General Dynamics (NYSE:GD) has done some unexpected things in recent months. Naming an admiral as its CEO, for example. Developing a robot navy. But both of these actions were broadly in line with its raison d'etre: defense contracting.
In contrast, last week's news of its $225 million bid to acquire ViPS from WebMD (NASDAQ:WBMD) owner HLTH Corp. (NASDAQ:HLTH) did not appear at all consistent with a "war" company. Out of the blue, it seemed, a maker of machines and munitions that maul and maim took a turn for the Hippocratic by buying itself a health-care company.
But let me show you how it all fits together.
"Blue" no more ...
It took several days for the reasoning to become clear, but I think this morning's announcement helps explain why General D broke ranks with military cohorts like Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), and Raytheon Co. (NYSE:RTN), and entered corporate med school. The General has been awarded $7.4 million worth of work from the Defense Medical Logistics Standard Support Wholesale Program: providing IT services to support medical procurement, catalog management, and related supply chain operations.
Digging into the General's most recent 10-K filing with the SEC, it turns out that health care isn't entirely foreign to the company's mission. I found one brief mention of how the firm's Information Systems and Technology division "supports the Army's military health-care IT mission, helping ensure continuity of care for injured soldiers by providing accurate, timely information to medical staff both in the field and at treatment facilities." And seeing as ViPS also works on "health care data management, analytics, decision-support and process automation solutions," I see a connection here.
But still strange
Still, you have to admit that buying an entire division from another company seems like an awful lot of trouble to go to, just to win a piddling seven mil in contracts. Seems to me that, while we've found a tenuous connection between last week's news and this week's, there must be more to General D's latest maneuver. I think I've found it.
With rumors abounding that defense spending may come under pressure under the next presidential administration, General D may simply be looking for a safe port in the storm. ViPS fits the bill. For one thing, the price is not excessive. The General will pay a little under 11 times operating profit for ViPS, whereas its own shares sell for just a little more than 10 times. And whereas the General earns a 12% operating margin on its revenue, ViPS earns better than 20%. Mundane as it may sound, I believe General D is quite simply following the money.
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