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NG Sale Sparks Industry Changes


When Senators Carl Levin and John McCain drew up the Weapons Systems Acquisition Reform Act, it's hard to believe they knew they would help reshape an industry. But that is exactly what is happening as a result of the conflict of interest provisions written into the bill. Proof of that came this weekend with Northrop Grumman's announcement that it was unloading its TASC unit and selling it for $1.65 billion in cash to an investor group led by General Atlantic LLC and affiliates of Kohlberg Kravis Roberts & Co. L.P.

The company, which declined to comment when asked earlier about the reasons for the pending sale, came clean this time, with CEO Ron Sugar laying out the case to protect the company's large amount of highly classified sensor and satellite work.

“This transaction is in the best interest of Northrop Grumman’s customers, employees and shareholders,” Sugar said. "Northrop Grumman’s desire to align quickly with the government’s new organizational conflict of interest standards, while preserving TASC’s unique organizational culture and its status as the advisory services employer of choice. TASC is a remarkable organization with a proud 43-year heritage of supporting critical national security missions. We are confident the investors understand the critical importance of its customers’ missions and the depth and sophistication of its employees’ expertise.”

The nub of the issue is that the acquisition reform bill prompted the nation's spy satellite maker and operator, the National Reconnaissance Office to issue a memo less than a month after President Obama signed the Weapons Systems Acquisition Reform Act into law, detailing its adamant stand against the possible appearance of any corporate conflicts of interest.

The memo said that any company that does not comply with the conflict of interest requirements, “will also be prohibited from bidding on or participating in any NRO contract to supply the system(s), or any major component thereof, or from serving as a subcontractor, vendor or consultant to the system supplier or major component supplier or major component suppliers on any system related to the work while in a non-conflicted status."

TASC and Lockheed Martin's Valley Forge unit both perform this sort of advisory work to the NRO and other three-letter agencies. There are other smaller units in other companies, but these are the heavyweights in the industry.

In our earlier story breaking the news of the NRO memo, a government official made the case for enforcement of the conflict of interest provisions: “I don’t care how many ‘firewalls’ a company puts up to mitigate OCI, the fact remains TASC provides advice on the cost, schedule & performance of developmental contractors such as Northrop Grumman. It is particularly disconcerting when going through a source selection and we need the advice of a particular subject matter expert but we can’t turn to him because the company he works for is owned by one of the potential bidders,” the official said. “This [enforcement] is a good thing and not a bad thing. The sky is not falling as a result and the other companies mentioned above will absorb contracts and employees as a result. There will be no perception of conflict and I don’t have to kick my subject matter experts out of the room during a crucial time in a review.”

Northrop Grumman's press release included the usual cautionary notes about the sale being subject to regulatory and legal review, including Hart-Scott-Rodino approval. The transaction is expected to close by year end, according to Northrop's release. But this will certainly not be the only sale prompted by the recently passed legislation. Although the company will not comment publicly, Lockheed Martin sources have told me that their Valley Forge unit will almost certainly have to be sold to keep the company from running afoul of the conflict of interest provisions. And Lockheed probably has more at stake than does Northrop, due to the large quantity of black satellite work it performs, including the new electro-optical spy satellite system recently approved by President Obama. The acquisition reform bill, and the NRO's strict interpretation of its language, puts up to $10 billion in Lockheed business at risk, according to several knowledgeable sources.

Among the companies which provide similar advisory services for highly classified programs, as well as unclassified satellite programs, are Scitor, IAI and SRS Mantech. Of course, there are also the federally-funded creations known as FFRDCs such as the Aerospace Corp. and MITRE.

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