That raises the interesting question of why BAE is comfortable sticking with federal services at a time when many contractors seem eager to get out, or at least scale back.  Last week I took advantage of my longstanding consulting relationship with BAE to put that question to DeMuro, and the answers I got say a lot about how uniquely positioned his enterprise is in the aerospace and defense sector.  I’ll lay out his reasoning in a moment, but first a bit of background on the sprawling operation he oversees.

BAE Systems, Inc. — “Inc.” as it is often referred to internally — is the U.S. arm of British-based BAE Systems plc, the third biggest military supplier in the world (after Lockheed Martin and Boeing).  Inc. operates under a special security arrangement that enables it to participate in some of the U.S. government’s most sensitive operations, a privilege seldom extended to other foreign-owned enterprises.  Because it is comprised largely of U.S. companies acquired over the years by the British parent, it has a distinctly American culture.  You don’t hear a lot of British accents in the operating units.  Last year it generated $10.5 billion in sales, representing 38% of plc’s total revenues — making America the parent company’s biggest market.

The business unit that has been under review since April, called Intelligence & Security, generates over $2 billion in annual sales, although only $1.7 billion of that was being considered for sale; a geospatial intelligence business within the unit was considered too valuable to divest, and will be realigned into the company’s electronics unit on January 1.  The latter unit, and Inc.’s combat vehicle, guns and munitions business, are often characterized in the media as suppliers of military hardware — unlike the Intelligence & Security unit.  The reality, though, is that all three of the company’s operating units in the U.S. are high-tech enterprises engaged to some degree in supplying technical services.

For instance, the unit that developed most of the Pentagon’s tracked combat vehicles also is a provider of sophisticated ship repair services to the Navy.  The electronics unit — which is a global leader in everything from jamming equipment to thermal sights to digital flight controls to radiation-hardened computers for satellites — also provides life-cycle support for military electronics.  So what makes Intelligence & Security different from the rest of the company is that services are its main focus, rather than just one feature of a much bigger portfolio.  It is one of the biggest outside providers of analysts to the intelligence community, a major player in cybersecurity services, and works side-by-side with warfighters in the field to defeat improvised explosive devices.

Much of that activity is highly sensitive, which explains why 84% of the 9,000 workers in the Intelligence & Security unit hold security clearances.  Although such work is vital to the defense department, intelligence community and law enforcement agencies, it has gotten some bad press recently from financial analysts who say margins are low, contract turnover is frequent, and the federal government has a preference for the lowest-cost providers — even when their technical credentials are sparse.  Some services companies have also seen sales stagnate as U.S. defense spending declined in recent years.  So why did BAE decide to stay in the business?

CEO DeMuro makes four points.  First, he says, the only reason BAE considered selling was that the company was approached by prospective buyers.  It received written offers from both strategic and financial buyers, and less formal expressions of interest from other quarters.  As a shareholder-focused company, DeMuro says, BAE had a fiduciary responsibility to at least consider whether divestiture might make financial sense.  It didn’t sell because after conducting extensive analysis, the company concluded that retaining Intelligence & Security provided a more attractive outcome for shareholders and stakeholders than getting out of that part of the business.

SOURCE: FORBES — http://www.forbes.com/