I have been following KEYW for a few months. Their field, cybersecurity, would seem to be a part of the defense budget that will be spared the cuts that I believe will be made to the overall defense budget. What I would like to know from some of you is the nature of the talent pool in the cybersecurity industry? For instance, if a company wants to grow their cybersecurity division is it easy or difficult to recruit/train someone with the required security clearances? Can value be found in the company's existing talent pool besides their ability to win contracts? Would a company like KEYW, worth a couple of hundred million dollars, with competitors whose market caps are in the billions, be a worthwhile acquisition to those competitors if they were of a mind to grow in that field? One more question, is the trend for the government to bring those types of workers into the ranks of the DOD or to continue to farm that work out to private contractors?
One thing to understand about KEYW is that they do not grow their business (or talent) organically. As was the case with Essex Corporation, all of the growth comes about as a result of acquisitions. The big difference between Essex and KEYW though is the fact that Essex had a large prime contract (as a result of their acquisition of Sensys Development Labs), while KEYW has none.
KEYW runs its organization almost like a franchise. Each of their acquisitions run independently, and there is no real infrastructure to support the award of a large contract for the company. For example, if KEYW had been awarded the AMBIANCE program, they never would have been able to staff it properly without impacting all of their other program work that came in with the various companies that were acquired.
There are major shifts in defense spending on the horizon. While cybersecurity spending will see some moderate growth, many other programs will be cut. The big integrators are much better positioned to win this type of work because of 1) their large talent pool, 2) their ability to field innovative solutions, and 3) because they have a proven track record with the DoD and IC customers. KEYW has none of these attributes and in a time of uncertainty, people tend to gravitate toward companies who offer stability.
KEYW is trading at approximately 20% below their IPO price, which, to the layman, says that they are worth 20% less than what they were when the stock was first offered to the market. They have spent tons of cash on acquisitions but have not been able to demonstrate any ability to win a large program or grow organically in the programs that they did get through their various purchases. The claim they make about their agility does not seem to be a valid one.
KEYW is in a very difficult position. They cannot compete for the small programs for which there are set-asides, and they are in a very crowded field when it comes to the larger ones. The only thing that they can offer now is to join up with other primes as a subcontractor on some of the new programs coming out of the various agencies. And given the overheated market we are seeing in this space, KEYW will find itself having to reduce labor rates in order to differentiate themselves against a very crowded field of companies who offer significantly more depth and ability to respond to customer requirements.
Now, as far as being a candidate for acquisition themselves, that has been the goal of Len Moodispaw all along. He started KEYW hoping to replicate the luck he had at Essex. Again, the big difference is that Essex had a large prime contract, which drove up the valuation. KEYW lacks the big contract that would be an attractive element to a potential buyer. If you have followed what Northrop did with the Essex purchase, you would know that all of the small contracts that came in outside of the large contract have basically either ended or have been sold off at a loss. Essex facilities are being closed and the only thing really remaining is their large effort in Annapolis Junction. If a large company were interested in buying KEYW, it would be at an almost fire sale price.
That is a xcellant reply..I believe at some point in time it will be acquired but just my opinion and with the loss of the contract, it may take longer than xpected. It is their intent to be acquired and make the same killing he did with his other company as u noted. Once again thank u for an xcellant analysis.