The DNSChanger Working Group was created as a campaign to clean up the DNSChanger infection of 4 million computers in 100 countries.  The Working Group includes participants such as Georgia Tech, Mandiant, and Trend Micro, as well as support from national / international CSIRTs (Computer Security Incident Response Team) and Internet Service Providers (e.gs. AT&T, Verizon, Comcast).  The Working Group was publically acknowledged as being instrumental to the FBI in the ultimate arrest of the cyber thieves and maintains an “are you infected” website for users.

Based on this apparent success, we speculate whether this is a prototype that could be proliferated by the U.S. Government and applied for persistent cyber attacks.

There are many facets of this prototype that need to be thought out…. particularly the business model question of addressing the cost to keep up with software and hardware in light of the current fiscal environment.  However, we see this as a good initial start, given the U.S. Government is the only entity with the authority to address Nation State attacks.

The plan is accompanied by two bills, from both the House Armed Services Committee and the Defense Appropriations Subcommittee, to spend the additional funds.  Rep. Paul Ryan (R-Wis) commented, “In our view, we shouldn’t be taking more from hardworking Americans to fix Washington’s mistakes.  Instead, we should be solving the problem with structural reforms to our entitlement programs… [there is] strong bipartisan agreement that the sequester is a bad policy.”

However, on May 10^th, the Pentagon immediately rejected both spending plans, which will likely be dead on arrival when the Democrat-controlled Senate finalizes its military spending recommendations.  Defense Secretary Leon Panetta commented, “The Department of Defense, and I believe the administration, are not going to support additional funds that come at the expense of other critical national security priorities…if members [of Congress] try to restore their favorite programs without regard to an overall strategy, the cuts will have to come from areas that could impact overall readiness.”

Big Movers

Aeroflex Holding Corp. (Down 23.2%) – Shares traded down this week after the company issued Q4 2012 guidance below Wall Street estimates.  The company reported that it expects net sales to be between $180 million and $195 million and adjusted EBITDA between $41 million and $51 million.  Analysts were previously expecting the company to report revenues of $202 million and EBITDA of $58 million.

GeoEye, Inc. (Down 16.1%) – Shares traded down this week after DigitalGlobe’s Board of Directors rejected GeoEye’s proposal to acquire the company for $17.00 / share.  Later in the week, a secondary drop-off occurred when Macquarie analysts downgraded GeoEye’s stock to “Neutral” from “Outperform.”

Wesco Aircraft Holdings Inc. (Down 10.4%) – Shares traded down this week after announcing earnings results on Monday, in which it reported earnings-per-share of $0.22, missing analysts’ consensus estimates by $0.03.  However, the company did report revenue that was up 3.5% as compared to the same quarter last year.

Relevant Transactions

GTCR announced that it has acquired CAMP Systems, a provider of maintenance management, flight scheduling, inventory control, and engine control trend monitoring solutions for $675 million.  The auction process was orchestrated by Credit Suisse AG, who also drew bids from Bain Capital and Welsh Carson, Anderson & Stowe for the Warburg Pincus-backed company.  According to sources close to the deal, the company was generating EBITDA ~$45 million.  The deal reportedly closed on April 7^th.

Kratos Defense & Security Solutions, Inc. has agreed to acquire Composite Engineering, a provider of ballistic missile target systems, augmentation and payload equipment, and launch solutions, for $155 million.  The company primarily provides miniature jet targets for the U.S. Air Force and U.S. Navy. According to Kratos, the company earned ~$94 million in revenues in 2011, up 25% over 2010, and has a qualified pipeline in excess of $1 billion.  The deal includes a $20 million component of Kratos stock.

General Dynamics C4 Systems has agreed to acquire IPWireless, a provider of LTE mobile broadcast solutions for government and public safety customers, as well as integrated mobile broadcast solutions for 3G mobile data offload applications, for an undisclosed purchase price.  General Dynamics consummated the transaction to tap into the “fast current of growth” in the rapidly expanding 3G and 4G wireless market.  The acquisition will also provide General Dynamics with a technological and pricing edge in future upgrades to secure communications networks programs for U.S. military and civilian customers.  IPWireless reportedly has ~90 employees and expects to generate between $65 million and $75 million of revenue this year.

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Big Data companies grabbed headlines for both M&A and venture capital fundraising in April, and Splunk, the first pure-play public Big Data company, saw its stock price double in the first day of trading after its IPO on April 19th.

