06.11.13 5:39 PM ET
Why Wall Street Still Loves Booz Allen
How much does it cost you if one of your employees goes rogue and screws over your business client? If you’re Booz Allen Hamilton, the government contractor that employed leaker Edward Snowden, about $60 million.
On Monday, investors in Booz Allen, which is publicly traded, had their first opportunity to react to the bombshell news that broke over the weekend. And the reaction was something close to a shrug. The stock closed at $17.54, down about 2.55 percent from Friday’s closing price of $18. Given the company’s market capitalization of $2.41 billion, it lost about $64 million in value. Through midday Tuesday, the stock was down less than 1 percent.
Snowden, who earned $122,000 a year from Booz Allen until the firm fired him yesterday, willfully leaked information. You would think such a breach in protocol and client-relationship management might be a disaster. After all, the U.S. government provides virtually all of the company’s revenues, and the national-security apparatus places a very high value on the ability to keep secrets. Booz Allen clearly failed to supervise Snowden adequately, or to make an accurate judgment about this particular employee’s willingness to abide by the terms of his employment. The result has been a huge black eye for the government, which will now incur significant financial and reputation costs. Imagine you were a law firm and a paralegal disclosed sensitive information from a major client. Or if an investment bank blew a high-profile public offering. Or if a seafood restaurant routinely served spoiled fish. The market would exact a swift punishment.
But government contracting is a different ballgame. When a company screws up, the government delivers a slap on the wrist—and then awards the company with new contracts. Based on recent history, investors could be forgiven for having a blasé attitude about Booz Allen’s prospects. Overcharging and being overbudget on high-profile fighter contracts hasn’t stopped Lockheed Martin from getting lucrative new high-profile contracts. A 2011 government report found that Boeing overcharged the Army for spare helicopter parts; This morning, Boeing announced it received a $4 billion contract to make helicopters for the Army.
Halliburton and its subsidiaries had a series of problems providing services in Iraq. But the revelations didn’t sink its stock. And in 2010 its subsidiary KBR got a fat no-bid contract to provide services in Iraq.
The reality is that these contractors have become, in effect, arms of the government. The national-security and defense apparatus needs them to carry out essential operations as much as the private companies need their federal benefactor to deliver returns to the shareholder. Government agencies these days simply lack the resources, permissions, and wherewithal to hire all the people they need to conduct operations. Using contractors is a necessity.
On the one hand, it is a fiercely competitive industry in which big firms compete with one another. On the other hand, the fix is in. The government spreads its contracts around between large companies. Small businesses and start-ups have a tough time competing for the biggest of the contracts. And there is a limited number of domestic large players, especially in sensitive defense areas. Lobbying also plays an important role. Big contractors hire lobbyists, make campaign donations, and advertise in the publications that politicos read—all in an effort to work the system to their disadvantage.
Eisenhower warned of the military-industrial complex. Were he alive today, he’d warn about the national-security-consulting complex.