On February 2nd, Defense Secretary Ash Carter announced The Pentagon’s proposal for the fiscal year 2017 budget. The budget, which is the first prepared under Carter, will propose more spending on cyber and high-tech weapon capabilities, increased attention on research and development (R&D) and a larger presence of U.S. forces in Europe.
The Pentagon’s 2017 budget request totals $583.0 billion, which is $10.0 billion more than Congress approved for this year. The increase in spending marks a major inflection point for the department. “In this budget we’re taking the long view,” Carter said. “We have to. Even as we fight today’s fights, we must be prepared for the fights that might come 10, 20, or 30 years down the road.”
The Pentagon plans to boost its spending on the war against the Islamic State by roughly 50 percent from last year, or $7.5 billion. The plan also includes investment in projects related to the DoD Strategic Capabilities Office (SCO), which Carter created in 2012 when he was a deputy defense secretary. His reason for creating this strategic office was to “help the department reimagine existing DoD, intelligence community and commercial systems by giving them new roles and game-changing capabilities.” In order to act on his vision, the 2017 budget requests for $71.4 billion for research and development. Such SCO efforts include projects involving advanced navigation, swarming autonomous vehicles and an arsenal plane that combines forward sensor and targeting nodes to legacy aircraft, essentially creating wholly new capabilities. In addition, the budget request also drives smart and essential technological innovation by utilizing undersea capabilities through an $8.1 billion investment in 2017 and more than $40.0 billion over the next five years.
To support the European Reassurance Initiative, The Pentagon requested $3.4 billion in 2017, quadrupling the amount requested for 2016 in order to fund rotational U.S. forces in Europe, training and exercising with allies and prepositioned fighting gear and supporting infrastructure.
On the Cyber front, Carter offered few details on plans, but did say the department would ask for $7.0 billion in 2017 and nearly $35.0 billion over the next five years. “This will help further improve DoD’s network defenses, build more training ranges for our cyber warriors, and develop cyber tools and infrastructure needed to provide offensive cyber options.”
The Pentagon’s request to increase spending follows a series of positive events beginning with the President’s Budget proposal in early February and the 2015 Bipartisan Budget Act (BBA) that was approved in November. The combination of increased spending requests and a clearer budget visibility, with strong public company valuations and an active government services M&A environment will continue to fuel the upward momentum in the sector. Companies with unique capabilities in high priority end markets will benefit from these strategic initiatives laid out by the Defense Secretary. In addition, firms catering to the DoD in the high priority areas of cyber security, C4ISR and defense electronics will be ahead of their less-focused equals when it comes time for future contract solicitations. For companies that lack certain capabilities, building an M&A strategy focused on identifying and acquiring innovative technologies/solutions is a logical approach to remain relevant in a competitive environment. As a result of the government sector’s positive momentum over the past year, we believe M&A will remain active over the next 12 to 18 months, especially in the high priority markets with private equity sponsors and strategic buyers focusing their M&A efforts and targeting government contractors with differentiated capabilities.