Industry Week in Review – December 14, 2018
Summary
President Trump reverses course and tells Defense Secretary Jim Mattis to submit a $750 billion budget proposal. The decision over whether the Space Force will be a sixth branch of the military has been decided. In addition, federal agencies are increasingly shifting away from physical data centers towards cloud computing. Trade tensions between the U.S. and China continue to mount after the massive Marriott hack.
Aerospace & Defense Update
President Donald Trump has told Defense Secretary Jim Mattis to submit a $750 billion budget proposal for fiscal year 2020. This is a reversal from his statement to trim defense spending to roughly $700 billion in October, which represents an approximate 5 percent cut, in line with the decreases planned for other agencies. Trump’s proposal dwarfs the $733 billion budget proposal Mattis and other top military leaders have been fighting to preserve. Many suggest that this new $750 billion number might be a “negotiating tactic” to ensure that the Democratic opposition does not push the eventual defense budget below the $733 billion that Mattis had initially been pursuing. However, the new $750 billion figure is not yet official, and the Pentagon is still working with the Office of Management and Budget to determine the department’s final top line budget number.
Defense Secretary Patrick Shanahan has told reporters that the question of whether the Space Force will be an entirely new military department or reside under the Department of the Air Force has been settled. However, Shanahan is not ready to disclose which direction the Pentagon leaders will go. While many initially presumed the Department of Defense would pursue the Space Force as an independent military branch, Defense One reported that some in the Pentagon believed a Department of the Air Force-owned Space Force was more likely to garner congressional approval. Either way, it seems that President Trump is on board with the Pentagon’s way forward on Space Force implementation. Interestingly, the cost of the Space Force is also still awaiting finalization, but the focus on the cost allocation will be centered around providing new capabilities as opposed to adding more bureaucracy.
Government Technology Solutions
In an effort to modernize legacy software and systems, federal agencies are increasingly shifting away from physical data centers and towards cloud computing. Given the extensive operational and financial benefits of moving workloads to the cloud, modernizing federal systems is a critical priority for agencies that are currently operating on legacy systems. Suzette Kent, the federal CIO, has pushed the government to accelerate the effort to leverage cloud computing services, stating that “[a]gencies should review their information technology portfolios to determine modernization plans for existing tools…and [that] those that have not begun this process are encouraged to start immediately.” For agencies who may be struggling to acquire cloud services in a fragmented market, the Office of Management and Budget’s (“OMB”) Cloud Smart initiative offers a path to safely and smoothly migrate legacy systems to cloud networks. The goal of the OMB’s cloud strategy is to help agencies fully integrate cloud messaging platforms, consolidate a fragmented cloud acquisition market, and discover innovative cloud applications in the federal space. To keep up with modern technology, it is imperative that agencies across the federal government embrace cloud computing infrastructure and solutions.
Trade tensions between the U.S. and China continue to escalate as the massive Marriott hack – which exposed the private information of approximately 500 million customers – has been traced to China’s Ministry of State Security. The revelation comes amid U.S. fraud allegations towards Huawei CFO Meng Wanzhou, who was arrested in Canada and released on a $7.5 million bail. In an interview, President Trump said he’s willing to intervene in the Huawei case if it helps improve trade relations with China: “If I think it’s good for what will be certainly the largest trade deal ever made – which is a very important thing – what’s good for national security – I would certainly intervene if I thought it was necessary.” Both events have put strain on U.S.-China relations and may impact the trade truce talks between President Trump and President Xi that have been ongoing since the 2018 G20 summit.
Big Movers
Boeing (Down 6.8%) – Share prices were down this week as concerns rise over the current trade dispute with China. In addition, China has warned Boeing that it could possibly levy tariffs on older 737 models.
Transactions
Cerberus Capital Management, L.P. has agreed to acquire Sparton Corporation, a provider of complex and sophisticated electromechanical devices with capabilities that include concept development, industrial design, design and manufacturing engineering, production, distribution, field service, and refurbishment. The deal is worth an estimated $182 million.
Kongsberg Defence & Aerospace and Patria Oyj have agreed to acquire Aerospace Industrial Maintenance Norway AS, a provider of MRO services within the aviation industry for both military and civil organizations. The deal is worth an estimated $18 million.
Lincoln Electric Holdings, Inc. has acquired Coldwater Machine Company, LLC, a provider of flexible automation integration, precision machining, and assembly manufacturing. The deal is worth an estimated $55 million.
MCM Capital Partners has acquired Andover Corporation, a provider of the design and manufacture of unique filters and coatings. Terms of the transaction were not disclosed.
