Anita Antenucci: Six OCI trends to watch in 2010
Monday, January 4th, 2010 by Lisa Singh | No Comments
Over the course of 2009, organizational conflict of interest dominated industry headlines. How the issue will play out in 2010 is now anybody’s guess. But this much is clear. “As we head into 2010, the level of avoidance — as opposed to simply mitigation — of OCI will be mandated at a much higher level,” says Anita Antenucci, managing director at Houlihan Lokey. Not surprisingly, government contractors are being exceptionally cautious. But where caution is warranted, so is optimism. Here, Antenucci offers six OCI trends to watch — and possible ways companies can grow amid a definition that’s still taking shape.
1.) OCI’s definition will vary from agency to agency. “What the policies will ultimately look like will diverge agency to agency,” says Antenucci. “DARPA has long been strict that the companies it relies on for support services are not allowed to bid to be funded by DARPA for the development of their technology,” she says. NSA, on the other hand, has historically been somewhat more tolerant of mitigation strategies.
2.) SETA is an obvious place to look but not the only place. “You have to look a little bit more extensively [than SETA],” says Antenucci. “There are parts of the advisory role that are acceptable and parts that aren’t … SETA is somewhat too specific to use to define what is not,” she says.
3.) The adoption of a nuanced strategy will be hotly debated. Some companies will simply divest themselves of anything that whiffs of OCI. Others will adopt a more nuanced strategy, avoiding OCI in certain agencies by being an advisor in one realm, a vendor in others. “That’s a strategy we’ll have a lot of debate about,” predicts Antenucci. “We are seeing this in our own business as well,” she adds. “People want an independent investment banker, they don’t want one that trades in and holds securities in the same companies that it’s advising a client on how to deal with. The government is simply looking for the same thing, so this is an economy-wide kind of approach.”
4.) Avoidance makes the most sense today. “Imagine you have a company that works for 10 customers and it advises five of them, then it goes to make an acquisition or win a new IDIQ contract that’s across several agencies,” says Antenucci. “It becomes difficult,” she adds, “to efficiently grow when you constantly have to monitor that map … it becomes a not-very-viable business strategy to try to grow on both sides of that fence.” Antenucci adds: “I think that in an uncertain government policy environment, avoidance makes the greatest amount of sense today.”
5.) OCI will present an opportunity to explore options. “There is great opportunity for companies on both sides of this fence to explore what is less valuable to them — and what is less valuable to someone else — and either arrange trades or simply take advantage of a strong M&A market to divest themselves of businesses that will be harder for them to grow in this environment and to acquire businesses that are more consistent with the strategy they’re adopting,” says Antenucci. “That may sound self-serving since I am an investment banker,” she adds, “but the reality is that this is what these companies are doing.”
6.) Private equity will continue to assert their role. “They’ve seen an investment opportunity where the traditional big defense buyers are unable to acquire good strong companies that are on the advisor side of the fence because of OCI, they are going to build good strong companies on the advisor side,” says Antenucci. TASC was acquired by two private equity firms, KKR and General Atlantic; Booz Allen & Company by the Carlyle Group. Schafer Corporation, meanwhile, was backed by Metalmark Capital in December of 2008, and is an active acquirer. “There are a handful of others, which goes to show you the degree to which private equity has anticipated — and built — growth strategies for companies around being on the advisor’s side of this fence,” says Antenucci.
How do you predict OCI will play out in 2010? Comment here.
Industry expert Greg Baroni (right) sees the purchase as further evidence of the importance of serving the government contracting market “as focused vertical.” “For each of the parties involved in the transaction, it’s a big win,” says Baroni, who serves as chairman and CEO of 
For anyone who cares about organizational conflict of interest, take note: Today, the Defense Department will hold an open public comment session. The forum is an opportunity for industry and other interested parties to provide input on new rules spurred by the Weapon System Acquisition Reform Act of 2009. But there’s a catch. “Unfortunately DOD hasn’t yet provided [the opportunity] to review their proposed rules,” says David Berteau, senior adviser and director of the CSIS Defense-Industrial Initiatives Group. That means any comments will be abstract rather than on any proposed change the DoD might be considering. “That puts everybody at a disadvantage,” adds Berteau. Here Berteau shares more details of the Dec. 8 event, and how industry can carry on the OCI conversation with government. 
John Hillen 
