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May 29, 2017

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Defense Department budget to aid IT, cybersecurity firms

ATLANTA -- As the U.S. Defense Department revamps its military capabilities to become better equipped for irregular warfare, companies that focus on information technology and preventing new security threats are poised to gain.

The Obama administration this week asked Congress for US$663.8 billion for the Pentagon as it shifts focus on expanding resources to better fight insurgents rather than traditional enemies.

The budget, which must be approved by Congress, would end production of Lockheed Martin Corp's F-22 stealth fighter jet, the VH-71 presidential helicopter and Boeing Co's C-17 military cargo aircraft. But it would bolster funding for systems that gather, monitor and disseminate intelligence, and provide more battlefield coverage by unmanned aerial vehicles. It also would boost "special operations" forces by more than 2,400.

"The companies that are making the technologies that actually help the soldiers on the ground" stand to benefit, said Brian Ruttenbur, a defense analyst with Morgan Keegan. "Things that had very high costs and questionable returns are coming to an end," he added.

Virginia-based defense consultant Jim McAleese said he was surprised by the White House's heavy focus on squelching some US$5 billion in additional weapons funding in the supplemental war budget on the eve of unveiling a US$3.55 trillion budget.

Given the drive to cut weapons programs, some in industry were beginning to fear "that defense may well have become a dirty word at the White House."

Yet Alex Hamilton, senior managing director at Jesup & Lamont Securities, said the Obama administration's shifting budget focus shows it is increasingly concerned about intelligence and protecting computer networks from threats rather than building more traditional military hardware. "The realization is that cyber is becoming one of the next fronts" of war, Hamilton said. "Anyone who plays into that space will be a big beneficiary."

Companies with a core emphasis on cybersecurity that he expects to gain from growth include ManTech International Corp , CACI International and NCI Inc, Hamilton said.

In recent years, some of the biggest defense contractors have expanded into information technology. Hamilton is betting that Lockheed, Northrop Grumman and General Dynamics Corp will make more targeted acquisitions in a bid to capitalize on the Pentagon's emphasis in fighting cyber threats.

"I think it's a no-brainer that some of these pure-play IT and pure-play technology companies get acquired," Hamilton said.

In fact, Northrop Grumman told its institutional investor conference in Maryland this week that it would seek out acquisition candidates that make "strategic sense" based on where business is headed.

"The global threats are evolving for sure, but they're not diminishing," Northrop Chairman and Chief Executive Ronald Sugar said.

Sugar noted that Essex Corporation, a cyber-information technology company that Northrop bought in 2007, has "grown significantly."

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