Contractors put more focus on being focused

Editor Nick Wakeman sees increasing signs that government contractors are shedding noncore businesses to focus on what they do best.

First there was Motorola’s decision to split. Now ITT Corp. has made the announcement that it will break into three companies.

These moves and other evidence have me thinking that we are entering an era in which specialization rather than diversity and size might be the key to future success.


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We’ve written a little about this in the past week or so — in a blog I wrote from the Raymond James investor conference last week and a column that Jim Kane wrote for us on the topic.

We’ll write more about this in the future, but I wanted to throw out a couple more facts that have come to my attention.

First, a little more from the Raymond James event. Raymond James analyst Brian Gesuale used CACI International and SRA International as examples of where size was rewarded on Wall Street earlier in the 2000s but wasn’t as the decade closed.

SRA’s revenue grew by 89 percent from 2005 to 2010, but its market capitalization fell 41 percent. CACI’s revenue grew 94 percent, but capitalization fell 14 percent.

Gesuale’s conclusion is that the era in which bulking up was the best way to build value is over. The key to creating value now is specialization around customer missions because it makes the work a company does more critical to the agency and thus a little more insulated from cutbacks. It doesn’t make you immune, though.

So it was with Gesuale’s words ringing in my ears that I started working on our annual mergers and acquisitions roundup, when we list all the closed deals from 2010.

I found that seven Top 100 companies divested units last year, and eight other deals also involve non-Top 100 companies selling parts of their businesses.

That’s a total of 15 deals out of 99 that closed last year. I can do the math — 15 percent.

To me that is significant. It shows that in this economy, companies are focusing on core capabilities. They are looking inside themselves and deciding who they are and what they want to be. That introspection is convincing many companies to sell businesses — some of them very good businesses — that aren’t central to who they are.

The other side of the coin is that you see companies making acquisitions that enhance their core capabilities and send them where they want to go in the market.

So you see a company like Vangent acquire Buccaneer Computer Systems and Services to continue to build its health care business.

How those activities will reshape the market remains to be seen. We’ll still have very large players who will win big contracts and have huge revenue numbers. But that is just one measure of success.

What might be more interesting is looking at profit margins and the type of work companies win. One indicator will be the valuations on Wall Street as several of the more focused contractors become public companies. Earlier indications are good when looking at companies, such as Global Defense Technology and Systems and KeyW Corp., that have had successful initial public offerings in the past year.

As a taxpayer, I also hope that the more nimble and specialized companies will have a higher success rate in serving their customers. That’s the real bottom line.