General Dynamics' Acquisition of Force Protection a Cautionary Tale for Small Suppliers

11/7/2011
By Sandra I. Erwin

The South Carolina-based company that rose from obscurity in 2004 as one of the Pentagon’s critical suppliers of blast-survivable armored trucks has decided that it can no longer subsist as an independent firm, and has agreed to be acquired by industry giant General Dynamics Corp.
General Dynamics' unsolicited $360 million bid for Force Protection Inc. of Ladson, S.C. is yet another sign that it is becoming more difficult for small businesses to compete and win contracts in a volatile military market where most procurement deals for new equipment are won by large firms.
Anticipated cutbacks in Pentagon research-and-development contracts, and across-the-board budget uncertainties “present challenges for smaller companies,” said Michael Moody, CEO of Force Protection Inc.
During a Nov. 7 conference call when he officially announced that Force Protection will become part of General Dynamics Land Systems, Moody said that small firms find it increasingly tough to survive in the defense sector. One big problem is “uneven revenues as a result of the procurement process,” he said. “Most procurements go to large companies.” Small businesses, with little access to capital and shrinking cash flow, must spend their scarce funds on research-and-development  “with no guarantees of success,” Moody said.
Force Protection once was the only U.S. supplier of V-shape hull armored vehicles that can survive roadside bomb blasts, and it became a Wall Street darling in 2006 and 2007, as the Pentagon rapidly ramped up orders for mine-resistant ambush-protected (MRAP) trucks. Procurements soared from a dozen vehicles a month to more than a thousand over the course of just 18 months. But Force Protection could not alone meet the rapid surge in demand and the Pentagon recruited other suppliers. The company’s stock skyrocketed when it was the only MRAP manufacturer but took a dive when the Pentagon decided to bring other companies into the fold.
The original owner of the MRAP concept was a company named Technical Solutions, which had adapted it from a combination of South African, British and Rhodesian mine-resistant vehicle designs. Technical Solutions was purchased in 2002 by Sonic Jet and they became Force Protection. The original MRAP model known as the Cougar was designed in 2004 by at Force Protection for the Marine Corps.
Force Protection, however, endured growing pains and had been losing investors’ confidence. Most recently it had been in trouble for failing to file financial reports on time. Another blow to the company was being eliminated from the initial round of development contracts for the Army-Marine Corps Joint Light Tactical Vehicle, a new truck that the services seek as a replacement for the Humvee and the MRAP.
Force Protection executives had said in media interviews over the past year that they planned to diversify the company and seek opportunities outside of MRAP sales, as the nearly $50 billion, 20,000-vehicle program is winding down.
"After careful consideration of the strategic direction of Force Protection, our board decided that a sale to General Dynamics would maximize value for our stockholders,” Moody said. “With their armored vehicle business, General Dynamics will be able to pursue opportunities that we could not have pursued as a stand-alone company.”
Force Protection's specialty vehicles include the Buffalo, Cougar and Ocelot. The company has delivered more than 3,000 MRAPs to the Defense Department.
The takeover of Force Protection is viewed as further proof that the defense sector increasingly will become "vertically integrated" as large companies swallow their financially weaker competitors. Brett Lambert, deputy assistant secretary of defense for manufacturing and industrial base policyrecently told the House Armed Services Committeethat the Pentagon is not concerned about the financial health of its large prime contractors, but sees "real fragility" in lower tier suppliers and small firms.

Topics: Business Trends, Mergers and Acquisitions, Land Forces

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