The market is going through a fundamental change driven by constrained budgets and new technologies, and the result will be a widening gulf between strong and weak companies.
My grandfather used to talk about the tasks on the farm that were separators. You know, the ones that separated the men from the boys.
Making hay in late June, when the sun cooks you and the dust suffocates you, is a separator. So is digging post holes by hand, in ground that is so rocky, the auger can’t get a bite and the post driver is useless.
But you get through it. You drink plenty of water; you wear gloves; you take a break. But mostly you suck it up, because no matter how tough, the job has got to get done.
When I look at the market for government contractors today, I’m reminded of my grandfather’s separator philosophy.
It’s a tough market. The best estimates are that 2013 and 2014 will be low points, but that the market should start to turn upward in 2015. That’s with or without sequestration.
If you throw 2010, 2011 and 2012 into the mix, we are in the middle of a multi-year stretch of slow to no growth. Couple that with crushing budget deficits, a shaky world economy, persistent terrorist threats and a political system that seems to be locked in a death grip of partisanship, and it’s enough to make you want to pack it in and head back to the farm.
But as I talk with executives and watch the happenings around the market, I don’t see them walking away. I see plenty of dedication and hard work going on.
After all, this is a great time to be in the government technology market, with the rise of such groundbreaking and innovative technologies such as mobile computing, the cloud and data analytics, to name a few.
And it still is a huge market, even if you believe the darkest predictions.
But despite good intentions and trying hard, I think the market conditions are such that we are going to see some companies come through this period stronger, and others that will come through weaker.
I would be worried if I were a small to midsize publicly traded company. The margin pressures coupled with Wall Street expectations will only make life harder for these companies. To succeed, these companies will either become aggressive acquirers – see KEYW Corp.’s activity – or they will be acquired themselves.
The shift to everything as a service is bound to have negative fallout on some companies, as government buyers look for quicker and hopefully less expensive ways to field technology. The winners here will be companies that understand the mission, master the technology and can offer quick, flexible solutions.
Because of the budget and economy, many companies have embarked on streamlining. Layoffs and reductions are hardly newsworthy anymore. Part of the reason Science Applications International Corp. is splitting into two comapnies is to cut costs.
The question for SAIC, and any for other company that is streamlining operations, is: Are the right things being cut? Are the investments for growth still being made? Time will tell.
Again, the public companies have the biggest challenge here because of the three-month timeframe they have to operate in. The return has to be now, not two years from now.
One question I have is whether mega-mergers will be part of the mix. It remains to be seen if the combination of BAE Systems and EADS will go through as envisioned. If successful, that transaction could set the stage for more deals.
At the very least, the deal making will continue in the small and mid-tier levels of the market.
It is hard to tell what the market will look like coming out of this period. Five years from now, the market will look different. Familiar names will be gone, but like granddaddy said, there is always work to be done.
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