Industry Week in Review – September 30, 2016
Aerospace & Defense Update
Safran, a French engine manufacturer, recently announced it has entered into exclusive talks with private equity firm Advent International Corp. about the sale of its Morpho identity and security business for $2.7 billion. Advent plans to combine Safran’s identity and security business with Oberthur Technologies, which was acquired by Advent back in 2011. This proposed deal allows Safran to be focused exclusively on aerospace and defense, as it sold off its explosives detection business earlier this year. The identity and security business, currently located in France, employs 7,800 workers and generated revenues of ~$1.7 billion during 2015. The deal is expected to close next year, pending regulatory approvals in the U.S. and Europe.
Congress passed a Continuing Resolution (“CR”) this past week funding the government and military through December 9th. The CR keeps military spending at its current levels and does not implement the 2017 defense budget increase that was targeted to begin at the end of this week. The House of Representatives (“House”) and Senate strongly disagree over the proposed $18 billion increase in spending proposed in the 2017 defense budget. The House believes a spending hike will allow the military to be prepared for an immediate crisis and to purchase new aircraft and ships. The Senate opposes the increase because they feel it will take funding away from the overseas war fund causing it to run out of money in April. Because of the inability of Congress to pass a budget, the Department of Defense has had difficulty developing long-term planning projections and goals. Congress plans to resume negotiating the 2017 defense budget after the November election.
Government Technology Solutions Update
Microsoft’s Customer Relationship Manager Online received a provisional authority to operate via the Federal Risk and Authorization Management Program’s (“FedRAMP”) new accelerated system. It took Microsoft only 15 weeks for its cloud services to be reviewed and approved, which is roughly seven times faster than the average time it took to gain approval under the old system. According to FedRAMP Director, Matt Goodrich, the accelerated approval process focuses on taking a more iterative and efficient approach, with a much heavier emphasis on a review of capabilities compared to documentation review, which had been the main area of focus of the older system. The accelerated process was created in an attempt to reduce the length of time and resources spent on authorizing new cloud services. Ideally, the accelerated FedRAMP process will reduce the average authorization timeline for new proposals to six months, compared to the current average of nine to eighteen months.
Oracle Corporation recently made the decision to leave the General Services Administration’s (“GSA”) schedule program for third-party reselling opportunities within the Federal government. This decision was based, in part, on what Oracle and many other industry insiders view as inefficiencies in the GSA’s schedule program, and that the litigation risk of doing business through GSA schedules outweighs the benefits of using them. The Department of Justice (“DoJ”) has recovered over $26 billion through the False Claims Act, with Oracle alone paying $350 million in settlements over the past 10 years. As a result, Federal contractors have been attempting to reduce their exposure to business being done through GSA schedules, instead pursuing other contract opportunities and vehicles which they see as less litigious. Oracle’s decision to leave the GSA schedule program makes it one of the most high-profile contractors to do so, with some in the industry fearing that an increasing number of businesses may follow suit.
Big Movers
Vectrus Inc. (Down 46.9%) – Shares were down significantly this week after Vectrus announced that the U.S. Army did not renew its contract to provide support services in Kuwait.
Mercury Systems (Up 4.5%) – Shares were up this week after Mercury Systems received $11.7 million in follow-on orders from an unnamed defense prime contractor.
Transactions
Acorn Growth Companies has acquired Raisbeck Engineering, Inc., a provider of systems that increase productivity and safety for aircraft through the infusion of advanced technology into in-service and new production aircraft. Terms of the deal were not disclosed.
Vista Equity Partners has acquired GovDelivery, Inc., a provider of digital marketing and professional solutions, including digital engagement, training, and open data services for government organizations. The deal is worth $153 million.
