Helping defense firms go civilian Two state programs finance transition for promising companies

February 09, 1997|By Greg Schneider | Greg Schneider,SUN STAFF

Whenever a resupply ship lashes up with a Navy vessel on the high seas and starts delivering fuel or boxes of corned beef hash, it uses the kind of equipment Dale Spencer and his 40 workers make at their shop in Stevensville.

Their cargo slings, flexible hose fittings and high-pressure valves keep supplies and fuel flowing between two moving vessels on a heaving ocean.

But the company, Hydrasearch Co. and Technical Products Inc., has felt a little seasick for the last few years. The Navy isn't slinging so much hash now that the Pentagon budget is at a prolonged ebb.

Revenues are flat even though Hydrasearch has bought a competitor and doubled its product line, said Spencer, president and chief executive officer of the privately held company.

What it needs, he said, are commercial markets to relieve its 98 percent dependency on federal work. But he doesn't know where to turn.

That's where the state's Strategic Assistance Fund comes in. With help from the fund, Hydrasearch hired a consultant in July to help figure out how to find commercial business.

Now the consultant is helping Hydrasearch make contact with petrochemical manufacturers and other industries in a search of new markets.

The Strategic Assistance Fund is one of two programs aimed at helping Maryland defense contractors make the transition from ever less-certain government work to the commercial marketplace. The other invests in companies that are trying to find ways to apply military technology to health care.

Combined with broader efforts to retrain workers and encourage new product development, the state is stepping in to provide some footing -- often with federal money -- where the end of the Cold War has rotted out the floor.

"These companies have been able to sell technology directly to the government, almost for whatever it cost to develop it. They haven't had to worry about profit points, product development and so on," said Marsha Schachtel, who works with defense companies for the Maryland Department of Business and Economic Development.

Maryland, Schachtel pointed out, is one of the most defense-dependent states in the country. More than 6 percent of the state work force is in defense-related jobs, she said.

What's more, 85 percent of the research and development performed by Maryland companies is federally financed, she said. That's in contrast to other states with a hefty technology industry, such as California or Massachusetts, where private companies pay for much of the research and development. And the government is spending less and less on such activities.

Vulnerable firms

The result is that Maryland businesses, especially small defense companies such as Hydrasearch, are vulnerable to federal downsizing that has seen the Pentagon's budget for new hardware shrink more than 70 percent over the last few years.

The state began surveying the health of defense contractors in the early 1990s. While Schachtel said she has never gotten precise numbers on the size of the state's defense industry or the scope of its woes, the surveys showed that contractors were frustrated about the difficulty of finding commercial markets.

Several years ago, the Pentagon established a Technology Reinvestment Program aimed at helping companies find commercial uses for military hardware. Maryland won more than $5.5 million in funds from that program, added a few hundred thousand dollars and formed the Maryland Health Care Product Development Corp.

Aimed at capitalizing on the vast network of medical research facilities in the state, the nonprofit corporation looks for investments in defense companies that are trying to apply their technology to health care products.

After almost two years of scrutinizing more than 150 companies, the MHCPDC has made just two grants-- totaling $800,000.

That low number reflects not only the agency's tough due-diligence standards -- which require, for instance, that the technology be less than 18 months away from the marketplace -- but also the steep climb these little companies face in going commercial.

"The world out there talks a good game about new mousetraps, but when you walk up there and you've got this new mousetrap in your grubby little hand often it's very hard to get their attention. You're a very small voice in this commercial cacophony going on out there. Everyone's selling," said Harry Letaw Jr., chairman and chief executive officer of Essex Corp. in Columbia.

First investment

Essex was the first investment the MHCPDC made, a $400,000 private placement in April. The company has long worked on electronic imaging for the National Security Agency and other government agencies, and now is trying to market a laser-based image processor that it says could revolutionize magnetic resonance imaging (MRI) at hospitals.

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