Defense companies eye niche technologies for growth
Credit: Reuters (www.reuters.com)
By Karen Jacobs
(Reuters) - U.S. defense contractors, under pressure to trim costs and boost revenue, are tapping into adjacent markets such as cybersecurity and intelligence gathering as they brace for a tougher budget environment.
Acquisitions of small firms that excel in these areas has picked up and more deals are expected as the Obama administration shifts funding from traditional weapons to areas of unmanned combat.
"It's clear that defense spending for the next several years is going to be under a tremendous amount of pressure, given the size of the overall budget and fiscal constraints because of the weak economy," said Patrick McCarthy, a defense analyst with FBR Capital Markets.
While some emerging technologies may not represent substantial sources of sales growth or new jobs today, over time they are expected to grow as governments look to fight new security threats, McCarthy added.
For example, cybersecurity, which involves thwarting threats to computer networks, presents longer-term opportunities to service the military and civil sectors.
"There's so much at risk in terms of infrastructure that there's going to have to be investments in protecting it," Morgan Joseph analyst Michael French said. "There's going to be very significant growth in this area (cyber), but it's really just starting out."
Some defense suppliers are laying the groundwork to generate new business in niche technologies, whether with or outside the government.
Harris Corp (HRS.N), which makes communications equipment, is building a cyber integration center in the U.S. Mid-Atlantic region to bolster its ability to manage critical systems in a trusted environment.
The company, which provides tactical radios that distribute voice and data in an encrypted form, operates some of the largest secure U.S. computer networks, including telecommunications for the Federal Aviation Administration. It has been making acquisitions to expand its cyber capabilities.
"We think the marketplace that's going to grow the fastest is in critical infrastructure, and 90 percent of critical infrastructure is in private ownership, not with the government," said Dale Meyerrose, vice president and general manager for Harris Corp's cyber division.
He estimated the so-called critical infrastructure business was valued at $150 billion to $200 billion.
In years to come, Harris is looking to provide bundled cyber services that will help companies such as banks and utilities maintain control over their intellectual property and other market-sensitive data. It also sees future business in areas such as security and privacy of healthcare data.
"We're still in the nascent part of our element," Meyerrose said.
Defense companies positioned to benefit from cyber security include KEYW Holding Corp (KEYW.O) and Raytheon Co (RTN.N), French said. Increased military focus on unmanned technologies is positive for Aerovironment Inc (AVAV.O), iRobot Corp (IRBT.O), Northrop Grumman (NOC.N) and Boeing Co (BA.N), McCarthy said.
"We are expanding into adjacent growth areas, including unmanned systems, cyber security, intelligence, surveillance and reconnaissance systems, logistics and energy," Boeing spokesman Dan Beck said.
Boeing this year acquired Argon ST for $775 million to beef up its capabilities in sensors, communication technologies and information management.
"We're also extending our core programs with enhanced capabilities and aggressively pursuing international opportunities," Beck said.
(Reporting by Karen Jacobs; editing by John Wallace)
Credit: Reuters (www.reuters.com)
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