Lockheed Martin [LMT] has received more interest than expected in its federal information technology services business that it put on the market in July and now expects to announce a sale of the business sometime in the first quarter of 2016 rather than be the end of this year, a top company executive said on Wednesday.
There has been “very high interest” in the IT business, “not sort of kicking the tires interest” but “real live buyers’ interest,” Bruce Tanner, Lockheed Martin’s chief financial officer, said at investor conference hosted by Credit Suisse. With this much interest, the process “tends to take a little longer to handle that level of detail that’s expected with more people involved in the process,” he said.
Lockheed Martin put its federal IT business on the market in July after a year-long review of strategic alternatives for sector, which largely consists of its Information Systems and Global Services segment and the technical services unit within its Missiles and Fire Control segment. At the same time it announced its plans for the $6 billion IT business, Lockheed Martin also said it had agreed to acquire the $6 billion Sikorsky Aircraft helicopter division of United Technologies Corp. [UTX].
L-3 Communications [LLL] in July also announced that it would divest its National Security Solutions segment, which includes government IT work as well as some command and control, and surveillance systems. The company in October said it planned to announce on the segment by the end of this year.
More recently, Britain’s BAE Systems said it decided to retain its United States government services business after putting it on the market in April. BAE said in November that keeping the business creates better value for the company.
It’s highly unlikely that Lockheed Martin will decide to retain its federal IT services business, Tanner said.
“It’s hard for me to envision a scenario and something dramatically would have to change in the marketplace with the government’s buying behaviors and they’d have to be signaled pretty quick if that were the case or [be] pretty evident by their actual buying habits [such as a] change from what we’ve actually seen the last five or six years,” Tanner said.
At one time the government IT portfolio was Lockheed Martin’s fastest growing business but that all changed when government spending on IT began to slow around 2010. Lockheed Martin thought that the government wouldn’t keep spending less on its IT needs “forever” because there would be a need to refresh technology, but changes in the market removed the premium on past performance and instead factored price much higher and led to a “cost shootout” and more competitors for the work, he said.
Tanner said “no one had a track record better than Lockheed Martin in this business” but that “didn’t seem to matter, and so we asked ourselves the question, is this a temporal trend or is this a permanent trend and right, wrong or different, the conclusion that we came too is we’re not certain that this is not a permanent trend.”
Tanner said there are “parts of the government IT business I love,” including the “incredibly high return on invested capital” and “great cash flow” but it’s not a growing business “and that’s not how you add value to a corporation.” There are more opportunities elsewhere for Lockheed Martin, particularly for international business, he said.