TASC’s New Ownership: Competitive Differentiator?

When Northrop Grumman’s sale of its TASC unit  closes, the new owners, private equity titan KKR and General Atlantic, tout that the stand-alone company will have unique standing, with no organizational conflicts of interest  (OCI) compared with other systems engineering and studies powerhouses.  Which companies will find the “nonconflicted” TASC more of a competitive threat?

Answer:  any that posture themselves as free of pertinent, unmitigated OCI and in a position to be objective advisers upstream of big buys of defense systems. Booz Allen Hamilton comes to mind, particularly in services like cost and economic analysis, and because it, too, is (~70 percent) owned by private equity investors, Carlyle Group.

Scanning the KKR portfolio, even a paranoid govt customer won’t find other government-contractor or overseas stakes owned by the parent that could spawn OCI worries about TASC at this time. The other TASC owner, General Atlantic, has more technology and country stakes, e.g. Lenovo/China, that could provide a wisp of worry for a few potential customers.

Carlyle, on the other hand, has had for decades full ownership or control of a variety of military hardware or government services firms (e.g., ARINC) suppliers, as well as overseas investors from the Middle East and potential-threat countries in its funds.  These other interests under the Carlyle umbrella reportedly gave pause to certain agencies when Carlyle’s purchase of BA was being reviewed.  Obviously, the government could accommodate those interests and any OCI  mitigations, which have not been publicly disclosed.

But OCI concerns remain a pop-up potential for any firms like TASC and Booz Allen owned by aggressive PEs.  It’s a  nature of the beast that they acquire aggressively, steadily diversify their portfolios, and are more open than ever to  foreign investors.

Congress may not believe the PE ownership structure is as insulating from organizational conflicts of interest, as the principals and agency customers do at this time.  It will be interesting to see how the TASC transaction refracts when it comes up in Congressional hearings, investigations, and plain old politics.

Finally, we got a kick out of the PR spin of the new TASC owners.  In their releases they speak of TASC as a national resource in the same sense that the FFRDCs,  often present themselves. But that’s for customer consumption rather than the PE investors grasping for high returns.  We doubt that MITRE and RAND are quaking.

Time will tell whether the claimed unique nonconflicted status of TASC makes a difference in the marketplace.