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By Nick Wakeman

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Nick Wakeman

How LPTA killed Lockheed's IT business

As Lockheed Martin moves forward with the sale of its IT business, I’ve been looking at their Securities & Exchange Commission filings in search of insights.

I know from the 50,000-foot level why they are selling the business Leidos for $5 billion, but a transcript from the recent Barclays Industrial Select Conference offers deeper insights and illustrates the challenges many companies in the government IT market face.

Bruce Tanner, Lockheed’s executive vice president and chief financial officer, participated in a Q&A session last week with Carter Copeland, a Barclays analyst. Barclays is a financial services company.

While the Sikorsky acquisition and the IT divestiture were announced at the same time, it sounds like the IT divestiture was likely going to happen no matter what.

When Lockheed entered 2015, it didn’t know that Sikorsky would be in play, but the company knew it had to do something about the IT business.

Tanner describes the federal IT market as “ultracompetitive,” and he also lays a significant amount of the blame for the challenging conditions in the market on lowest-price, technically acceptable contracts.

“This push to get more LPTA … sorts of business, where your past performance wasn’t as important as simply the cost that you were bidding … that took a lot of what I think we were really, really good at within IS&GS off the table,” he said.

The nature of the IT market also was a strike against keeping the business. IS&GS has revenue of about $5 billion and a backlog of about $5 billion. “So every year, it basically has to regenerate itself,” he said.

By comparison, Sikorsky also has $5 billion in revenue, but its backlog is $16 billion.

When you combine this with the fact that the rest of Lockheed’s business is very platform-centric, you really see the IT business as an outlier.

That would be fine if you were an outlier that was growing and returning strong margins, but Lockheed’s IT business was struggling to compete and win.

“I love that business,” Tanner said. “It’s a very high return on invested capital business; there’s low capital expenditure requirements; low [independent research and development] requirements. It’s very good from a cash-to-earnings conversion perspective.”

But Lockheed went into 2015 knowing it had to do something about IS&GS.

The first question the company had to answer was whether the current marketplace and the focus on LPTA was a temporary phenomenon or was a long-term characteristic of the market.

“Our conclusion – right, wrong or indifferent – was this was not temporary. This was going to be the way it was going to be for quite some time,” Tanner said.

So you have an ultracompetitive market that doesn’t value past performance or technical differentiation. “That influenced our decision,” he said.

First, the company tried to see if it could make internal changes at Lockheed to make it work, but “the way we run the business was just – it wasn’t going to be a good fit,” he said. “If that’s how the marketplace was to reward players in the market, then we probably were not the best owner of this business.”

“There were not a lot of structural things we could do to get to that point,” Tanner added.

That’s a pretty amazing statement to me when you consider that Lockheed Martin spent nearly two decades building the IT business, and at one time it, was the fastest growing sector for the company.

Not being a platform business wasn’t a deciding factor, but Tanner acknowledged that the differences between IS&GS and the rest of Lockheed presented a challenge.

“I think Sikorsky does bring a lot of customer sets, a lot of capabilities that we are very, very familiar with in the corporation. And arguably more parts of the rest of Lockheed Martin can contribute to the success of Sikorsky than could contribute to the success of IS&GS,” he said.

But Tanner also has a personal preference, and that would have been to keep IS&GS, but preference met reality and reality won.

“If you asked me: Would I rather be a $50 billion company with IS&GS and have that portfolio growing into the future as part of Lockheed Martin? I’d say yes; I’d love to have that — if it performed and if the market was the way it was three, four years ago even. But the market’s changed,” he said.

And that change made all the difference.

Posted by Nick Wakeman on Feb 25, 2016 at 9:26 AM

Reader Comments

Mon, Feb 29, 2016

The trouble with the "Service" business is that all too often the services needed to be developed first. Unfortunately, the budgets did not allow for any development process, expertise, and labor. The leadership would go into the denial mode and then throw overhead money to close the hole.

Mon, Feb 29, 2016

A troubled analysis. Yes, perhaps this article was looking through the wrong end of the telescope. LMIT was the leader of the race to the bottom, and zealously so. The real reason: there was no penalty for being wrong. Execs were not canned for shrinking margins. All of this is a caricature of what happens when you have a bunch of metal benders, used to a bottomless, self-licking trough of tax dollar treats, not care so much about a "minor" line of business that is chaotically run and not nearly as profitable as it should be. There is probably a connection between this internal and investor tolerance of bad management and the gross waste and fumbling evident across the company in the F35. They don't no how to manage, but the government keeps on buying.

Mon, Feb 29, 2016

IS&GS was sold off not because of just the reasons listed here. It was also sold off simply for Marilyn to get even with the Gooden legacy and all the leaders that were groomed under Linda. Marilyn lost out to Linda to be EVP of IS&GS and instead was ousted to Greenville and Owego. Also, Chris K never liked the IS&GS portfolio because it was not prestigious on the Hill nor to the investors not to him dominating the A&D market. MH was mentored by Chris and the two of them planned to rid IS&GS long ago as soon as Bob announced he would be leaving. Should have happened in 2012, but the scandal with Chris delayed the spin off a bit. so where did the best and brightest end up pre-spin-off? AT&T, CACI, and Leidos. AT&T couldn't make that kind of acquisition in a commercial company. That left CACI and Leidos. CACI was the right fit but theyknew the numbers to well and didn't want to overpay. Big mistake for them Leidos had the IS&GS corp strategy folks so they also knew the portfolio, but were not close enough to knew the valuation. I just wonder what will happen with L3? Looks like they are trying to build their ISR business and want to take that role from LM, NG, and GD.

Fri, Feb 26, 2016

I agree with much of the sentiment above. LMIT was so desperate to get into the services business, they destroyed many mid-tier companies by swallowing them whole and spitting out the pieces. They were awful at doing due diligence and privately admitted that they didn't even know why they bought some of the companies they did. Then when budget cuts came full force - they spit out more pieces of those companies. I don't think they embraced LPTA, I know of countless fights by LM BD staff to keep prices higher. The problem became no real competitive advantage other than being able to lowball other bidders.

Fri, Feb 26, 2016

Let's be honest ... LM didn't lead the race to the bottom. LPTA is the result of our out of control politicians trying to solve budget problems. IS&GS had the scale to out price many, but it required effective solutions to deliver the prices and they generally did that.

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