Two giants form alliance for government systems


Defense giant Lockheed Martin Corp. and software giant Microsoft Corp. announced plans yesterday for a strategic alliance, banking that their shared expertise can create a new giant in the business of designing and building computer systems for government agencies.

No money is to change hands, and neither company is to get access to the other's proprietary technology.

But both companies gain footing in a business on the fringes of what each does best, analysts said.

Bethesda-based Lockheed Martin benefits from Microsoft's software and Internet systems expertise. And Microsoft, of Redmond, Wash., gains a partner skilled at turning complex systems into something the government wants.

Given each company's formidable stature, analysts said the combined enterprise could immediately become a force in the crowded federal information technology business.

"If these companies want legitimacy and some credibility in that business, this could do it. They can really use each other," said Greg Vogel, a technology analyst for Banc of America Securities. "I imagine this would be pretty beneficial for both of them."

The new foray into information technology evolved from a relationship the two companies formed while working on Pentagon projects.

They are developing a warfare system for the next generation aircraft carrier, upgrading the computer systems of the North American Air Defense complex in Colorado and designing the Pentagon's classified e-mail network.

But the federal information technology market is mostly new ground.

Microsoft has long wanted to branch out from its desktop software specialty into the more tailored systems-design business, analysts said yesterday. But it lacks the staff and experience.

Lockheed Martin has been developing a government technology business to augment weakening sales of its aircraft, satellites, rockets and other core products. But most of its expertise is in weapons or other defense-related products, not the office-based systems it hopes to build with Microsoft.

Neither company said yesterday what federal projects the new venture will pursue, but a Lockheed Martin spokesman said a joint team of new-business specialists is looking for opportunities.

"We've been working together on a number of projects, and it sort of came to us one day: 'Gee, maybe we could link up as a formal alliance,' " said Peter Harrigan, a Lockheed Martin spokesman.

Northrop Grumman Corp. already has an entire division devoted to the effort and has built computer systems for the General Services Administration, the Internal Revenue Service, the Defense Department and other agencies. Its Logicon unit posted $1.7 billion in sales last year, more than 20 percent of the corporation's revenue for the year.

"Information technology is a pretty low-margin business - probably in the high single digits, at best," said Robert Friedman, a defense analyst for Standard & Poor's Equity Group. "I don't see what's so attractive about that business. But with Lockheed Martin and Microsoft working together, it will be interesting to see where it goes."

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