Lockheed to sell bulk of IT business

In a bold portfolio shaping move, Lockheed Martin announced plans to sell off $6 billion of its IT business while investing $9 billion to get deeper into the helicopter business.

That Lockheed Martin is buying Sikorsky Aircraft for $9 billion isn’t a huge surprise. After all, over the last 20 years, Lockheed has earned a reputation for making bold moves and positioning itself for growth in the market.

So, given that context, it also shouldn’t be surprising that Lockheed Martin also announced today that it has kicked off the process of divesting the bulk of its IT business, either through a spin-off or an outright sale.

Lockheed Chairman and CEO Marillyn Hewson echoed what I’ve heard other executives say about the federal IT services market – it is highly competitive and the customer is extremely cost conscious.

“We have a proud legacy of being a world leader as an IT services provider,” Hewson said in a call with analysts. “However, market dynamics and trends have led us to believe these businesses may achieve greater growth … by operating outside of Lockheed Martin.”

Specifically, the company is looking to divest five major components of its Information Systems & Global Solutions business:

  • Air traffic management
  • Technical services
  • Government/Enterprise IT
  • Commercial cyber
  • Government health care IT

It is also looking to divest the technical services business that falls under its Mission & Fire Control sector.

All told, these businesses have more than $6 billion in annual revenue and have profit margins in the mid-7 percent range.

The company is keeping mission IT and services, energy solutions and space and space services that are part of IS&GS. Those business will be absorbed into other Lockheed Martin sectors. IS&GS will go away.

Hewson also emphasized that while it is divesting its commercial cyber business, it is keeping its government cyber business.

“We are not exiting the cyber business. That is important, and we bring value to it,” she said.

But the other parts of the IT business face a market that has changed in recent years of sequestration, budget cuts, LPTA contracts and other factors that have made customers very cost conscious.

“It is increasingly difficult for us to be competitive under our standard business model,” Hewson said.

By separating these businesses from the rest of Lockheed, they’ll have their own business structure that will help the company to compete and grow, she said.

“These businesses need to have as cost-effective a structure as possible to survive in today’s market,” Lockheed Martin Chief Financial Officer Bruce Tanner said.

“We believe these are strong businesses with strong performance and strong programs,” Hewson said.

Hewson said that Lockheed Martin has been ranked as the No. 1 IT contractor in the market for 21 years. [A reference to the Washington Technology Top 100, even though she didn't mention us by name.]

“We think it is a premier asset, and if we can stand it up as a standalone company or find the right buyer for it, that will be the best thing for that business,” she said.

The company also has continued to invest in the IT business. As recently as October, the company acquired Systems Made Simple to bolster its health IT business and that business is now part of the divestiture plan.

But customer behavior has been hard to predict, Tanner said.

“As we went through different SMS competitions, we saw different acts by customers than we expected,” he said, such as breaking out parts of contracts and other twists.

The company has come to the conclusion that it couldn’t compete in the IT sector and create value for customers and employees if the businesses remained with Lockheed.

A divestiture is the best way to “create value and give employees the best chance of growth,” Tanner said.

“All of the business is extremely prices sensitive,” Hewson said. “We may be performing at the top of the heap, but if someone comes in at a lower price, our customer will move.”

Lockheed will likely know by the end of 2015 what it will do with the businesses. The company will reap more cash through a sale as opposed to a spinout, Tanner said.

But the company may do different things with different parts. It isn’t wedded to the idea that all the businesses will have to stay together.

While I’m not sure Lockheed was planning from the start to announce the acquisition of Sikorsky and the divestiture of the IT businesses on the same day, but the two moves send a definite message about where Lockheed sees its future.

In a way, the two portfolio shaping moves signal that Lockheed wants to make sure it remains in a strong position in the parts of the market that are higher margin and have longer sight lines into priorities and programs. It also wants to make sure that it is in markets where it can differentiate itself with its technology and not with pricing.

That’s why it is staying in the mission IT business and the government cybersecurity business because it can leverage investments in technology into advantages as it competes for programs.

The rest of the IT business should make a crown jewel for a company that has the right cost structure to make it competitive in a market driven by price.

