September 23, 2012

Defensive strategies

Contractors brace for Pentagon spending cuts by selling less profitable businesses and betting on others the government might need in the future.

By MARJORIE CENSER The Washington Post

(Continued from page 1)

Sampson Aegis Destroyer
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In Maine, General Dynamics owns Bath Iron Works, builder of Navy ships like the Aegis destroyer Sampson, above, and Armament and Technical Products in Saco, maker of weapon systems, below. The company recently announced plans to buy a cybersecurity firm, a potential growth area in military spending.

File photo/The Associated Press

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Courtesy photo

Also seeking larger profits, several other contractors have been jettisoning their government services units. As these kinds of contracts have become increasingly awarded based on price, some companies have said they require a different business model than more profitable work, such as building military radios or intelligence systems.

The decisions being made in the industry run "the gamut from great strategy to great fear," said Stuart Shea, SAIC's chief operating officer. "We're on the strategy end of that spectrum."

Still, the potential EADS and BAE combination is the most dramatic turn for the industry. In this case, the deal would help both companies diversify, given that EADS is largely focused on commercial aviation, while BAE is known for its military and government work.

EADS and BAE have cautioned that they are only in negotiations, and analysts said it would take time for the deal to move forward.

"I don't think in this case it's big for the sake of big," said Linda Hudson, president and chief executive of BAE Systems' U.S. business, in an interview. "We're both vulnerable to the cyclical nature of those different markets so what you end up with is a healthier enterprise."


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