aren't configured well enough to support joint operations," said Douglas Schmidt, managing partner with Legg Mason Inc. of Baltimore."The imperative is to share technology, especially with our NATO allies," Knop said.Six months ago, it appeared that the Pentagon wanted to move trans-Atlantic deals on a faster track but defense officials seem to be moving more cautiously now because of national security concerns, Knop said.But Gansler said such concerns can be addressed."If they can show they can control the technology, we can allow the acquisitions, but where they can't, we won't allow it," Gansler said, referring to systems or sensitive data about technology that could be transferred to U.S. enemies. Both Alcatel and Wang have set up separate boards of directors to oversee their government divisions, company officials said."You can overcome those concerns," Alcatel's Paluzzi said. Alcatel picked up the majority of its defense business when it bought Xylan Corp. of Calabasas, Calif., in March. Xylan brought Alcatel customers in the Navy, Department of Defense and National Security Agency. The company did about $80 million in U.S. government business last year. The growing trend of trans-Atlantic deals also was identified in a Government Electronics and Information Technology Association market study, said Michael Kush, a former vice president of government marketing and strategy for Electronic Data Systems Corp. of Plano, Texas. Kush led the association committee that developed the defense market forecast."There is a higher incentive for European companies to come into our markets," Kush said. That is because U.S. military spending, which totaled $280 billion in 1999, tops that of any other country, and U.S. military technology generally is viewed as the most sophisticated in the world. It also gives foreign companies a better opportunity to pursue U.S. commercial customers.But Jon Kutler, president of the investment banking firm Quarterdeck Investment Partners of Los Angeles, said he is not convinced that European companies will snap up U.S. information technology concerns."I'd love to see it, because it certainly increases the universe of buyers," he said. "But there are cheaper and easier ways to establish interoperability."European governments, including those that provide their defense companies with funding, also need to be more open to deals. "It can't be just a one-sided opportunity," he said.