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Boeing and Lockeed Martin Announce Reorganizations To Adjust To Less Spending

Last week both Boeing (BA) and Lockheed Martin (LMT) announced restructuring and renaming of their defense components. The two major defense contractors are reacting to what looks like to be a the new world of defense spending. In the long term view of these companies there will be a downward trend in their traditional markets and the reorganizations streamline operations and allow them to enter new and more diverse markets.

As part of their change Boeing's Integrated Defense Systems (IDS) will now be known as Defense, Space & Security. The change in name is to show that not only will major defense programs be a focus but also work in satellites, space research and security matters to include homeland defense, cyber security and intelligence matters. This may mean a move by Boeing to get more involved in contracts supporting the U.S. military and civil intelligence agencies as there have been major collection and analysis contracts as well as more mundane work providing translators and support services.

Lockheed Martin announced that it would combine two of their major electronics business groups. Maritime Systems & Sensors will merge with Systems Integration. The initial net result of this plan will be abut the loss of 1,200 of their 140,000 employees. Despite this move there is currently no plans to shut down any facilities although the Systems Integration group in Owego, N.Y. has perviously been hard hit with the loss of the VH-71 New Presidential Helicopter.

Boeing is being clear that they are focusing on growing new business areas and that the reorganization is related to that. They are concerned that new large defense systems may not appear in the near future as the U.S. and European governments especially struggle to maintain high levels of defense spending. The recent acquisition of several companies is allowing the company to grow business and win contracts in areas they previously had not competed such as unmanned aerial systems and cyber-security. Traditionally in defense contracting M&A of a company is one of the quickest ways to get into a new business area.

The Lockheed move seems to be a more standard practice to consolidate and eliminate overlapping jobs and responsibilities. The company feels that with the possibility of less spending available the company needs to be more focused and responsive. The plan is to reduce workers to save money while maintaining the core capabilities of the combined groups.

In the Nineties as the defense budget drew down from its peak under Reagan the same thing often happened. Companies acquired other ones to build new business areas while reducing overhead and eliminating redundant positions. This is already starting to happen with the announced and executed changes to the budget since President Obama took office. If the trend in defense spending continues then the next step will be the removal from the market of some of the large contractors as they move to sell off defense business to other ones or merge with others of the big companies. This happened as well in the Nineties as McDonnell Douglas, Grumman, and Martin Marietta merged with their competitors and the U.S. was left with just the five big defense contractors.

This trend if it continues will also not aid the U.S. economy from growing jobs. The current rate is ten percent and there was little if any job growth in the last quarter. If defense spending ends up being less then companies will have to lay off workers increasing unemployment and counteracting any growth in the civil sector. The next few years will see consolidation and change in the defense industry as it reacts to restructuring of spending.

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