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“For combat, we know the Humvee is no longer feasible,” Maj. Gen. Tony Cucolo, director of force development for the deputy chief of staff, G-8 said. Army officials have stressed that the Humvee still has a future within homeland security and logistics operations, however, once the vehicle leaves Afghanistan it will not see the battlefield again.

After years of debate over finding a replacement for the Humvee, it now appears that the Joint Light Tactical Vehicle (“JLTV”) will fill this role. A joint venture between the Army and the Marine Corps, the JLTV is currently moving towards a prototype and testing phase that could result in production orders for more than 55,000 vehicles. The JLTV program is expected to cost well over $10 billion, though some estimates have put this figure as high as $70 billion, depending on the final per-vehicle cost and total quantity ordered.

Big Movers

DigitalGlobe, Inc. (Up 35.5%) – Shares are up this week after the satellite imagery company GeoEye, Inc. offered to purchase DigitalGlobe for $792 million in a cash-and-stock deal. A deal between the two companies would create the world’s largest fleet of commercial imagery satellites. (note: DigitalGlobe has since rejected GeoEye’s unsolicited offer)

Chemring Group plc (Up 4.6%) – Shares rose this week after Non-Intrusive Inspection Technology, Inc. (“NIITEK”), a U.S. subsidiary of Chemring, was awarded an Army sole source contract for the Ground Penetrating Radar Husky Mounted Detection System worth up to $579 million. The Company has already been awarded an initial order of $161 million.

ManTech International Corporation (Down 21.8%) – Shares fell this week after ManTech missed analysts expectations for the second quarter in a row and cut its 2012 outlook sighting slowing revenue from overseas contingency operations. The Company now expects FY2012 revenue of $3 billion and net income of $113 million.

CACI International, Inc.(Down 20.3%) – CACI’s shares saw their steepest decline since April 2011 this week after the Company cut its sales forecast from $4.05 billion down to a range of $3.73 billion to $3.83 billion. Analysts had estimated $3.95 billion. CACI blamed the shortfall in part on slower-than-anticipated procurement by customers, uncertainty in government budgeting, and the drawdown in Southwest Asia.

Relevant Transactions

Kanders & Company, Inc. to acquire BAE Systems’ Safariland, LLC, a manufacturer of protective equipment for law enforcement agencies, including gloves, holsters, and riot gear, as well as armored combat vehicles, ships, and satellite systems for the military. The proposed $114 million sale is another step in BAE’s ongoing plan to streamline its organization and further align its business portfolio and strategy. The sale is expected to close in the second or third quarter.

GeoEye, Inc. to acquire DigitalGlobe, Inc., a provider of commercial earth imagery products and information services worldwide, for $792 million in cash and stock. In the face of increased defense budgetary pressures and internal competition, a combined company will be better able to provide the U.S. government with geospatial intelligence. GeoEye has offered to pay $17.00 per share for DigitalGlobe, a 26 percent premium to Thursday’s close. (note: DigitalGlobe has since rejected GeoEye’s unsolicited offer)

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1. Focus on cost avoidance.  These are the solutions the federal market is thirsty for, and investors want to invest in.  The key to effective healthcare reform and especially lightening the burden of healthcare on the budget deficit has a direct line to cost avoidance efforts.  However, these cost avoidance measures must also be mindful to not compromise the quality of care – conflicting priorities on the face of it.  Fortunately there are many ways to play this trend ranging from fraud, waste and abuse avoidance technologies to architecting and integrating IT systems that support the organization, tracking, and payment processing for new models of care, amongst others.
2. Don’t bet on regulation- that’s gambling.  While there’s consensus as to the need for healthcare reform, there are too many forms it may take and the time frame is unclear.  Investors are not looking to bet on Supreme Court decisions or Administration changes (or continuation), but rather the non-policy solutions the address the drivers of the healthcare crisis. See point #1 above.
3. Invest in or target areas that avoid reimbursement risk.  Pricing pressure on providers is a near certainty irrespective of what healthcare reform looks like.  Outside of providers for whom greater reimbursement equates to higher income, the rest of the healthcare ecosystem is incentivized to drive costs down.  This theme will naturally push providers to find efficiencies within their business model, but hopefully not to the detriment of quality of care (can we avoid the “factory” general practitioner model).  Try to stay one layer away from direct reimbursement. Some ideas are to focus on the systems, HIT applications, and the big data of healthcare.

