By Calvin Biesecker

Lockheed Martin [LMT] yesterday said it plans to sell two of its business units, one to avoid organizational conflicts of interest with work the company does with the Defense Department and the other because its customer’s needs don’t jibe with the company’s long-term strategy.

The Enterprise Integration Group (EIG) and Pacific Architects and Engineers, Inc. (PAE), the two units up for sale, are part of the Information Systems & Global Solutions (IS&GS) business area. The two units combined account for about 3 percent of Lockheed Martin’s annual sales and less than 3 percent of its operating profits.

EIG, which provides independent systems engineering and integration products and services, is being sold to avoid organizational conflicts of interest (OCI) stemming from new Pentagon rules aimed at preventing a defense contractor from advising one side of a procurement while competing for, or doing, the work on the other.

The Pentagon published its proposed rule on OCI in April and is accepting public comments on it until June 21 (Defense Daily, April 27). Other firms are also scrutinizing their portfolios to see if they’ll need to shed assets to comply with the OCI rules. Last fall, after Congress passed legislation that prompted DoD to rewrite the rules governing conflicts of interest, Northrop Grumman [NOC] sold off its advisory services business (Defense Daily, Nov. 10, 2009).

"Through EIG, Lockheed Martin provides both systems and services to a broad range of government customers, and this has led to concerns about the potential for conflicting interests," Christopher Kubasik, Lockheed Martin’s president and chief operating officer, said in a statement. "Divesting the company will free it from the OCI concerns and position it to grow."

Lockheed Martin acquired PAE in 2006 for just over $600 million. The business unit’s largest customer is the State Department. It provides peacekeeping, infrastructure support and disaster relief services.

When it acquired PAE, Lockheed Martin believed it could bring its information technology and systems integration services to a new set of customers. However, Kubasik said, "In the current market customers are seeking a different mix of services that do not fit with our strategy."

For example, Kubasik said that some customers want infrastructure support to be combined with facility construction and the provision of physical security, services that Lockheed Martin doesn’t directly supply and which are not in its long-term strategy.

"EIG and PAE are both solid businesses with good growth prospects, but their growth and ultimate long-term value are currently being constrained by their affiliation with Lockheed Martin," Robert Stevens, Lockheed Martin’s chairman and CEO, said in a statement.

Lockheed Martin also said it is realigning two other business units, Readiness & Stability Operations (RSO) and Savi Technology, with the Simulation, Training and Support unit under Electronic Systems. The Electronic Systems sector is part of Lockheed Martin’s IS&GS area, which has been renamed from Information Systems & Global Services to better reflect its focus.

RSO provides global services in logistics, mission operations support and readiness, engineering support, and integration solutions. Savi provides wireless tracking services and solutions for managing assets, inventory and shipments. The newly aligned businesses will be named Global Training and Logistics.

Lockheed Martin is using Stone Key Partners and JP Morgan as financial advisers on the EIG sale and Evercore Partners for the PAE sale.