QinetiQ Continues Its Restructuring For The Future

(MoneyWatch)  QinetiQ is an interesting company. It was formed by the British Government privatizing its test and evaluation organizations in 2001. This set up a company with a variety of ranges, equipment and personnel optimized for the testing and development of weapon systems. It has used its capabilities as well as being able to sell some of its assets to grow its business in other areas. By setting up an American subsidiary and some acquisitions it has been able to penetrate the U.S. defense market.

This is an example of foriegn companies being able to take advantage of the rapid growth of the U.S. defense budget over the last eight years. In many cases this has been facilitated in order to reach the competition goals required by U.S. Government procurement regulations. QinetiQ has also realized that its main focus needs to shift to more profitable areas which includes focus on the United States as the British business has been in decline. The company is also having issues with its English workforce many of whom are unionized and former civil servants.

QinetiQ had a banner year in 2008 after going public in 2006. Mainly due to its U.S. business growth it saw profit almost double when compared to 2007. At the same time it was laying workers off in England while hiring in the U.S. This lead to tension with its workforce and ultimately strikes. In a way this is similar to IBM laying off U.S. workers but taking stimulus dollars and expanding in India.

As part of their restructuring QinetiQ announced yesterday that they were selling their underwater systems business to Atlas Elektronic UK. This small part of the company works on sonar systems, combat management, counter measures and submarine signatures. The major customer of course is the Royal Navy as well as some foriegn countries. Atlas Elektronic GmbH is a joint endeavor of ThyssenKrupp and EADS.

One of the major roles of the group was to continue the management and operation of the underwater test ranges privatized earlier. These ranges are used to collect signature data on Royal Navy and foriegn ships and submarines to aid in the development of countermeasures and weapons. This is the kind of original core business areas that QinetiQ is shedding.

It is clear that the U.K. and the United States are going to reduce defense spending. The highs of the last two Bush budgets will probably not be seen again after 2010. The end of combat operations in Iraq and Afghanistan alone will slice billions out of the Operations and Maintenance (O&M) account. The budget difficulties faced by the two nations are putting pressure on procurement accounts and defense spending overall.

It is in this environment that companies are going to have to operate. QintetiQ is planning on using its new business in the U.S. to offset the loss of its traditional assets transferred from the English government. Whether this will work will not be known for a few years as the budgets shake out as well as the defense contracting business.