Why Lockheed gave up $1.3 billion
By
Nick Wakeman
The decision to sell two units and drop $1.3 billion in revenue is part of a strategy to focus on core competencies.
The irony isn’t lost on Linda Gooden that Lockheed Martin Corp. started the Enterprise Integration Group at the government’s behest and now, 42 years later, the company is selling it, also at the government’s behest.
The unit, which does high-end and highly classified mission planning for the government, got caught up in the government’s increased vigilance concerning organizational conflicts of interest, the same vigilance that pushed Northrop Grumman Corp. to sell its TASC unit.
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The for-sale signs on EIG and on another Lockheed Martin unit, Pacific Architects and Engineers, are part of an initiative to keep Lockheed Martin focused on core competencies over the long term. The businesses being sold represent about 3 percent of Lockheed Martin’s overall revenue, or $1.3 billion, based on 2009 revenue of $45.2 billion.
Lockheed’s EIG unit always was cordoned off from the rest of the company so it could help customers develop the requirements for projects and contracts that would then be pursued by the greater Lockheed Martin as well as its competitors.
“We never had a firewall breach,” said Gooden, who is the executive vice president of Lockheed Martin’s Information Systems and Global Solutions group, under which the Enterprise Integration Group fell.
But with the passage of the Weapon Systems Acquisition Reform Act two years ago, pressure increased on companies that provide both the front-end systems engineering work and the development and deployment work, Gooden said.
For a year, Lockheed Martin worked with its customers to mitigate the conflict-of-interest risk, but “we couldn’t find a path forward,” she said.
On June 2, the company announced that it would sell the Enterprise Integration Group.
If the group remained a part of Lockheed Martin, it would be very restricted on what contracts it could bid on and its business would shrink. So selling it allows the unit to continue to pursue new business and grow, Gooden said.
There is a good chance that the group could be acquired by a private equity group similar to the buyers of TASC because a private equity buyer doesn’t have to worry about potential conflicts of interest the same way an established company would, Gooden said.
Although she would not comment on the size of the Enterprise Integration Group, she did say it was smaller than TASC, though still a substantial business. TASC has about $1.6 billion in annual revenue.
Along with announcing the plan to divest the Enterprise Integration Group, Lockheed Martin also said it was selling another part of Gooden’s sector, Pacific Architects and Engineers Inc., which Lockheed Martin acquired in 2006.
Known as PAE, the company provides a lot of engineering and infrastructure support work in developing countries.
“When we acquired them we thought that we would evolve the company into more of an information-oriented business like the rest of Lockheed Martin,” Gooden said.
But that plan never came to fruition as Lockheed got to know PAE’s customers and market better. “Their mission is important, but it never aligned with our core competencies,” she said.
PAE's work falls more in areas such as construction and physical infrastructure support. The company takes on projects in countries such as Liberia, Congo, Chad and Sudan.
The company would bring a large contract forward to pursue, but Lockheed would decide not to bid on it because it didn’t line up with the company’s more information-centric business strategy, Gooden said.
“These are not technology-driven projects,” she said.
As part of Lockheed Martin, PAE’s growth potential was being stymied, so selling it should unlock its growth potential, Gooden said.
Besides moving both PAE and the Enterprise Integration Group out of Lockheed Martin’s portfolio, the company also moved two units, Readiness and Stability Operations and Savit Technology Inc., from Gooden’s group to the Electronic Systems group.
Gooden said the company has had logistics and training capabilities scattered around the company and this move is an attempt to bring those pieces of business together in one place.
The moves are part of the streamlining strategy initiated by the company’s new chief operating officer, Christopher Kubasik, who took on that role in January, Gooden said.
“We needed to clean some things up, so this de-blurs the lines,” she said.