Airport Defense, Beltway Offense

Washington, D.C. – At a crowded congressional hearing on aviation security two weeks ago, the temperature in the room was uncomfortably high. So too, with the London Underground bombings still fresh in the headlines, was the frustration voiced by some of the members of the Subcommittee on Economic Security, Infrastructure Protection and Cybersecurity.

“The Transportation Security Administration spends approximately $4 billion a year to screen passengers and baggage,” said Rep. John Linder (R-Ga.), “I fear that this country is not getting nearly the return it would hope on such an investment.” Rep. Loretta Sanchez (D-Calif.) grumbled that “we’ve had plenty of meetings with many technology companies who tell us they have a solution to everything.”

One witness feeling the heat that day was Deepak Chopra, chief executive of OSI Systems. His company pulled in half its $247 million in 2004 revenues from its security division, Rapiscan Systems, which makes X-ray and gamma-ray inspection systems, as well as devices to detect dangerous materials (explosives, drugs and so on) using bursts of subatomic particles. After the Sept. 11, 2001, terrorist attacks, the U.S. Transportation Security Administration spent heavily on Rapiscan machines. TSA remains Rapiscan’s biggest customer.

Full story at Forbes.com

Is Uncle Sam Leaving Children Behind?

WASHINGTON, D.C. – Three weeks ago, 858 people showed up in Washington for a conference, hosted by the Consortium for School Networking, on the use of technology in K-12 education. The mood at the event? “Pretty somber,” reports participant Bruce Wilcox, chief executive of an education technology venture called Project Inkwell.

Weighing on the group: money troubles. For one, concerns simmered about the fate of E-Rate, or the Schools and Libraries Universal Service Support Mechanism. The U.S. government program, funded by fees added to phone bills and devoted to wiring schools to the Internet, has been wracked by charges of fraud and mismanagement.

A more immediate worry was President George W. Bush’s proposed education budget for fiscal 2006. The budget, released in February, proposes eliminating a program known as Enhancing Education Through Technology. Created as part of the No Child Left Behind Act of 2001, EETT doles out grants for integrating technology into schools. The program received $500 million in fiscal 2005, down from $700 million in 2002.

Full story at Forbes.com

Run, Robot, Run

Gary Carr is a mechanical engineer working for Ensco, a professional-services firm and government contractor headquartered in Falls Church, Va. But get him started on the subject of the robot he’s building, and he sounds more like a beaming parent.

“It starts to go off and make decisions on its own,” he explains. “Decisions sometimes you can’t believe it made.”

Carr leads Ensco’s team which is competing in the second annual Grand Challenge, a robot derby taking place next October that is sponsored by the Defense Advanced Research Projects Agency (DARPA). The challenge in question is to build an unmanned vehicle capable of traveling on its own through 175 miles of desert terrain in less than ten hours. The team whose robot completes the mission the fastest takes home $2 million.

At last year’s Grand Challenge, Ensco fielded “David,” a modified all-terrain vehicle. Alas, it and the 12 other robots all crapped out within eight miles of the start. But the firm got plenty of mileage in publicity terms. On its Web site, Ensco, a relatively small outfit with $100 million in annual revenue, still proudly touts a 38-page booklet packed with media mentions from the 2004 event.

Full story at Forbes.com

Motorola’s Cargo Call

Washington continues to grapple with how best to protect the flow of commerce from terrorism. This week, U.S. Customs and Border Protection hosts a symposium on the matter, an event following up on the Department of Homeland Security’s “Cargo Security Summit” a month ago. There, outgoing Homeland Security Secretary Tom Ridge declared cargo security to be “a linchpin issue.”

That makes it a ripe business opportunity, too. In Ridge’s audience at the December meeting lurked reps from Boeing, Booz Allen Hamilton, IBM, Lockheed Martin, Northrop Grumman, Science Applications International and Unisys.

Also in that crowd was another company to keep an eye on: Motorola. A year ago, the Schaumberg, Ill.-based company launched Secure Asset Solutions, an outfit aiming to help businesses use satellite, cellular and short-range radio technologies to keep track of valuable goods, such as cars and cargo containers.

Full story at Forbes.com

Pentagon: Rough RFID Ride Ahead?

WASHINGTON, D.C. – It’s always a little nerve-wracking when big businesses or government bureaucracies wager on a new technology, especially when the technology in question involves the fate of thousands of suppliers and billions in inventory. So Wal-Mart Stores and the U.S. Department of Defense have no doubt rattled some with their embrace of radio frequency identification, or RFID, as the next big thing for managing their supply chains. Both outfits have deadlines this coming January for significant RFID rollouts.

But between the two RFID efforts, which will likely prove more challenging for the organization and its suppliers? That’s an easy one: the Pentagon’s. “Their needs are probably the most robust and exhaustive of anyone, way more than whatever Wal-Mart is thinking,” says Ann Grackin, chief executive at ChainLink Research, a Cambridge, Mass.-based logistics consultant that advises both the U.S. military and its contractors.

