What's coming in 2020; Dynetics sold; BAE Inc.'s new CEO; and more...

As the clock ticks down on 2019, it looks as if the government will not shut down and the Pentagon will end the year with a fiscal 2020 budget, even though it’s almost three months late. So let’s look ahead to the new year.

Will the mergers continue? The Raytheon-United Technologies megamerger is expected to close in the first half of 2020. It’s unlikely the Pentagon will oppose the deal. So what’s next? Just this week, Leidos announced it would acquire Dynetics (more on that below). For reference: Here’s a list of the major defense mergers and acquisitions since 2015.

Who will build the Navy’s new frigate? The bidders are Huntington Ingalls Industries, Austal USA, Lockheed Martin, Fincantieri Marine, and General Dynamics Bath Iron Works. The Navy is planning to award the $20.5 billion, 20-ship deal in July. Here’s a handy Congressional Research Service backgrounder about the project. Still TBD: how will unmanned ships and submarines count toward the Navy’s 355-ship goal?

What happens to the defense budget? Congress this year passed a budget deal that would allocate $740 billion to defense for 2021, which in real terms is a bit less than the $738 billion defense is expected to get in 2020. After three years of substantial growth, will the defense budget plateau? Experts and defense CEOs seem to think that’s the case. Oh, and there’s an election in November, which could change a lot.

Will Boeing’s 737 Max problems affect its defense business? The company’s defense executives have said no, but this week’s announcement that the company would stop building its once-popular, now-grounded 737 MAX raises that question yet again. Temporarily pausing production while regulators evaluate fixes to the plane is expected to affect the planemaker’s suppliers. While 2018 saw a series of major Boeing wins, 2019 was mired by more problems with the KC-46 tanker. Still, Boeing should deliver about 30 tankers to the Air Force this year. Boeing did not bid on the $85 billion program to replace the Air Force’s intercontinental ballistic missiles, leaving the job to Northrop Grumman. Boeing said the contract favored Northrop. Will it challenge the Air Force in court? Also, will Dennis Muilenburg, who was fired as chairman earlier this year, keep his job as the company’s CEO?

What policy changes are in store? A lot could happen even before November’s election. Troop levels in the Middle East and Afghanistan appear to be in flux, which will affect Pentagon purchases. Then there’s North Korea and its recent threats to send the U.S. a Christmas gift that might include new weapons tests. Will Congress change the federal budget process? Will the Pentagon change how it pays contractors? How will the Pentagon manage the standup of the Space Force?

Also: Will Pete Maverick break the rules but come out on top? Top Gun: Maverick is scheduled to hit theaters in June. Paramount Pictures dropped its second trailer for the film on Monday. Enjoy!

Welcome

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Leidos to Buy Dynetics for $1.65B

We introduced you to Huntsville, Alabama-based Dynetics in 2014 and have written regularly about how they have punched above their weight, building technology for some of the Pentagon’s high-profile projects, like hypersonics, directed energy, swarming drones, space and small munitions. After months of rumors that the company was up for sale, Leidos won the contest. The transaction is expected to close in the first quarter. From then, Dynetics will operate as a wholly owned subsidiary run by its current CEO Dave King.

Why it matters: Leidos just bought its way into one of the hottest Pentagon markets. Now it will have the challenge of turning “science projects” into programs of records, likely with competition from larger prime contractors. “The deal continues a trend of blurring of business lines by services-focused defense contractors who are moving more into product segments,” wrote Byron Callan of Capital Alpha Partners in a Dec. 18 note to investors. “Leidos is not a stranger here, given its work on the DARPA Sea Hunter autonomous naval vessel on simulation products.”

BAE Systems, Inc. Names New CEO

BAE Systems, Inc. — the U.S. arm of the UK’s BAE Systems — has tapped Tom Arseneault to be its next CEO, replacing Jerry DeMuro, who has served since 2014. Long considered the heir apparent as president and COO of the $10.8 billion-dollar firm, Arseneault will assume the new role on April 1. DeMuro will become executive vice president of strategic initiatives and will continue serving on the U.S. company’s board of directors.

DeMuro, interviewed at the recent Reagan National Defense Forum, talked about aligning BAE’s portfolio with military priorities, including artificial intelligence, autonomy and cyber. “[W]e invest a lot more in R&D in the electronics business, precision guided munitions, [long-range precision fires], and the application of those technologies in our products,” he said. “If you think about swarming and AI, as well, you need assured communications in a contested environment. So that's where we're investing.”

On the defense budget: "As a practical matter, there is a window of time right now where the United States government has agreed – there's a consensus that we need to fund defense to replenish many of the major systems. And add to that, that there's a sense of urgency because of the peer competition we face."

On where China and great power competition is reflected in Army acquisition: "Where we see it is in area access denial, and capabilities and technologies that apply there: long-range precision fires…directed energy weapons, precision guided munitions. Not only are they trying to make them go further developing precision, [but] if you [also] think about some of the weaponry being repurposed, maybe for counter missile” systems.

Bonus: Here is some of our past coverage of BAE:

• Convo with BAE Systems CEO
• Video: Global Business Briefing with BAE Systems’ President and CEO Jerry DeMuro
• Removing bureaucracy from acquisition

Czechs to Buy Bell Helicopters

U.S. Defense Secretary Mark Esper and Czech Republic Defence Minister signed a letter of offer and acceptance last week that finalizes the sale of four Bell AH-1Z and eight UH-1Y helicopters to the Czech Air Force. “This mix [of helicopters] allows the Czech Republic to accomplish a diverse mission set, from humanitarian assistance and disaster relief to close air support and air-to-air warfare,” Joel Best, Bell’s military sales and strategy director for Europe, said in a Dec. 13 statement. The first aircraft are expected to be delivered in 2023.

Satellite Market Set to Soar

Frost & Sullivan predicts the more than 20,000 satellites will be launched between 2019 and 2033. “Such demand could take the small-satellite launch services market past the $28 billion mark by 2030 and present significant growth opportunities throughout the industry,” the consulting firm said. “To keep up with market requirements, Frost & Sullivan anticipates high-volume demand for component manufacturers, dedicated launch service providers and low-cost ground station services.” 

Making Moves

• Air Force undersecretary Matt Donovan has become the acting defense undersecretary for personnel and readiness. He replaces Jimmy Stewart, who had been performing the duties in that role.
• Tina Kaidanow has left her position of senior adviser for international cooperation, Defense News reports.
• Randall Schriver, assistant defense secretary for Indo-Pacific security affairs, has left his position.
• Kari Bingen, principal deputy defense undersecretary for intelligence, is stepping down on Jan. 10, Politico reports.
• Russ Quinn has been named president of Top Aces, a company that specializes in adversary air services. He was previously the company’s chief commercial officer.