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Is QinetiQ The Bellweather For Smaller Defense Contractors?

Two years ago QinetiQ (UK:QQ) was one of the darlings of the defense contractor world. A new, aggressive company formed from privatizing parts of the British Ministry of Defence's test organizations and personnel it went public a few years ago. QinetiQ had a profit of over one billion dollars in 2008 much of it gained through buying companies in the United States and winning contracts there. QinetiQ also worked to sell off some of its lower performing assets in England. This process while enhancing revenue did not make it popular with its English employees many of whom were former, unionized civil servants.

The last year though has not bee that good for the company. The CEO, Graham Love, who had seen the growth and privatization was made to leave over concerns about financial issues related to some contracts and a safety investigation into the crash of a Nimrod intelligence aircraft. The company reported that earnings were declining in 2009 due to delays in contract awards and concerns of declining defense spending. These issues have begun to focus thoughts on the large amount of debt the company holds.

Late last week the company warned that the situation is getting worse. Shares fell about sixteen percent at their worst. QinetiQ reiterated concerns that some contract awards will be delayed and now some may not happen. Some analysts are predicting a fall of fifteen percent in revenue from that number predicted when the year began. Britain is facing budget issues that may not be resolved until after elections this year. That may mean major cuts to all spending not only defense.

England did go ahead, though, and begin the process of building their new joint training center. QinetiQ is one of the key companies involved in this. The goal is to centralize and privatize training in Wales. There were worries due to the financial condition of the country that the contract would not go through. This first award is an encouraging sign.

Perhaps QinetiQ can ride the downturn out. It may end up selling off parts of itself; especially the newer American acquisitions to keep its core business going. It might be absorbed by a bigger, better off defense contractor. If the future does hold reductions in defense spending in the U.S. and the U.K. then QinetiQ could be the first warning of the shakeout that will occur among the different defense contractors. We could see another round of M&A similar to the Nineties where even large companies such as McDonnell Douglas and Martin Marietta went away. It could be a rocky few years ahead.