Northrop still in the IT game even with divestiture
Northrop Grumman’s decision to sell off its IT services business sent me down memory lane, which got me thinking about how much the market has changed and how in some ways it stays the same.
Within my first couple weeks at Washington Technology in 1996, I tagged along to a previously arranged briefing at BDM International. In the room was CEO Phil Odeen and a couple other executives, including Bill Hoover and Todd Stottlemyer.
One year later, TRW Inc. announced it was acquiring BDM for $1 billion. TRW had its ups and downs for a few years. In 2002, Northrop saw an opportunity and made an offer that eventually became a hostile takeover of the company. To add a little intrigue, Northrop made its bid just as TRW’s chairman, president and CEO at the time in David Cote resigned to go to Honeywell.
To get control of the chaos and reassure customers, shareholders and employees TRW brought back the recently retired Philo Odeen as chairman.
After some back and forth, Northrop bought TRW for $7.8 billion. The deal pushed Northrop to be an almost $7 billion-annual revenue IT business.
TRW might have been its biggest deal but it wasn’t Northrop’s only IT-focused transaction. Northrop had already acquired Litton Industries in 2001 for $5.1 billion. Three years prior to that, Northrop acquired Logicon for $750 million.
Logicon then became the foundation of Northrop’s IT business, absorbing portions of those deals and others like the $302 million Federal Data Corp. acquisition in 2000. Side note: the FedData deal never made a lot of sense to me because it was primarily a reseller and not a high-end IT and systems integration business.
So why look back at deals from two decades ago? Besides giving me a chance to write Phil Odeen’s name again, they are important reminders of how dynamic this market is.
IT businesses were hot commodities in the early part of this century. By the close of the first decade, defense companies were struggling to figure out how to balance the different business cycles, allowable costs and conflicts of interest among their various lines of business.
The IT and related technical services businesses were often the outliers. In the companies' eyes, those units often just didn’t fit.
Organizational conflicts of interest drove Northrop to divest TASC in 2009. After a few other transactions, the TASC businesses made their way to Science Applications International Corp.
The same OCI concerns forced Lockheed Martin to divest its homegrown Enterprise Integration Group in 2010. That business focused on systems engineering became a pillar for what is now Perspecta.
Six years later, Lockheed sold the bulk of its remaining IT services business to Leidos in a deal valued at $4.6 billion.
General Dynamics is another defense company that made major IT investments in the late 1990s and afterward. In 1999, GD acquired the bulk of GTE Information Systems. In 2003, GD acquired Veridian for $1.5 billion. In 2006, GD acquired Anteon for $2.2 billion. In 2011, GD bought Vangent for $960 million.
Bad news hit in 2013, when new CEO Phebe Novakovic looked at General Dynamics IT and declared its acquisition process “somewhat broken.” Over the previous decade, GD’s then-information systems and technology group had made some $8 billion worth of acquisitions.
In 2012, the IS&T business saw its revenue shrink by $1.2 billion and Novakovic had GD write down $2 billion of the value of the acquisitions.
GD is often a contrarian though, given they didn’t make wholesale divestitures the way Lockheed and Northrop did. In fact, GD did very little for about five years. Then in 2018, GD acquired CSRA in a $9.6 billion transaction that confirmed a big commitment to IT services. Following that deal, GD divested the call center business to Maximus for $400 million.
That is a chronology of three major defense contractors and their moves in and out of IT. Raytheon and BAE Systems have also been active buyers during this time and haven’t made major divestitures. Their buys also have been narrower and not as much into the broader IT services arena as the others have been.
But divestitures or not, all of these companies value IT capabilities.
In fact, despite its large divestitures, Lockheed Martin has remained a top five-ranked IT business as measured by our annual Washington Technology Top 100.
Northrop is in the top five as well. There is a good chance they’ll drop out, but I’ll be surprised if they are outside the top 10.
So how can you divest and still be an upper tier IT provider? Well, that goes to the overriding trend of the last 20 years -- IT is everywhere and in every mission.
Just look at the contract vehicles Lockheed Martin still has like Allliant 2, OASIS and GSA Schedule 70. They have those vehicles to support their customers and their platforms.
I look for Northrop to be in a very similar position. Northrop’s not abandoning IT, but merely adjusting the focus.
Posted by Nick Wakeman on Dec 11, 2020 at 12:40 PM