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When the Biden Justice Department sued Booz Allen on antitrust grounds over Booz’s acquisition of EverWatch, it sent a signal. The federal contracting class of companies isn’t exempt from an aggressive anti-trust stance. Justice said the acquisition would combine the only two competitors in certain support services for national security. Joining the Federal Drive with Tom Temin with...
When the Biden Justice Department sued Booz Allen on antitrust grounds over Booz’s acquisition of EverWatch, it sent a signal. The federal contracting class of companies isn’t exempt from an aggressive anti-trust stance. Justice said the acquisition would combine the only two competitors in certain support services for national security. Joining the Federal Drive with Tom Temin with the industry’s reaction, the CEO of the Professional Services Council, David Berteau.
Tom Temin: David, does this feel like kind of new ground to you guys?
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David Berteau: It does, Tom, you know, there were a lot of signals from this. In fact, it was a year ago, July 9 of 2021.
But it was a year ago that the executive order on competition was released by the White House and it had a heavy focus on too much consolidation going on. Now, much of that executive order was focused on the commercial marketplace, not on the government contracting marketplace. In fact, it was only a small part of it that focused on DoD (Department of Defense) and focused on government contractors. Now, a year later, we have the Justice Department filing lawsuit to block an acquisition, that on its face, seems to be a very small issue, because it’s only a single contract. And it’s a contract. It’s a classified contract with the National Security Agency. So there’s not a lot that we can say publicly about the contract, or at least not a lot that that we can see and report on. But this is to us, and I’ve spoken with many mergers and acquisition lawyers around town since the lawsuit was filed on the 29th of June. It’s an unprecedented action by the Justice Department to define competition, not based upon a marketplace, but based upon a single contract. And it’s a contract that for which the solicitation hasn’t even been issued yet. So it’s not an active, ongoing contract. So to accuse Booz of having bought its only viable competitor seems to us to be quite a stretch and an unprecedented action. Where does this go, then?
Tom Temin: It’s unclear what specific services Justice says would have no more competition with the merger of these two companies. But could this have been a warning from inside the intelligence community that is going to be letting this contract that’s figuring we’re only going to get two competitors to bid? And now look what’s happening.
David Berteau: Well, one of the questions to which we’re not sure we know the answer yet is whether or not the Justice Department even talked to the agency about this order before they filed the lawsuit. And Booz Allen has indicated in its press statements that it intends to challenge the issue. And so we’ll be seeing a court case flowing from this all indication so far. But in fact, if the agency was not even consulted, as part of the process, it really raises some very serious questions about both the intentions of the administration and the way in which they’re following those intentions.
Tom Temin: Because they have challenged some of the big aerospace mergers in the past.
David Berteau: Absolutely. The most recent of course, was Lockheed Martin’s bid to acquire Aerojet. And that ended up in a lawsuit as well. The pursuit was dropped as a result, that case did not go to court. In fact, most of the time when the Justice Department filed suit to block a merger or an acquisition, a merger or acquisition falls apart, nobody wants to go fight it in court. That doesn’t seem to be the case this time. But this is a services contract. And it’s not a very large services contract. My understanding is it’s fewer than 100 of full time equivalent personnel involved in the process. And so it’s it’s kind of a strange one to pick as the precedent setting activity here. I don’t know what the administration’s interests are here. So far, there have been no comments from the Defense Department whatsoever on this. And that’s a bit of a surprise as well, because their competition report issued last February, really did focus as its primary recommendation, reducing excessive consolidation in the industry, even though the report itself said that wasn’t a big problem.
Tom Temin: And this was only Booz’s bid to buy a piece of a larger company EC Defense Holdings, and this is for NSA was going to issue the solicitation for operational modeling and simulation services for its signals intelligence data missions. It almost makes you think that if Booz were to acquire this everwatch, 10 other companies would say, golly, now there’s only one bidder, let’s jump in.
