Companies Clamber for Homeland Security Cash

With peace on earth looking like a pipe dream, American companies are scrambling to capitalize on an estimated $38 billion of government money earmarked for homeland security next year.

Many sectors -- especially security, software and defense -- stand to benefit. From smaller firms, such as Identix ( IDNX), a maker of facial-recognition and fingerprint technology, to giants like Oracle ( ORCL), scads of companies are strategizing about spending.

The funding may end up being a boon for smaller companies in particular. A provision in the homeland security legislation requires government agencies to find small businesses and new market entrants to help fulfill contracting requests from the private sector.

President Bush in November signed the legislation that would create a new Homeland Security Department, bringing 22 government agencies, including the Immigration and Naturalization Service, Secret Service, Customs Service and Federal Emergency Management Agency, under one umbrella.

The plan, which hasn't yet received full Congressional approval, includes $38 billion for 2003 to combat bioterrorism, secure U.S. borders, improve information-sharing technology within the government and support first responders, such as firefighters, police and emergency medical teams.

Firms Scramble to Cash In on Homeland Security
Wireless Sector Pins Hopes on Shutterbugs
Consumer Debt Looks Set to Keep Soaring
War Optimists May Face Pricey Surprise
Oil Price Outlook Is Clear as Mud
Credit Crunch Could Chew Up Lenders

Identix, for one, is looking to take advantage of the government's initiative to make the nation's borders more secure. The company is aiming to win contracts to implement its biometric offerings -- either fingerprint or face-recognition technology -- on U.S. passports and visas.

In November, the Defense Department selected Identix and defense contractor Northrop Grumman ( NOC) for a second round of testing of its fingerprint technology for an identification card that would allow active-duty military personnel access to buildings and controlled spaces.

Oracle, meanwhile, has testified four times on Capitol Hill since the Sept. 11 attacks about the importance of security technology. Its ties to government go back to its founding 25 years ago, when it set up its first database program for the Central Intelligence Agency. Now, the company is looking to provide software and database solutions for the Homeland Security Department.

"Many of the systems that support border control and transportation systems already run on top of Oracle," said Steven Perkins, senior vice president of Oracle Homeland Security Solutions.

Others are also quickly getting in on the act. Microsoft ( MSFT) named a former Coast Guard official to head a new homeland security division. And Motorola ( MOT) is trying to secure funding to make its radio networks interoperable. That would enable emergency units in different counties and cities to communicate and share data with each other.

Security Spree

Among security firms, L-3 Communications ( LLL), which makes intelligence technologies, has been on an acquisition path. Earlier in the year, it purchased businesses from Northrop Grumman. More recently, it bought International Microwave, a manufacturer of surveillance systems, and took a stake in Millivision, a security systems firm.

Also, OSI Systems ( OSIS), which manufactures metal detectors and X-ray baggage scanners, bought Ancore, an aviation security firm.

Elsewhere, Applied Signal Technology ( APSG), which manufactures eavesdropping equipment, and American Science & Engineering ( ASE), an X-ray technology firm, are looking to benefit.

"With the consolidation of different agencies under one roof, the government is going to have to buy new equipment," said Steven Gish, a research analyst at Roth Capital Partners, adding that the opportunity for investors in various sectors is coming, but that people will have to be patient.

Indeed, some analysts say it may be years before homeland security dollars go to the corporate sector. "Companies will not be able to do vendor booking for most of these projects until at least 2004," said Stephen Murphy, a research analyst at CIBC World Markets.

To be sure, shares of Identix fell 19% on Dec. 16 after it said second-quarter revenue would be lower than previously expected as a result of delays in government spending plans. The firm also cited reduced orders from the government, due to uncertainty about the agencies' roles within the new Homeland Security Department. And it lowered its sales estimates for the remainder of fiscal 2003.

Mixed Response

In fact, since the homeland security bill was signed on Nov. 25, shares have put in a mixed performance. L-3 Communications is ahead 4.1% to $46.25, OSI Systems is up 2.3% to $16.83, Applied Signal Technology is up 5.6% to $11.20 and Northrop Grumman is up 0.9% to $98. Among the decliners, Identix is down 29% to $4.64, Oracle is down 4.5% to $11.06, Microsoft is off 7.2% to $54, Motorola is behind 15% to $8.93 and American Science & Engineering is down 3.1% to $12.45.

Overall, it is unclear how much of a net gain companies will get from the new budget recommendations. "A lot of the spending post-Sept. 11 has been against existing contracts," said Ray Bjorkland, vice president for market intelligence at Federal Sources, a research firm.

Nevertheless, businesses are working on a game plan. "Now is the time for smaller companies to build business-development strategies for how best to approach state and federal governments," said Lorraine Lavet, chief operating officer of AeA, a high-tech trade group.

More from Markets

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Inside Carnival's Mind Blowing New Horizon Cruise Ship (Video)

Jim Cramer: The 10-Year Yield Could Go to 2.75%

Jim Cramer: The 10-Year Yield Could Go to 2.75%

Oil Slumps, Gas Spikes Ahead of Holiday Weekend; Assessing the Chipmakers--ICYMI

Oil Slumps, Gas Spikes Ahead of Holiday Weekend; Assessing the Chipmakers--ICYMI

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Week Ahead: Wall Street Looks to Jobs Report as North Korea Meeting Less Certain

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%

Dow and S&P 500 Decline, Energy Shares Fall as U.S. Crude Oil Slides 4%