LITTLE ROCK — Defense contractors are spinning off their less-profitable divisions, and lower Pentagon spending is causing more companies to consider following suit.
SAIC Inc., the U.S. government’s eighth-biggest contractor, said last month that it would split into two companies. In July, L-3 Communications Holdings Inc. spun off its services division as a new company called Engility Holdings Inc.
Federal contractors such as CACI International Inc., ManTech International Corp. and Unisys Corp., which provide both advisory services and higher-profit technology solutions, may be considering similar moves to attract investors, James Friedman, an analyst at Susquehanna Financial Group in New York, said.
“Bigger is not better in this environment,” said Friedman, who in July estimated an SAIC spinoff could boost shareholders’ value by 20 percent. “You really want to make sure that your best assets are clustered together and away from the assets that may be under pressure.”
Contractors that provide consulting, or so-called management-support services, have seen federal contracts for such work decline 15 percent to $13.1 billion in the first half of fiscal 2012, compared with $15.5 billion in the same period a year earlier, according to procurement data compiled by Bloomberg. Total contract spending fell by 3.5 percent in the period.
The lower spending on consulting came in 12 areas the Obama administration has targeted for cuts, such as acquisition planning and program management.
Contractors also face the possibility of automatic federal spending reductions of about $1.2 trillion through 2021 that are scheduled to begin Jan. 2. The planned cuts are part of a deal reached last year between the White House and Congress after talks failed on a bipartisan plan to curb the nation’s increasing debt.
Jody Brown, a spokesman for Arlington, Va-based CACI, and Jim Kerr, a spokesman for Unisys, declined to comment. Jaime O’Keefe, a spokesman for Fairfax, Va.-based Man-Tech, also didn’t comment.
Lower-margin businesses within companies such as CACI and ManTech probably have “targets on their backs,” said Michael Lewis, a McLean, Va.-based analyst at Lazard Capital Markets. “The question is when does management pull the trigger.”
CACI and ManTech are more likely to sell small portions of their businesses than to spin off large segments as independent contractors, Lewis said.
Blue Bell, Pa. Unisys was awarded $479 million in direct, or prime, federal contracts in the year that ended Sept. 30, 2011, according to procurement data compiled by Bloomberg. It had revenue of $3.85 billion last year.
SAIC, based in McLean, Va,., said on Aug. 30 it would split into two publicly traded companies by Jan. 31, 2014. One company will be a technical services and consulting business with about $4 billion in revenue; the other will be a $7 billion business concentrating on technology such as cyber-security and data analysis for the defense and health-care markets.
SAIC Chief Operating Officer Stu Shea said the rationale for splitting the company wasn’t to isolate lower-profit divisions from its higherearning business.
The decision had “very little if nothing to do with the whole issue of trying to offload” lower-margin consulting work, he said in a phone interview.
Rather, the split is intended to increase opportunities for each company by eliminating organizational conflicts of interest and reducing overhead costs, he said.
Business, Pages 78 on 09/30/2012