Thursday, November 20, 2008
Posted on November 11
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Blessedly, the campaigns are over, and there will be increasing certainty about many things in government, even if your guy didn't win. We take a look at some of the relevant Barack Obama positions that will affect the industry.
The US Treasury Department agreement with Bank of New York Mellon to be the overall custodian and financial agent for the bailout program contains some unusual requirements regarding role (compared to the typical government contractor), personnel, and other features. As we've said all along, financial services firms will win almost all of the bailout work from Treasury. Even if they had the technical skills for the work, the usual contractors would have trouble meeting other provisions of the deal.
The LSI label is largely defunct now, and for the most part, so is the idea of having contractors perform some of the government-side management of programs while they also deliver the product. In October, the Department of Homeland Security took back the operative part of major-program acquisition authority from the US Coast Guard in the wake of an LSI failure in the Deepwater program. A joint venture of Lockheed Martin and Northrop Grumman, acting as the LSI and approving its own design work, delivered vessels deemed unsafe. In addition, the government has tried to recover payments made for the cutters.
On November 7, BearingPoint shares closed at $0.14 (fourteen cents), just before de-listing took effect. The company is moving to redress its market capitalization to meet NY Stock Exchange requirements. More important than the reverse stock-split and debt restructuring in the works is the company's declaration in late October that it would sell all or part of its business. Several companies are interested in the contracts BearingPoint has, but not the brand.
Alan Chvotkin recommends specific things companies can do to navigate the somewhat murky waters in the next few months.
Yes, we've learned the hard way that contract performance in Iraq is fraught with problems, including security. But mismanagement, surfaced courtesy of the Special IG for Iraq Reconstruction, has been breathtaking. Mismanagement by government and contractors in a minority of contracts, but glaring nonetheless. What's been surprising, six years down the road, though, is that documented poor performance has not kept companies from winning more contracts. There are a lot of variables, but it doesn't look good, and this phenomenon is consistent with the frequent tolerance by domestic customers for a contractor's errors in previous engagements.
Two months ago we described a Justice Department False Claims Act investigation and lawsuit that led to a jury trial. This was unusual because SAIC, like most companies in government cross hairs, choose to settle with Justice, with no admission of wrongdoing. However, SAIC lost the case, as described in our earlier article, and in the process was found to have engaged in extensive nondisclosure of organizational conflicts of interest. Last month the federal court set the fines and damages, but, in the process, gave SAIC a backhand compliment along with the bill.
We haven't read or talked with any experts who put much stock in Rep. Barney Frank's notion that Defense spending could use a 25 percent cut soon. Certainly, President-elect Obama does not support that, based on his emerging national security plans. But there will be a lot more scrutiny of spending proposals. And there's a decent chance that Sen. John McCain will help bring some of the troubled, wasteful programs to the chopping block.