Industry Week in Review – March 25, 2016

Aerospace & Defense Update

Alphabet, Google’s parent company, announced its plans to sell Boston Dynamics, the legged-robot maker, as a result of internal disagreements and concerns about the Company’s ability to develop a marketable product within the next few years.  Alphabet acquired Boston Dynamics and six other companies in 2013, as part of an acquisition spree to develop a robotics unit dubbed Replicant.  Due to organizational conflicts, Alphabet recently dissolved Replicant and reassigned its employees to the Company’s X division, a future innovations arm that focuses on “moonshots”.  However, Alphabet executives struggled to find a proper fit for Boston Dynamics, as Boston Dynamics executives resisted Alphabet’s demands to abandon humanoid robots in order to work towards solving transportation or logistics problems.  Additionally, Boston Dynamics robots’ distinguishing feature, their ability to walk on two or four legs, is primarily useful for military applications creating further conflicts of fit as Alphabet stated it would not sell robots for military purposes.

Government officials and U.S. aerospace companies are striving to develop new cockpit-equipment standards that would eventually allow aircraft to tap into local satellite-navigation systems across the globe.  Recent efforts to draft regulations and common technical benchmarks aim to enhance airline safety by supplementing signals from U.S.-operated Global Positioning Satellites (“GPS”) with broadcasts from separate regional or ground-based technology.  Although the concept has been discussed in principle for years, many industry leaders and regulators are increasingly advocating for joint standards with the ultimate goal of enabling more precise and redundant location information worldwide, regardless of airline or aircraft type.  Industry leaders also outlined the importance of establishing signal integrity and availability requirements in order to address potential increases in intentional signal interference or hacking.

Government Technology Solutions Update

In preparing its 2015 FISMA report, the Office of Management and Budget (“OMB”) found that Federal agencies reported over 77,000 cyber incidents in 2015, an increase of ~10% from 2014.  The 2015 figure continues a decade-long trend of increasing Federal cyber incidents dating back to 2006 in which only 5,500 incidents were reported.  Despite an increase in total incidents, the OMB found 30% were unrelated to cyber-intrusion, including mishandling of sensitive information, loss of physical data records, and policy violations.  To understand if agencies’ cyber capabilities are successfully adapting to evolving threats, the 2015 Federal Inspectors General implemented an Information Security Continuous Monitoring (“ISCM”) framework to assess capabilities.  Their findings revealed 21 of the 24 CFO Act agencies implemented low-level ISCM maturity; only the General Services Administration (“GSA”) received a favorable score of 91%, exceeding the 68% average.  While there is still room for improvement, the OPM has cited significant improvement for areas targeted in last year’s cyber sprint, and is hopeful the $19 billion provision for cyber improvements in the President’s FY2017 budget request will accelerate this effort.

The GSA established its initial dedicated cloud computing effort nearly seven years ago; however, given the scale of the project, the agency continues its work of migrating to the cloud in pursuit of enhanced capabilities and reduced costs.  In order to expedite this process for the GSA and other Federal agencies, the Office of Citizen Services and Innovative Technologies (“OCSIT”) recently released a Request for Information (“RFI”) to gain a better understanding of vendors’ capabilities in the space.  The primary aim is to create a robust portfolio of cloud products, tools, platforms, and services that can support Federal agencies as they transition to the cloud.  The RFI focuses on five critical areas focused on both government experience and suggested contractor responsibilities. Primarily, the OCSIT is looking for contractors who not only understand the challenges that are inherent to government operations, but also that bring distinctive and innovative perspectives.   By encouraging creativity and calculated risk-taking on smaller projects, the OCSIT hopes to leverage any insights learned from successes or failures to improve processes on significant projects in the future.

Big Movers

Mercury Systems (Up 11.2%) – Shares were up this week after the Company announced plans to acquire certain businesses from Microsemi Corporation

Smith & Wesson (Down 9.7%) – Shares were down this week after Sportsman’s Warehouse projected a decrease in firearm sales for FY2016


FTG Aerospace acquired Airco Industries, Inc., a provider of displays and control panels for military and commercial airborne and ground communications and navigation systems.  Terms of the deal were not disclosed.

Mercury Systems to acquire Embedded Security, RF and Microwave, and Custom Microelectronics businesses from Microsemi Corporation, a provider of high-frequency components and subsystem solutions for defense electronics, homeland security, and other government end-use applications.  The deal is worth an estimated $300 million.

Micro Focus International to acquire Serena Software, a provider of orchestrated IT solutions and application lifecycle management for Global 2000 companies and Federal customers.  The deal is worth an estimated $540 million.

Novaria Group to acquire Ferco Aerospace, a provider of high-strength and temperature resistant brackets, tube assemblies, and other exotic metal fabrications.  Terms of the deal were not disclosed.

Sirius Computer Solutions to acquire Force 3, a provider of infrastructure and security services, including next generation networking and IT support for Federal agencies.  Terms of the deal were not disclosed

Click here to review comparable company analysis.