Pentagon Vow on Cybersecurity to Ease Contractor Pain From Cuts
January 17, 2012, 10:26 AM ESTBy Chris Strohm and David Lerman
(Editors: the following Bloomberg Government feature moved earlier and is being made available to newspapers today.)
Jan. 9 (Bloomberg) -- U.S. military plans to invest more in cybersecurity and space-based capabilities may ease the blow for contractors such as Northrop Grumman Corp. and Lockheed Martin Corp. facing cuts in other defense programs.
The Defense Department intends to beef up spending on computer network protections and satellite intelligence systems, while targeting troops for cuts under a global strategy released last week. Funding levels, which were not specified, will be detailed in next month’s federal budget proposal.
President Barack Obama is balancing the need to counter cyberthreats from China and give the military the latest technology with plans to cut almost $490 billion in defense spending through 2021. Contractors may look to expand cybersecurity and space businesses through acquisitions as the Pentagon winds down two wars and buys fewer bullets and bombs.
“Large prime contractors who may be at risk of losing significant revenue from decreases in major weapon systems are looking to go where the dollars are,” John Hagan, director of aerospace, defense and government services for BB&T Capital Markets in Reston, Virginia, said in an interview.
Major contractors have about $40 billion available for acquisitions, Hagan said. “You are seeing a lot of transactions taking place with regard to cyber and space because that’s where the growth is going to be.”
The increased emphasis on cybersecurity and space-based technologies is spurring the creation of startups, some of which will be acquired by established contractors, Rodney Joffe, senior vice president for NeuStar Inc., a Sterling, Virginia- based data-manager, said in an interview.
“When it comes to cyberspace, much of the innovations are occurring at small companies,” Joffe said.
Raytheon Acquisitions
Raytheon Co. of Waltham, Massachusetts, said Dec. 29 it bought Henggeler Computer Consultants Inc. for an undisclosed amount, its 10th cybersecurity acquisition since 2007. CACI International Inc. of Arlington, Virginia, paid $61.5 million for Paradigm Holdings Inc. on Sept. 19 and purchased Pangia Technologies LLC on July 1 for an undisclosed sum.
“Our mergers and acquisition program is accelerating our momentum in the high-growth cyber arena,” Paul Cofoni, chief executive officer of CACI, said in a Nov. 2 statement.
U.S defense cybersecurity spending totals $10 billion to $11 billion, Howard Rubel, an analyst at Jefferies & Co. in New York, said in an interview. That spending may increase faster than many other military programs, he said.
China Espionage
Increased reliance on satellites and drone aircraft may raise vulnerability to hackers and other disruptions that are expanding with technological sophistication. The U.S. will “invest in new capabilities to maintain a decisive military edge against a growing array of threats,” Defense Secretary Leon Panetta said in introducing the plan.
The National Counterintelligence Executive, an advisory panel of senior U.S. intelligence officials, blamed China and Russia in a Nov. 3 report for stealing sensitive U.S. economic and commercial data. The report said that the pace of cyber espionage is accelerating and threatening an estimated $398 billion in spending on research and development.
Northrop Chief Executive Officer Wes Bush said during an Oct. 26 conference call that the Falls Church, Virginia-based company considers cybersecurity important “because of the just ever-growing recognition of the threat and the ever-growing magnitude of the threat.”
Northrop is the Defense Department’s largest supplier of unmanned systems and the government’s biggest cybersecurity provider, spokesman Randy Belote said in an e-mail.
Space Capabilities
Linking cybersecurity and space systems is “encouraging because it reflects reality that we need to be doing more on both sides of the coin,” Roger Cressey, senior vice president for Booz Allen Hamilton Holding Corp., a McLean, Virginia-based security and intelligence consulting firm, said in an interview.
The Pentagon requested about $10.2 billion this fiscal year for its space initiatives, including about $5.8 billion for satellites and $2 billion in launch costs.
Two of the space programs are being developed by Bethesda, Maryland-based Lockheed Martin: the Advanced Extremely High Frequency satellite and the Space Based Infrared System, a network of satellites.
Another is the Evolved Expendable Launch Vehicle, a satellite system using medium and heavy-lift rockets that the Pentagon requested about $1.7 billion for this year. It’s run by United Launch Alliance LLC, a joint venture of Lockheed Martin and Chicago-based Boeing Co.
Increases in space defense expenditures may lag those in the faster-growing cybersecurity area, Mark Gunzinger, a military analyst at the Center for Strategic and Budgetary Assessments in Washington and former deputy assistant secretary of defense, said in an interview.
NeuStar’s Joffe agrees, saying that the U.S. should create “what our enemy already has, really good offensive cyber capabilities. We should be able to get enormous leverage from investments in offensive cybersecurity.”
(For more information on Bloomberg Government, visit bgov.com.)
--Editors: Steve Walsh, Michael Shepard
-0- Jan/17/2012 15:04 GMT
To contact the reporters on this story: David Lerman in Washington at dlerman1@bloomberg.net; Chris Strohm in Washington at cstrohm1@bloomberg.net
To contact the editor responsible for this story: Michael Shepard at mshepard7@bloomberg.net
