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Nick Wakeman

Will spinoffs drive more bid protests?

The competition for a $50 million Army security contract has gone through multiple rounds of awards and protests and corrective actions.

The latest dispute might be the last as the Government Accountability Office ruled against BAE Systems and in favor of the award to Leidos to build an automated entry solution at military installations.

The story of the contract is a bit a convoluted. L-3 Communications won it originally in April 2014, but that award was pulled back when BAE filed a protest. A new solicitation in November 2014 resulted in an award to Leidos in July 2015.

BAE again filed a protest and again the Army decided to take corrective action to address BAE’s concerns.

In November 2015, the Army again awarded the contract to Leidos, which kicked off the current protest.

This time the protest wound through the entire process at GAO, which ultimately rejected BAE’s arguments that Leidos had personal and organizational conflict of interest and that the Army didn’t reasonably evaluate its proposal.

While GAO rejected both of those arguments, the conflict of interest allegation is worth exploring because of the large number of the large number of divestitures and spinoffs the market has experienced in recent years.

In 2013, Leidos was created when the old Science Applications International Corp. spun-off a portion of its business and changed its name to Leidos. The spin-off took on the old name of SAIC, even though technically it was the new entity.

As the old SAIC, the company had a contract to support the Army and how it was developing the contract that Leidos and BAE ended up competing for.

The Army required any contractor supporting development and execution of the contract to sign nondisclosure agreements. The new SAIC (the spin-off from Leidos) also was not allowed to bid on the contract but Leidos could.

The Army investigated BAE’s conflict of interest allegation and produced a 15-page report documenting how the contracting officer determined that there was no personal or organizational conflicts of interest.

The personal conflict of interest involved one person, who was an employee of the new SAIC, but still owned Leidos stock he received when the companies split. He had thought the stock was frozen and was to be converted into a retirement account. When he was told it wasn’t frozen, he sold the stock a month before an award decision was made.

He also wasn’t involved in making the award decision and was only called in to help evaluate technical matters.

GAO ruled that he didn’t stand to make a financial gain from the award to Leidos because he no longer owned the stock and he exerted little influence on the final decision.

GAO also rejected BAE’s organizational conflict of interest argument because the SAIC-Leidos split occurred nearly a year before the original solicitation was released and that solicitation was revised again after the first round of protests.

While the Army appears to have easily beaten back the claims of conflicts of interest, the protest should be read as a warning to the many other companies involved on both sides of spin-offs and divestitures.

GAO may have rejected BAE’s argument, but the decision provides a blueprint for others looking for weaknesses when agencies award contracts to companies recently involved in spin-offs and divestitures.

They are going to be looking for how clean of a break was there between the two companies. Who got what contracts? Where did the people who worked on those contracts end up after the split? How was the stock split?

In many of these deals there are still significant financial ties between the two companies. Leidos, for example, is acquiring the IT business from Lockheed Martin in a $5 billion deal, but Lockheed will end up owning a significant portion of Leidos stock after the deal closes. Could that create a conflict down the road?

The answer to those and other questions might not provide a slam dunk victory for a protestor but it might muddy the waters enough for another shot at the contract. And sometimes that can be a victory in itself.

Posted by Nick Wakeman on Jul 11, 2016 at 12:50 PM

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