The subcommittee seeks to fully fund procurement of 29 Lockheed Martin F-35 Joint Strike Fighter aircraft, and to buy the additional 12 General Atomics MQ-9 Reaper unmanned aircraft, the subcommittee recommends a $180 million addition to the Air Force’s $920 million request.  The markup also authorizes multiyear procurement of the Bell-Boeing V-22 Osprey, funds production of 21 tilt-rotor aircraft in 2013, extends the Boeing F/A-18E/F Super Hornet multiyear for a fifth year, and funds 26 F/A-18s and 12 EA-18G Growler electronic attack aircraft.

Army budget requests were also revisited. In its markup of the authorization bill, the subcommittee says there is not enough information available about the Army’s future needs or the risks associated with temporarily closing the combat vehicle production lines.  In the absence of the force-mix study results and a quantitative analysis of the impacts to the combat vehicle industrial base, the subcommittee recommends providing funding to keep those production lines open.  The subcommittee recommends an additional $181 million for continued M1 Abrams tank upgrades and $140 million for upgrades to the Bradley fighting vehicle. It also adds $62 million to increase 2013 production for the M88A2 Improved Recovery Vehicle.

Big Movers

Dynamics Research Corp. (Down 23.3%) – Shares are down this week after the Company further reduced 2012E expectations, citing continuing deferral of procurement decisions and program cuts, together with intensified price competition as the main drivers for the downward shift.

Safran SA (Up 14.3%) – Shares rose this week as brisk overhaul demand for jet engines underpinned stronger than expected first quarter sales.  The Company posted first-quarter revenue of 3.1 billion euros ($4.1 billion), above market forecasts of around 3 billion, boosted by a 15.1% rise in the economically sensitive after-market for civil jet engines.

Relevant Transactions

Blackland Aerospace acquires Lewis Machine Company, a provider of complex precision-machined components for clients in the commercial and military jet engine, airframe, missile and power plant industries. The acquisition of Lewis Machine represents the third in fourteen months and reaffirms Blackland’s commitment to building a leading platform in the sector. The terms of the transaction were not publically disclosed.

Six3 Systems acquires Ticom Geomatics, a provider of interoperable, mission-ready, precision Geolocation and ISR systems and services. The acquisition combines Ticom’s expertise in Tactical precision Geolocation and COMINT with Six3’s strong capabilities in the National ISR/SIGINT and Cyber market. Together the Company will be able to offer customers comprehensive solutions and services that span from National through Tactical ISR needs and address all elements of the Multi-INT market. While some reports show Ticom’s latest reported revenue to be almost $30 million, the specific terms of the transaction were not publically disclosed.

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In a related story, the Air Force announced this week its intention to launch the second Advanced Extremely High Frequency (“AEHF”) communications satellite on May 3, as part of the effort to replace the legacy Milstar constellation and provide secure, high-integrity, jam-resistant communication support to senior military and government officials.  The third AEHF satellite is expected to launch in September 2013, a fourth satellite is on contract, and two more are expected to be procured by the end of the upcoming summer.

Big Movers

MAXIMUS, Inc. (Up 7.0%) – Shares rose this week after the company announced that it has signed a definitive agreement to acquire Denver, CO-based Policy Studies Inc. (“PSI”) for $67 million.  PSI helps administer various government health programs, including Medicaid and the Children’s Health Insurance Program, welfare-to-work programs, and child support enforcement initiatives.  The acquisition is expected to help bolster MAXIMUS’ position in the increasingly lucrative government health market.

TransDigm Group Incorporated (Up 5.4%) – Shares rose this week after analysts reported confidence that the company will raise adjusted earnings-per-share (“EPS”) estimates meaningfully during reports next month.  Analysts rationalize the higher EPS estimates through a combination of further McKechnie upside, AmSafe accretion, and continued aftermarket strength.

Relevant Transactions

HEICO Subsidiary Radiant Power Corp. acquires the aerospace assets of Mortiz Aerospace, a designer / manufacturer of next generation wireless cabin control systems, solid state power distribution and management systems, and fuel level sensing systems for business jets, military / defense aircraft, and general aviation consumers.  The acquisition enables Radiant Power to provide a full suite of power control and cabin electronics solutions.  Terms of the deal were undisclosed.

Venture Aircraft, LLC acquires certain assets of Swift-Cor Aerospace, Inc., a producer of precision computer numerical control (“CNC”) machined and sheet metal parts, as well as assemblies, for commercial jets, business jets, and military aircraft, among other aerospace platforms.  The combined entity will now operate as Impresa Aerospace; management views the acquisition as instrumental towards being able to tackle growing demand driven by rapidly increasing aircraft build rates.  Terms of the deal were undisclosed.