David Berteau: It’s certainly the possibility. I mean, competition is generated not by the government, as much as it is by the existence of companies who want to bid on this sort of thing. The solicitation could well generate interest from quite a number of people. In fact, my suspicion is all this attention has increased the visibility of this contract well beyond what it normally would have had if it were coming up for re-compete. But the bigger question is, what kind of precedent does this set? What comes next? Right, because if an individual contract can be the basis for an antitrust action, then where’s the limit to that that I mean, there’s, you know, millions or contract actions every year taken by the federal government. Most of them in the services business, and so there are huge questions that we have as to where does this is go.
Tom Temin: Maybe the next one will be a task order. We’re speaking with David Berteau, president and CEO of the Professional Services Council. And on this theme, there is the idea of a study. This is part of one of the I think Defense Authorization Acts to look at DoD and the way it finances contracts. And there’s some big changes that could come there, too. Tell us what you’re seeing.
David Berteau: So back in June, the Defense Department through its Defense Federal Acquisition Regulation Office DFAR Office in DoD issued an RFI 30 days for comments from industry to provide insight and input into DoD as it undertakes a study of contract financing. That contract financing includes, of course, payments in advance of delivery progress payments, but it also includes a host of other issues and practices associated with how the government pays its bills for its contractors. This stems from an aborted request back in a proposal back in 2018, by DoD to cut dramatically progress payments to 50%. It generated an outcry not only from industry, PSC included in that process, but also from the Congress. And it was ultimately that proposal was dropped. A GAO study was requested by an NDAA, in fact that study was issued in 2019. And it had only one recommendation, it recommended the DoD undertake a full study of contract financing. In fact, it’s almost 40 years since the last such study. The Defense Finance and Investment Review, the DFAIR study was done in 1984, the report issued in 1985. I happen to have been privileged to work on it. And I can tell you that it’s a bit out of date based upon today’s finance world. In fact, the words free cash flow don’t even appear in the report whatsoever. And it drives publicly traded companies today. So it’s certainly time for a study. And the DoD has only given industry though 30 days to provide comments. PSC will be submitting comments next week, when they’re due. And then we’re going to track this study very, very carefully. It’s a very important set of questions, though. How does the government fund the industry that relies on the government for its market?
Tom Temin: Right, I think industry and by the way, you must be the only one alive, who remembers 84/85 study. But industry cares a lot about this. Because if the somehow it were to be established, the DoD only pays for things after final delivery, then contractors would have to carry tremendous costs on services contracts, or even development contracts of products until the very end.
David Berteau: Well, it’s true. And if you look back at the previous topic, we were talking about if in fact, the government is going to intervene in a company’s ability to acquire other companies and grow through acquisitions as opposed to grow through organically, through additional work, the government has to recognize that it is in fact the marketplace, right? It’s not as if you can create competition for more than what the government is going to be willing to buy. And so in the end, how the government finances these companies is really critical, because they can’t compete in the financial marketplace, the same way a commercial company does. They can’t, if they can’t be acquiring, if they can’t be investing in your business, then the government has to finance you. And it becomes really critical for all of industry as to how the government’s going to play this out. They give no clue in the RFI as to what they’re thinking they only asked a series of questions about financial health, about access to capital, about paying contractors and subcontractors about the impact on small businesses, and so on.
Tom Temin: And on this antitrust idea, I can’t help, it’s probably a stretch, but Health and Human Services, awards regional contracts exclusively to single suppliers of baby formula under the public assistance programs. And therefore we have a baby shortage formula from lack of competitors. And so it makes you kind of wonder the government can be of two minds sometimes in different domains.
David Berteau: Well, yeah, consistency is certainly something that we would like to see because it makes it easier for companies to plan and invest in their workforce and then the technological capabilities, etc. I think that the rationalizing all of these government actions is something that’s really critical, and the left hand does have to know what the right hand is doing and they have to be connected to the same set of objectives.
Tom Temin: David Berteau is president and CEO of the Professional Services Council. Thanks so much for this insight.
David Berteau: You’re welcome, Tom. Look forward to this to be continued later on.