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US: Lockheed Looks Beyond Weapon: Contractor Targets Growth With Services in Strife-Torn Areas

by August ColeWall Street Journal
September 24th, 2007

Lockheed Martin Corp.'s history is built on making jets, missiles and other weapons of war. But lately, its growth plans also call for securing more U.S. government contracts for an array of behind-the-scenes services throughout the world -- everything from managing military bases and embassies to helping write constitutions for developing nations.

Lockheed is making its move through Pacific Architects & Engineers Inc., a little-known Los Angeles company it acquired last year. For more than five decades, PAE quietly worked on Army bases and provided facilities-management services to the State Department. That meant such work as maintaining fresh paint at the U.S. embassy in Moscow to providing logistics for African Union peacekeepers in Darfur, Sudan. Half of the company's revenue comes from the State Department.

Lockheed, of Bethesda, Md., sees PAE as a vehicle to provide more crucial -- and lucrative -- services to governments and other entities. PAE has developed expertise in areas such as disaster relief, peacekeeping missions and election monitoring. Such work has historically been the State Department's turf.

As the Defense Department's budget begins to plateau and U.S. forces are stretched thin, Lockheed needs to find ways to grow beyond big weapons systems. To capitalize on the changing nature of military activity around the globe, the company is seeking a role in everything from the occupation of Iraq to disaster response to antiterror efforts.

"We believe that the definition of global security is changing. Expanding, actually," Lockheed Chairman and Chief Executive Bob Stevens said.

Defense Department spending on service contracts rose 72% to $141.2 billion in fiscal 2005 from $82.3 billion in 1996, according to the Government Accountability Office, Congress's investigative arm. Meanwhile, spending has been growing at the State Department and other federal branches.

Partly because of that shift, Lockheed and its peers have been building up its log of work not tied to the traditional military budgets that fund ships, tanks and fighters. Since 2001, Lockheed has acquired 18 companies toward this end. "PAE is an interesting variation, but one variation on a theme," Mr. Stevens said.

Such work isn't without operational or political risks. PAE's employees work in far-flung corners of the globe in conditions that may be fraught with physical and ethical perils. Lockheed said it has the training and oversight to protect against these dangers. Scrutiny can be intense on contractors providing a government even seemingly innocuous support and logistics services, as proven by the difficulties former Halliburton Co. unit KBR Inc. faced in Iraq.

Lockheed bought closely held PAE last year for what analysts estimated was $700 million. Its chief executive, Allen Shay, remains at the company, which was started by his father. It is now part of Lockheed's $10 billion information-systems and global-services division.

A person familiar with PAE's operations said it is expected to post sales of $625 million this year, up from nearly $500 million last year. Lockheed last year reported net income of $2.53 billion on revenue of $39.62 billion.

PAE's parent division counts as customers the Social Security Administration, New York's Metropolitan Transportation Authority and the United Kingdom government's census. Countries familiar to PAE, such as Afghanistan and the Democratic Republic of Congo, are on the radar screen as potential buyers of domestic-security technology, government consulting or even postal services.

An example of PAE's capabilities can be found in Africa, where the company has become the logistics backbone of the 7,700-strong African Union troops in Darfur under a State Department contract that also involved DynCorp International Inc.

In Darfur, an area about the size of France, PAE provides 34 base camps as well as vehicle maintenance and telecommunications equipment. The contract was valued at $21 million when awarded and predates Lockheed's acquisition of PAE. The Department of State is spending about $400 million on such efforts in sub-Saharan Africa.

The U.S. military, which has proven it can quickly win conventional military campaigns, is looking beyond the occupation of Iraq and Afghanistan to other parts of the globe that risk becoming threats through economic, political or humanitarian crises.

"When you think about the engagements we have today, winning the war is just one aspect," said Linda Gooden, executive vice president of Lockheed's information-systems and global-services division. "There's considerably more resources attached to winning the peace."

Africa is one such place. The Defense Department is setting up a regional command this year that will include countries that have been devastated by bloody regional conflicts. While the continuing hunt for al Qaeda and other terrorist groups in places such as Somalia provides one imperative, economic-development and security-training have become increasingly important to U.S. strategy in the region. China is already establishing itself economically in Sudan. PAE gives Lockheed a shot at challenging incumbent firms such as KBR for that work.

"With our knowledge that we have gained through PAE working in Africa, we feel we're well positioned to support [the Department of Defense] as they open up the expeditionary bases in Africa," said Ms. Gooden.

PAE was founded in 1955 and specialized in construction and engineering work, expanding through U.S. government contracts during the Cold War and afterwards. While Lockheed's "Skunk Works" engineers were working on advanced jets in the 1960s, PAE was working on building bases in Vietnam. Today, PAE's contracts include training police throughout the world on behalf of the State Department and election monitoring for the Organization for Security and Cooperation in Europe, also through a State Department contract. The company's employees helped write Afghanistan's constitution and set voting policies there.

By buying PAE's know-how, Lockheed can leap ahead on the learning curve of how to do the tricky, often dangerous, work that goes along with countries emerging from war or those that are on the brink of it.

"Lockheed doing this kind of thing is crucial to this process," said Thomas Barnett, who is senior managing director at corporate and government consultant Enterra Solutions and an expert on how the military can deal with the developing world and ungoverned areas.




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