Waveland Investments acquired NTE Aviation, an aftermarket reseller of airplane engine and airframe components.  NTE engages in the sourcing and reselling of engine and airframe parts to / from MRO facilities, OEMs, airline operators, and leasing companies.  The company is well recognized within the aviation industry as a specialist in the regional airline turboprop engine and airframe segment, in addition to Boeing 737 Classic applications.  Terms of the deal were undisclosed.

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• Meet the demand for persistent, multirole intelligence, surveillance, and reconnaissance (“ISR”) capabilities
• Provide sufficient enabler capability and capacity
• Acquire fifth generation fighter / attack aircraft, while maintaining sufficient inventory capacity
• Modernize long-range strike capabilities; and
• Emphasize modernization and readiness.

Along with the surprise announcement that a new Air Force One presidential transport has been included in the 30-year plan (the first time the Pentagon has mentioned a replacement to the long standing Boeing 747 jet transport), the Pentagon released plans to increase its fleet of armed and long-haul surveillance drones by 45 percent over the next 10 years. The U.S. inventory of UAV’s will increase to 645 aircraft by 2022, from about 445 aircraft in 2013. Even as drones are set to play an ever increasing role in the Pentagon’s future, “smaller and leaner” force, the U.S. military is buying fewer than originally planned due to budget restrictions.

Big Movers

Hexcel Corp. (Up 8.5%) – Shares are up this week amid speculation that Hexcel Corp. will submit a counter bid for British aerospace parts supplier Umeco Plc. Cytec Industries Inc. has already made an offer valued at roughly $439 million, however analysts believe that were Hexcel to counter bid, it would be the likeliest candidate. Umeco’s shares rose as much as 48% on Thursday, following the initial bid.

Embraer SA (Up 2.8%) – Shares rose this week after the Company announced it had entered into a partnership with Boeing targeted to pursue several areas of cooperation, including research, technology, and sustainable aviation biofuels.

Relevant Transactions

L-3 Communications to acquire the assets of Thales Training & Simulation Ltd., a provider of simulation and training systems for military aircraft to government, defense, aerospace, and air travel industries, for $132 million. L-3 plans to integrate the civil aircraft simulation and training business into its link simulation and training organization, within its electronic systems group. The acquired assets are expected to generate sales of approximately $150 million for the 12 months ending December 31, 2012.

Thunderbird, LLC acquired Excaliber Precision Machining LLC, a developer of precision machining and assembly of aerospace parts, for an undisclosed amount. The acquisition will add complimentary machining skills to Thunderbird’s capabilities. Following the change of control, the business will be renamed Excaliber Precision Manufacturing LLC.

Trimble Navigation Limited acquired Gatewing N.V., a Belgian provider of lightweight unmanned aerial vehicles for photogrammetry and rapid terrain mapping applications. The acquisition broadens Trimble’s platforms for surveying solutions. Terms of the deal were not disclosed

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Some emerging thoughts reconceptualizing time measurement are:

• Prototypes of ultra precise timekeeping devices currently exceed the time standards of NIST (National Institute of Standards and Technology).  Further, these clocks are not Cesium-based and therefore, do not measure seconds—the current fundamental unit of measurement. [2]
• Clocks measure duration between events but not the speed between them.  Thus, the “flow of time is subjective, not objective”.[3]
• Correlation among objects may make time redundant and thus irrelevant to describe relative change.  The idea here is “relating physical systems directly to one another rather than to some abstract notion of global time”.[4]

We couldn’t help but think about these developments from a cyber security perspective.  Given digital electronic applications all reference a frequency from a crystallized oscillator, a fundamental change instituted based on any of the time-based development work cited above would not only have a material impact on the rate at which instructions are executed so as to increase computational power but also for digital electronic devices at large.

This suggests in the near future the times to defend, attack, respond, and redirect may be reduced to an almost infinitesimal rate.  With cyber attack moving toward the convergence of electronic hardware, firmware and software, we wonder what out of the box active defense methodologies —predominantly those that maintain human decision making— could be applied ….  in time.

In the federal arena, General Keith Alexander, Director, NSA and Commander of CYBERCOM spoke to the House Committee on Armed Services Subcommittee on Emerging Threats and Capabilities.  General Alexander addressed key cyber threats and challenges facing our nation, as well as the country’s approach to offensive cyber operations.

On the M&A / VC funding front, security and cloud computing remain top priorities, with Dell’s acquisition of once-public SonicWall for over $1 billion, and AMD’s purchase of SeaMicro for $334 million leading the way.

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