Fighting cyber crime to combat budget crunch

Fighting cyber crime to combat budget crunch
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Sep 01, 2011, 11.50 PM | Source: Reuters

Fighting cyber crime to combat budget crunch

Fighting cyber crime to combat budget crunch

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Fighting cyber crime to combat budget crunch

Fighting cyber crime to combat budget crunch

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By Soham Chatterjee and Bijoy Anandoth Koyitty

REUTERS - Efforts to chip away at the U.S. budget deficit are making life tougher for companies that provide services to government agencies -- from engineering and systems to IT for the military, intelligence services and homeland security.

As these companies chase fewer and smaller state and local government contracts, salvation for some may be in the growing commercial market for cyber security.

A spate of high-profile online hacking attacks have pushed cyber security up the must-have list in both corporate boardrooms and the Pentagon, which now classifies foreign government cyber attacks as "acts of war".

ManTech International, CACI International <CACI.N> and Science Applications International Corp are among those made vulnerable as the United States looks to cut $850 billion from its national security bill over the next decade.

For ManTech, there is the added blow from the planned draw-down of U.S. forces from Afghanistan and Iraq. The $1.4 billion company could lose about a third of its revenue in the coming years.

"If you lose that percent of revenue, you can't make it up with organic growth," said RBC Capital Markets analyst Rama Bondada, who has a 'sell' rating on ManTech stock. "It's going to be very difficult to have organic growth in the next few years as the (military) drawdown takes place."

Mantech shares have dropped 19 percent in 7 weeks -- underperforming the broader S&P 1500 IT Consulting & Other Services index, which shed 9 percent -- and last month touched a 4-year low.

Booz Allen Hamilton Holding Corp, Dynamics Research Corp and NCI Inc also provide management and technology consulting to defense, intelligence and civil markets.

As competition for contracts becomes more intense, cyber security could be a key battleground.

"Regardless of what the chatter is about further budget cuts, cyber security is going to be a bright spot in the defense budget, and ManTech has exposure to cyber," said Alex Hamilton, managing director of EarlyBirdCapital.

Most federal IT service providers have increased their expertise in cyber security though acquisition and expansion.

RBC Capital Markets analyst Rama Bondada notes CACI's exposure to cyber gives it an edge, while companies like KEYW Holding Corp are cyber pure-plays.

Bondada predicts spending in areas like C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), cyber and intelligence will grow 8-10 percent even in these cutback times.

The commercial world, more fearful of online security, may offer a lifeline.

Mantech has had talks with financial services, healthcare and energy firms, though it doesn't yet have any material commercial work.

"We believe that if our cyber business is going to reach its full potential, the commercial market is a natural extension for us," ManTech Mission, Cyber & Technology Solutions Group President Bill Varner said in July.

OVER-PRICED M&A

CACI, ManTech and SAIC, which have strong balance sheets and cash flow, have together snapped up 15 companies since last year and signalled more to come, particularly in cyber security and healthcare IT.

Mantech is scouting for deals that are immediately accretive and expects at least one more acquisition this year, while Stifel, Nicolaus & Co analyst William Loomis has said SAIC is on the prowl for bigger deals.

As the deal landscape becomes more competitive there are warnings about valuations and the subsequent impact on margins.

"If everyone is looking to buy, the multiples are going to be higher, and you have to spend a lot more money to buy an asset to maintain growth," Bondada said.

(Reporting by Soham Chatterjee and Bijoy Koyitty in BANGALORE; Editing by Ian Geoghegan)

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