Computer-based simulation industry braces for consolidation

Feb. 1, 1998
ORLANDO, Fla. - Will the precedent-setting mergers and consolidations in the U.S. aerospace and defense industry extend into the simulation and training market? At least one industry executive believes it will - and his company already has been responsible for some of that.

By J.R. Wilson

ORLANDO, Fla. - Will the precedent-setting mergers and consolidations in the U.S. aerospace and defense industry extend into the simulation and training market? At least one industry executive believes it will - and his company already has been responsible for some of that.

"I think the simulation and training industry consolidation lags the defense side by a year or so and there will be future consolidation," predicts Steve Buzzard, vice president of business development for Lockheed Martin Information Systems in Daytona Beach, Fla. "You`ll also have companies deciding whether to be full-up systems providers or find a niche."

Several big names already are gone: GE Aerospace (CompuScene) is now part of Lockheed Martin, as is Northrop Grumman; Hughes Training belongs to Raytheon; Harris is submerged into Concurrent Computer. And other major changes seem to be inevitable.

For example, Ed McCracken`s announcement in October that he was resigning as chairman of Silicon Graphics - a post he assumed only two years after the company`s 1982 formation - combined with an announced 10 percent cut in the SGI workforce, an erratic, loss-marred financial performance the past two years, two simultaneous shareholder lawsuits filed in December, and the loss of other senior executives to further fuel speculation SGI may be on track to a merger. Some in the industry speculate that may be the only way to save the $3.7 billion corporation from an increasingly limited niche future.

While some companies insist they are neither targets nor targeting for mergers and a few more openly welcome suitors, most of those contacted by Military & Aerospace Electronics have assumed the role of aggressor.

The greatest merger targets may be companies that produced the big systems that dominated the market in the 1980s. With a growing shortage of trained engineers and programmers, this is partly a question of being able to maintain proficiency and critical mass to address legacy systems while still committing people and dollars to new technologies.

"Because of some of these legacy considerations, a number of customers were skeptical that any of us would continue to support them as needed," says Rick Maule, vice president-general manager of desktop graphics at Evans & Sutherland in Salt Lake City. "But we have demonstrated that support while still keeping our announced schedule of developing and fielding new technologies. What the customers really need is somebody that will still be here in five years, pumping out upgrades as needed and providing new technologies and products.

"We live in a world where investments in and acquisitions of technologies and channels is a way of life," Maule continues. "Certainly anybody in the market who doesn`t consider and evaluate that on a regular basis is being shortsighted."

But Maule says he believes the forces that led to a major consolidation of big program prime contractors as the Department of Defense itself restructured may not be so prevalent in the training and simulation community.

"That kind of consolidation is very likely among extremely vertical businesses, but if an industry is more broadly based, consolidation is difficult without helping one end of the company while hurting another," he says. "I think the whole industry learned that is not a good way to maximize the value of the acquisition. The classic example of that was Singer and the breakup of its parts, which were never again equal to the original whole."

Some say they believe a consolidation may be forced by too many small companies competing for an increasingly competitive market.

"The simulation market now is very fragmented, with too many choices available," says Bruce Caridi, marketing vice president at Paradigm Simulation Inc. in Dallas. "We formed the Solution Group to try to get synergy and momentum short of merging everyone together."

Others, however, see that same scenario leading to less, rather than more, consolidation. While acknowledging that officials at MultiGen Inc. of San Jose, Calif., are looking for acquisitions, for example, marketing vice president Jay Kidd says he sees a new kind of integration for the simulation industry.

"There still may be a shakeout caused by competition and there will be some mergers, but they won`t be driven by the same motives that drove the big mergers," he says. "The ability to perform is so high in this industry and the ability to team temporarily is growing, so I think the industry will move to a mode that is based on the transaction - and the transactions will get larger."

Another change being contemplated by DOD officials - the so-called "pay-per-hour" approach being implemented in Great Britain, among others - may lead some companies to opt out. Under this scheme, the government does not buy simulators and training systems, but "rents" their use, as needed, from contractors.

But U.S. government officials have won little support for their view of this concept. Unlike the U.K., the U.S. is not offering the financial stability of multi-year usage guarantees to contractors. This is particularly onerous to a defense community that remembers all too well similar "partnerships" in the past that left industry holding an expensive empty bag.

"As the scope of risk goes up, people become more and more reluctant to just trust the government," Maule says. "But we`re early enough in this cycle that plenty of learning will go on during the next five years."

Click here to enlarge image

High-performance simulators such as the Evans & Sutherland Harmony image generator, pictured above, are giving way to lower-cost hardware and software from companies such as Microsoft, Intel, Silicon Graphics, and Intergraph. Today`s fast processors are yielding high-resolution imagery not possible with the commercial equipment of a few years ago.

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