One part of the divestiture plan that sticks out to me is the air traffic management business, where Lockheed has been one of the FAA’s largest contractors and has played a major role in creating the building blocks for the Next Generation Air Transportation System.

Lockheed has multiple products and it is a large international market. So if one piece will be sold separately from the others, my first bet would be on the air traffic management business. The commercial cyber business also is a likely candidate to be sold on its own.

And while a spinoff is a possibility, the fact that Lockheed isn’t announcing that as a plan from the start indicates to me that they feel confident they can find either find another company, a private equity partner or some combination to buy its IT businesses.

Whatever happens, we’ve entered the final chapter of Lockheed’s IT story and a new story is about to begin.

X
This website uses cookies to enhance user experience and to analyze performance and traffic on our website. We also share information about your use of our site with our social media, advertising and analytics partners. Learn More / Do Not Sell My Personal Information
Accept Cookies
X
Cookie Preferences Cookie List

Do Not Sell My Personal Information

When you visit our website, we store cookies on your browser to collect information. The information collected might relate to you, your preferences or your device, and is mostly used to make the site work as you expect it to and to provide a more personalized web experience. However, you can choose not to allow certain types of cookies, which may impact your experience of the site and the services we are able to offer. Click on the different category headings to find out more and change our default settings according to your preference. You cannot opt-out of our First Party Strictly Necessary Cookies as they are deployed in order to ensure the proper functioning of our website (such as prompting the cookie banner and remembering your settings, to log into your account, to redirect you when you log out, etc.). For more information about the First and Third Party Cookies used please follow this link.

Allow All Cookies

Manage Consent Preferences

Strictly Necessary Cookies - Always Active

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data, Targeting & Social Media Cookies

Under the California Consumer Privacy Act, you have the right to opt-out of the sale of your personal information to third parties. These cookies collect information for analytics and to personalize your experience with targeted ads. You may exercise your right to opt out of the sale of personal information by using this toggle switch. If you opt out we will not be able to offer you personalised ads and will not hand over your personal information to any third parties. Additionally, you may contact our legal department for further clarification about your rights as a California consumer by using this Exercise My Rights link

If you have enabled privacy controls on your browser (such as a plugin), we have to take that as a valid request to opt-out. Therefore we would not be able to track your activity through the web. This may affect our ability to personalize ads according to your preferences.

Targeting cookies may be set through our site by our advertising partners. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. They do not store directly personal information, but are based on uniquely identifying your browser and internet device. If you do not allow these cookies, you will experience less targeted advertising.

Social media cookies are set by a range of social media services that we have added to the site to enable you to share our content with your friends and networks. They are capable of tracking your browser across other sites and building up a profile of your interests. This may impact the content and messages you see on other websites you visit. If you do not allow these cookies you may not be able to use or see these sharing tools.

If you want to opt out of all of our lead reports and lists, please submit a privacy request at our Do Not Sell page.

Save Settings
Cookie Preferences Cookie List

Cookie List

A cookie is a small piece of data (text file) that a website – when visited by a user – asks your browser to store on your device in order to remember information about you, such as your language preference or login information. Those cookies are set by us and called first-party cookies. We also use third-party cookies – which are cookies from a domain different than the domain of the website you are visiting – for our advertising and marketing efforts. More specifically, we use cookies and other tracking technologies for the following purposes:

Strictly Necessary Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Functional Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Performance Cookies

We do not allow you to opt-out of our certain cookies, as they are necessary to ensure the proper functioning of our website (such as prompting our cookie banner and remembering your privacy choices) and/or to monitor site performance. These cookies are not used in a way that constitutes a “sale” of your data under the CCPA. You can set your browser to block or alert you about these cookies, but some parts of the site will not work as intended if you do so. You can usually find these settings in the Options or Preferences menu of your browser. Visit www.allaboutcookies.org to learn more.

Sale of Personal Data

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Social Media Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.

Targeting Cookies

We also use cookies to personalize your experience on our websites, including by determining the most relevant content and advertisements to show you, and to monitor site traffic and performance, so that we may improve our websites and your experience. You may opt out of our use of such cookies (and the associated “sale” of your Personal Information) by using this toggle switch. You will still see some advertising, regardless of your selection. Because we do not track you across different devices, browsers and GEMG properties, your selection will take effect only on this browser, this device and this website.