Northrop Move Portends Reshaping Of Sector

Bloomberg Business News reported yesterday that Northrop Grumman plans to sell its TASC technical services unit. On its face, the move seems like a simple divestiture of a non-core business — possibly hastened by new federal rules about conflicts of interest among companies that provide both hardware and advisory services to the government. But something much bigger is going on here, both at Northrop and elsewhere in the defense industry. With defense spending leveling off after eight years of steady increases, industry execs are beginning to reshape their businesses for the lean years ahead.

Northrop Grumman is leading that trend, making several major changes. It recently combined its mission-systems and information-services businesses into a single infotech unit better positioned to compete for cyber opportunities. It also merged its satellite and aircraft businesses — both of which are heavily involved in secret intelligence activities — into a consolidated aerospace unit. And the company has broken ground on a facility it is building with French energy giant Areva to manufacture components for the nuclear power industry. Northrop clearly is engaged in a major reshaping of its business, and rumors are rife about other moves to come, especially at its under-performing Gulf Coast shipyards.

It won’t be long before the rest of the defense industry follows Northrop Grumman’s lead in reshaping business portfolios. Some companies are already preparing to make big bets in non-traditional markets. For instance, Lockheed Martin seems determined to grow its role in healthcare services for the federal government. But the Obama Administration has complicated industry efforts to respond to any defense downturn by reversing the recent trend in outsourcing of federal work. With opportunities in federal services looking less robust than expected, companies may have no choice but to diversify into commercial markets — like General Dynamics did when it bought Gulfstream. Wall Street hates diversification because it makes businesses harder to analyze, but it hates weak year-over-year results even more.