Some background on RFID: The technology, around since the 1940s, is the same used for automated highway toll collection and key chain devices to open car doors. For years, RFID has been touted as the successor to bar codes as the best way to keep track of merchandise. Tagged with RFID chips, boxes and cases of merchandise will automatically transmit information from embedded RFID chips to “readers” throughout the distribution process. The promise: less work and better-stocked shelves–or better-equipped soldiers.

In mid-2003, Wal-Mart upped the RFID ante by asking its top 100 suppliers to put tags on cases destined for Wal-Mart and Sam’s Club stores in the Dallas/Fort Worth area by January 2005. By 2006, Wal-Mart expects all its suppliers to be on board with RFID.

The Pentagon, which had already had success with RFID in certain war zones, announced in October 2003 that its suppliers, save those in “bulk commodities,” would have to have RFID tags on cases by January 2005. About 40,000 vendors do regular business with the military.

So what makes the Defense Department’s RFID initiative tougher? Beyond the security difficulties inherent in dealing with combat operations, Grackin points out some unevenness in the military’s facilities; it has some of the best warehouses and depots in the world but also some of the worst. That’s not the case with Wal-Mart.

Full story at Forbes.com

The Battle To Secure The Supply Chain

WASHINGTON, D.C. – When Congress passed the USA Patriot Act two years ago, it acted swiftly and broadly. The 342-page bill, which President George W. Bush signed into law on Oct. 26, 2001, modified 15 statutes, authorized hundreds of millions of dollars in new spending, and expanded the government’s powers in the realms of surveillance, criminal justice, immigration, intelligence and trade sanctions, among other areas.

The process couldn’t have been more different when it came to beefing up security for businesses shipping goods into and out of the country. Rather than going for heavy-handed legislation or rule-making, the government approached companies involved in shipping and brainstormed with them to develop a largely voluntary, self-regulating system of securing the supply chain.

The shipping community continues to debate the success of the foremost result of this brainstorming, a program known as the Customs-Trade Partnership Against Terrorism, or C-TPAT, run by U.S. Bureau of Customs and Border Protection.

Here’s how C-TPAT works: Businesses–carriers, customs brokers, freight forwarders, importers and anyone else involved with shipping or logistics–sign a memorandum to get the C-TPAT process started. The next step is to conduct a self-assessment of supply chain security using C-TPAT guidelines on physical security, manifest procedures, education and training, and other topics. C-TPAT participants then submit a security questionnaire and profile to customs, develop a program and agree to future audits of security practices to check whether progress is taking place.

For the companies involved, the carrot part of the equation is a reduced number of inspections at borders, access to a list of other C-TPAT members, and an “assigned account manager” at the Customs bureau.

In terms of numbers, C-TPAT certainly seems to have been a hit. As of today, from a core group of “charter members” such as Motorola, Ford Motor, and Target , C-TPAT has 4,300 companies signed up. “[That number] indicates that because of C-TPAT,” Customs Commissioner Robert C. Bonner testified in Congress recently, “trade is a lot safer from terrorist exploitation.”

Full story at Forbes.com

Cold War To Hot Technology

WASHINGTON – For 25 years, tech contractor SRA International has done high-level problem solving for the U.S. government. One of its first gigs: advising the Department of Defense on how to keep its operations running in the buildup to and aftermath of a nuclear exchange between the Cold War powers.

“People talk about the danger of a dirty bomb,” muses SRA Chief Executive Ernst Volgenau. “Can you imagine 1,000 Soviet nuclear warheads descending on the United States?”

Yes, SRA designs government computer networks and systems. And it would like to do more such work. But it also helps prepare government agencies for disaster and develops software and techniques for analyzing the effectiveness of civilian and defense programs. Example: In a recent engagement for the Centers for Medicare & Medicaid Services, SRA was hired to look for patterns in Medicare claims that might indicate fraud.

So far, this mix of business has served SRA well. Revenue, $450 million for the latest 12 months, has grown at a 15% annualized clip over the past five years. And given today’s national security situation, analysts expect more of the same; the Thomson First Call consensus forecasts SRA’s bottom line will expand at a rate of 21% (annualized) over the next thee to five years.

Yet even with that kind of projected growth, one might wonder whether SRA has sufficient bulk to compete, particularly as the giant defense contractors muscle into the field of government technology. Last week, Lockheed Martin announced a $1.8 billion bid for Titan, a San Diego-based technology-services outfit specializing in national security and defense.

Moreover, SRA has a reputation for being relatively selective about both the engagements it takes on and the acquisitions it makes. “They’ve had measured growth,” says Cynthia Houlton, equity analyst with RBC Capital Markets. “They haven’t gone out for large deal opportunities just to beef up the top line.”

Full story at Forbes.com

Government IT: Who’s Ready For A Deal?

Over the past year, consolidation among companies providing technology services to the federal government has been brisk, to put it mildly. “Unprecedented,” says David Heinemann, head of the Strategic Advisory Services Group at Input, a Reston, Va.-based market research firm.

