Johnson's Job: Polish Lockheed's IT Gems

Johnson's Job: Polish Lockheed's IT Gems<@VM>The Leaner Lockheed <@VM>The New Lockheed Martin

By Nick Wakeman Staff Writer

Lockheed Martin Corp. has handed a top executive the job of unlocking the value of its fast-growing state and local government and commercial information technology units in a restructuring that could rearrange the government IT landscape.

Arthur Johnson, former president and chief operating officer of Lockheed Martin's $6 billion Information and Services Sector, will explore whether to spin off the state and local and commercial IT units, form joint ventures or plot another course.

These businesses yield $2 billion in combined annual revenue and have more than 9,000 employees. They are:

?Enterprise Information Systems, which handles Lockheed Martin's internal information technology services;

?Integrated Business Solutions, which does commercial outsourcing;

?IMS, Lockheed Martin's state and local division.

The state and local business and the commercial business each do about $500 million annually. The internal IT business under Johnson performs approximately $1 billion worth of services for the rest of Lockheed Martin.

Johnson, 52, was named vice president of corporate strategic development in the Sept. 27 restructuring that saw the $26 billion company shift from five sectors to four business areas and pare its lines of business from 27 to 17.

The Bethesda, Md.-based company also plans to divest itself of eight non-core business units that have combined 1999 revenue of about $1.4 billion and employ about 9,000 people.

"We have flattened the management structure and fundamentally changed how these businesses will be managed," said Vance Coffman, chairman and chief executive of Lockheed Martin, whose stock price has plunged from $56.75 to $30.19 in the past year as the company's aerospace business battled launch problems, production delays and lost business.

"They have been under enormous pressure to do something," one source said.

"The confidence of investors has been shattered over the last eight months," said Paul Nisbet, an analyst with JSA Research in Newport, R.I.

Lockheed Martin's stock price has changed little since the restructuring announcement, hovering just above $32 for the week of Sept. 27. Nisbet said that price probably will change little until "people see some real results."

The move involving Johnson, who is considered a rising star at the company, generally was seen as positive, but many industry observers are taking a wait-and-see attitude.

In his new role, Johnson will continue to report directly to Peter Teets, president and chief operating officer and the No. 2 executive at Lockheed Martin.

"A lot of it seems very vague and fuzzy," said an executive from a Lockheed Martin competitor. "But it definitely looks like a promotion for Art because [corporate strategic development] is a key job, and he is a smart guy."

Johnson replaces Robert Stevens, who was promoted to executive vice president of finance and chief financial officer. Stevens replaces Philip Duke, who was named to the new position of executive vice president of shared services.

If Johnson is looking for strategic partnerships or joint ventures, there should be plenty of takers, sources said.

"These changes should open up more partnering capabilities with Lockheed Martin," one IT executive said.

Among the most likely to step up to form a strategic alliance or joint venture with Lockheed Martin in the commercial outsourcing and state and local government services markets are the three leaders in those areas, said George Podrasky, an analyst with Duff & Phelps Credit Rating Co. of Chicago. They are Computer Sciences Corp. of El Segundo, Calif., Electronic Data Systems Corp. of Plano, Texas, and IBM Corp. of Armonk, N.Y.

Spinning out Johnson's units into separately traded public companies might be the best way to unlock value for Lockheed Martin's shareholders, said Thomas Meagher, a principal with the investment banking firm, Boles, Knop & Co. of Middleburg, Va.

When comparing market value to revenue, outsourcing and IT services companies, such as Affiliated Computer Services Inc. of Dallas, Computer Sciences Corp. and Unisys Corp. of Blue Bell, Pa., are valued at 1.3 to 1.6 times their annual revenue, Meagher said. But as an aerospace company, Lockheed Martin's market value is roughly 0.5 times revenue, he said.

So the value of the outsourcing and services businesses under Johnson would get a substantial boost if they were spun out from the rest of Lockheed Martin and valued independently, Meagher said.

"He has got the only part of the business that is really doing anything anyway," he said.

Johnson declined to comment for this story on his new role. However, in an August interview with Washington Technology, he described the commercial and state and local businesses as Lockheed Martin's fastest growing IT units, both with better than 20 percent annual growth.

"The state and local services market is growing very fast, both because of the devolution of responsibility from the federal government to the states and because of the state [budget] surpluses," Johnson said in the earlier interview.

Johnson's state and local unit fueled its growth by winning work in areas such as child support payment processing, welfare case management, electronic toll collection, parking meter systems and red light photo enforcement. Lockheed Martin processes more than $5 billion in child support payments, Johnson said in August. In 1999, the company won major contracts with the states of Florida, Georgia, Michigan and Pennsylvania.

"We think we have a pre-eminent position in a number of key areas," Johnson said.

In the commercial IT outsourcing business, the company won major contracts with Nike and Gateway Computers in 1999, Johnson said. "We have had tremendous growth over the last three years or so," he said. Lockheed Martin, which formed the commercial business in 1996, should finish 1999 with a contract backlog of $1 billion to $1.5 billion, he said.

The Nike and Gateway contracts are for data center outsourcing services, but could expand to other areas, Johnson told Washington Technology. With the restructuring, Lockheed Martin's federal information technology services now fall under two of the four new business areas.

The new Systems Integration business area, with about $9 billion in annual revenue, houses Lockheed Martin's work in areas such as air-traffic control and command, control and communications and intelligence.

The Technology Services area, with $2 billion in revenue, houses range support services, payload integration, launch operations and support for NASA as well as IT services through the General Services Administration schedules and large task-order contracts.

The other two major business areas are Aeronautical Systems and Space Systems.

While Lockheed Martin appears to have lost some focus and "dropped the ball" in the aerospace business, said an executive from a competitor, that is not the case in the IT arena.

"Despite all their problems, they are still a very tough competitor," the executive said.

? Nick Wakeman Aeronautical Systems

$5.5 billion in revenue from tactical aircraft, airlift and aeronautical research and development
Led by James "Micky" Blackwell

Space Systems

$7.5 billion in revenue from space launch, commercial satellites, government satellites and strategic missiles
Led by Albert Smith

Systems Integration

$9 billion in revenue from missiles and fire control, naval systems, platform integration and command, control, communications, computers and intelligence systems
Led by Robert Coutts

Technology Services

$2 billion in revenue from federal IT services, energy programs and aeronautical services
Led by Michael Camardo

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