By Marjorie Censer
Published: 4 September 2011
Traditional defense contractors are increasingly muscling into the health care services field, hoping that the burgeoning area can help them weather reductions in Pentagon equipment buying.
Bethesda-based Lockheed Martin and Falls Church-based General Dynamics, both of which already had health care practices in place, have ramped up their businesses in recent weeks with new acquisitions.
“All of the larger players, but especially the ones that are attached to major platforms like Lockheed, GD, Boeing, are scared to death” of reductions in traditional programs, said Bob Kipps, managing director of the McLean-based investment firm KippsDeSanto. “The good news is they’re sitting on a pile of cash.”
General Dynamics announced it would pay close to $1 billion to acquire Arlington-based Vangent, a federal contractor that specializes in health care services. Vangent, which is majority-owned by private equity firm Veritas Capital, will become part of General Dynamics Information Technology.
Gerard J. DeMuro, executive vice president of GD’s information systems and technology group, said the Vangent buy complements the company’s 2008 acquisition of Towson-based ViPS, which provides mostly back-office health IT, such as claims processing systems and fraud detection software. Vangent focuses on systems customers use, such as call centers for Medicare and Medicaid beneficiaries.
“We’ve been growing in this market organically and through acquisitions over the last three or four years,” said DeMuro, noting that GD’s health care practice now generates annual revenue of $250 million to $300 million. The company sees the market “growing faster than the traditional defense market.”
A week later, Lockheed announced its acquisition of Diamond Bar, Calif.-based QTC Holdings, which provides outsourced medical evaluation services to the Department of Veterans Affairs, among other government agencies. Lockheed did not disclose the terms of the agreement.
The company said in a statement that QTC — and particularly its case management and electronic health records experience — made it a natural fit.
Both Lockheed and General Dynamics have seen sales and revenue flatten in recent months, and the Pentagon is promising additional reductions.
Defense contractors are “looking to reposition,” Kipps said. “These things they’re doing are all part of … retooling to deal with the [ongoing] market evolution.”
George A. Price Jr., senior equity research analyst for information technology services at BB&T Capital Markets, said the defense contractors’ moves are part of a broader effort by government contractors to ramp up their health IT focuses.
McLean-based Science Applications International Corp. and Dynamics Research Corp., which has a large office in Clarendon, are among those that have made recent acquisitions with health care capabilities.
“You’ve got a few areas that companies are targeting to be strong currents within an otherwise … challenging … federal spending environment,” Price said. “I think it’s going to get increasingly competitive in and around health care.”
BB&T and its affiliates have relationships with a number of government contractors.