In the first quarter of this year, Input tallied 18 merger or acquisition transactions among tech outfits selling expertise to the federal government. And the deals just keep coming. In late May, Fairfax, Va.-based Anteon International completed its $91 million purchase of Information Spectrum, a provider of identification card technology. Shortly thereafter, General Dynamics offered to buy Veridian, a network security engineering firm headquartered in Arlington, Va., for $1.5 billion.

All this deal-making is driven by the $45 billion that Uncle Sam spends each year on vendor-furnished information systems and services, a number expected to grow 8.5% annually over the coming five fiscal years. Input projects that by 2008, 87% of federal technology spending will get contracted out.

Both the growth prospects for the business and the consolidation frenzy have attracted investors. Anteon, for instance, trades just a hair off its 52-week high. In fact, some of these stocks have done so well, that some market watchers are nervous. For example, last month The Washington Post columnist Steven Pearlstein warned of a “Beltway Bubble About To Burst.”

Time to sell? Anteon Chief Executive Joseph Kampf, for his part, doesn’t sound alarmed. “There’s more consolidation to be had,” he says, pointing out that there are 3,000 companies in this marketplace, and even the largest players in the field hold market share numbers in the single digits.

Full story at Forbes.com

Reading, Writing And Regulation

WASHINGTON – It may not be at the top of Congress’ to-do list right now, but the Higher Education Act of 1965 is up for reauthorization in 2003. For-profit purveyors of postsecondary education–and their shareholders–will be watching closely.

These outfits draw the largest portion of their revenue from government financial aid programs. Career Education (nasdaq: CECO – news – people ), for example, which runs schools such as The Texas Culinary Academy and the International Academy of Design & Technology, pulls in about two-thirds of its total revenue from government sources.

Some background: The main federal source of postsecondary funding is Title IV of the Higher Education Act. Title IV encompasses such programs as Federal Family Education loans, Pell Grants and Perkins Loans. For the 2004 budget, President George W. Bush recently asked for $62 billion in total grants, loans and work-study programs at the postsecondary level. Pell Grants, $11.4 billion for this fiscal year, would rise to $12.4 billion.

But with that money comes a raft of standards and requirements set forth by the U.S. Department of Education and others. These include ensuring that default rates on student loans don’t exceed 25% for more than three years straight; keeping each institution’s federal aid revenue under 90%; hitting certain targets, vis-à-vis completion and placement rates; and maintaining acceptable levels of “administrative capability,” such as providing sufficient financial aid counseling and other services.

So which way will the rulemaking pendulum swing in the reauthorization process? Some members of Congress have made noises suggesting a tightening. A fact sheet from the House Education & the Workforce Committee, for example, has this to say: “While the cost of a quality education continues to rise, questions remain about the quality and accountability of America’s higher education system.”

Analysts say such bluster shouldn’t cause investors in for-profit postsecondary education firms much anxiety. On the accountability issue, for instance, analyst Richard Close, who follows the sector for Atlanta-based brokerage SunTrust Robinson Humphrey, says for-profit providers have a fairly solid track record. “They have an incentive to provide a quality education that enables a student to get employment after [graduation],” he says, “and they do a pretty good job on that front, as opposed to their competitors in public schools and community colleges.”

Full story at Forbes.com

Can AMS Stay In The Big Leagues?

As the 1960s wound down, five young turks at the U.S. Department of Defense saw there was money to be made in advising governments on information technology. The firm they founded in 1970, American Management Systems, cleared a path for the multitude of technology services companies that now line the Dulles Toll Road in northern Virginia.

Yet now, AMS ranks only 77th among the top contractors to the federal government, according to Government Executive magazine. And even that spot may be in jeopardy as the company faces ever more intense competition.

Technology outsourcing from the federal government could grow at an annualized clip of 18% to $15 billion by 2007, says Input, a market research firm based in Chantilly, Va. So tech service firms that once concentrated on the now hurting commercial market are gearing up to capture business in what looks like the greener pastures of the public sector.

No surprise, consolidation has emerged as these big firms maneuver for position. Last month, El Segundo, Calif.-based Computer Sciences agreed to pay $950 million for Reston, Va.-based Dyncorp, a tech services firm specializing in government work that has sales of $2.3 billion.

Could such a deal be ahead for AMS? With latest 12-month sales of just over $1 billion and an enterprise value (market capitalization plus net debt) of $430 million, the firm could make a tempting target. Its enterprise multiple, calculated by dividing enterprise value by operating income (here defined as earnings before interest, taxes, depreciation and amortization), stands at just 3.5, low relative to a multiple of 10 for BearingPoint and 4.5 for Electronic Data Systems.

Moreover, during the past year Chief Executive Alfred Mockett has slimmed down AMS’ operations to focus on its core public sector, financial services and communications markets. The firm, for example, just unloaded its utilities consulting practice for $24 million to India’s Wipro, a technology services firm.

Yet Mockett, who recognizes the pressure to consolidate, sure doesn’t sound like someone shopping his company around. “There will be a series of players that will go for scale and diversity and play in the big leagues,” he acknowledges. But, he adds, “given the breadth of our customer base and offerings, AMS has what it takes to play on the scale and diversity side.”

Full story at Forbes.com