The "war on terror" has brought the homeland security industry
into the financial limelight. Screening technologies, biometric
identification, "smart" detectors, network security, background and
database checking, among other things, are in high demand as the US
government strives to boost transportation and border security and
improve intelligence gathering.
Security companies have scooped billions of federal dollars in
contracts and seen company stocks skyrocket. As a result, a number
of new stock indices and investment banks catering to the security
sector have appeared on the scene. But industry analysts wonder just
how many new security companies the market can sustain, especially
with the bulk of the contracts coming from the federal government.
"Since 9/11, hundreds of new companies have appeared," says Jack
Mallon, founder and principal of Mallon Associates, an investment
bank focusing on the security sector. "But with strong competition
and a highly fragmented market, consolidation is inevitable."
On average, homeland security stocks tripled in value within
three months of the Sept. 11 attacks, says equity analyst Brian
Ruttenbur of Morgan Keegan, an investment firm, although growth has
since slowed significantly. One example is InVision Technologies, a
California company that installs sophisticated explosive detectors
in major US airports. Four months after 9/11, InVision (now owned by
GE) saw its stock grow an unprecedented 2,000 percent. Since then,
the company has secured billions of federal dollars in contracts,
making it one of the single largest recipients of homeland security
Stock indices focusing on security companies, such as the Spade
Defense index or the SecurityStockWatch index, claim a close to 100
percent increase over the past four and five years, respectively -
clearly outstripping the Dow Jones and Nasdaq.
Industry watchers are convinced that security is a lucrative
issue here to stay, as made evident by the Department of Homeland
Security's (DHS) steadily increasing budget. (For fiscal year 2007,
President Bush has asked for a record $42.7 billion for the DHS -
almost $2 billion more than 2006.)
The hope of securing more government contracts has persuaded some
defense contractors to branch out. For instance, Boeing, Lockheed
Martin, and Raytheon have dedicated corporate divisions to homeland
security or acquired smaller companies in the sector.
War and associated defense spending is "cyclical," says Mr.
Ruttenbur. In contrast, "spending on homeland security grows
continuously as the threat persists," he says. Ruttenbur expects the
DHS's budget to increase by 5 to 7 percent annually over the next 10
According to the Federal Procurement Database, the DHS has
awarded at least $15 billion in contracts to the private sector over
the past 12 months. …