Title: Is DOGE the Real Deal for Government Services Companies? Let's Explore
Title: Is DOGE the Real Deal for Government Services Companies? Let's Explore
In the limelight lately is the "Department of Government Efficiency," a proposed entity set to make a splash in the incoming Presidential administration. Known colloquially as "DOGE," this organization is led by Elon Musk and Vivek Ramaswamy, with the moniker serving as a clever nod to a well-known cryptocurrency both gentlemen support.
Historically, the term "Doge" was associated with title of the chief magistrate in city-states such as Venice and Genoa during medieval times, serving as a decisive judge for cases presented before a court of justice. However, in this context, DOGE is intended to act as an advisory commission rather than a full-fledged department like Defense or Treasury, which would require a piece of legislation from Congress.
Initially, Musk and Ramaswamy put forth lofty expectations. Musk proposed trimming solely the federal budget by $2 trillion, while Ramaswamy hinted at potential elimination of entire departments and a reduction of up to 75% of the Federal workforce. To get a sense for where these numbers are derived from, the 2024 federal budget yielded a staggering potential annual deficit of $1.9 trillion and the Congressional Budget Office expected it to balloon even further to $2.6 trillion by 2034.
Reducing government spending through blue-ribbon advisory commissions is nothing new. Previous examples include Theodore Roosevelt's initiatives and Ronald Reagan's Grace Commission, which was charged with paring down federal spending. Although the Grace Commission’s efforts were fruitful on paper, unfortunately, little of the findings were ever enacted due to policy disputes or bureaucratic resistance.
Fast forwarding to recent times, the financial markets bet on the potential success of DOGE, causing a decline of up to 31% in stock prices for companies such as Booz Allen Hamilton, Amentum, CACI, SAIC, Leidos, V2X, Parsons, and KBR. These companies provide various technical, engineering, or IT services to federal projects, and many possess the necessary clearances to work on classified projects.
This decline translated into second-order effects as KBR recently became a target of activist investor Irenic Capital, which pushed for a separation between government services and private sector services units due to the slower growth rate of the former. The investor estimated that shareholder value could be improved by 50% with such a division.
However, despite the potential cost savings, companies such as X, formerly known as Twitter, have experienced their own challenges. Musk led the takeover of Twitter in 2022, reducing the workforce from 8,000 to 1,500—a drastic reduction. Although some feared the platform would crumble, X continues to operate albeit in a scaled-down version.
This period has ushered in a shift in the tech sector, transforming the mindset from competition for talent to managing a surplus. Now, companies such as Meta, Google, Amazon, Microsoft, and Apple have shed over 500,000 jobs during this timeframe.
The DOGE initiative is an intricate web of promises and expectations, facing legislative hurdles and public support challenges in their pursuit of slashing government spending. Although the means of measuring spending reductions have yet to be determined, and there is no clarity on whether alternate spending will offset stakeholder backlash, the very specter of reduced government spending has caused ripples across various sectors of the financial markets.
- Elon Musk and Vivek Ramaswamy, the leaders of the proposed Department of Government Efficiency nicknamed DOGE, share a common interest in the Dogecoin cryptocurrency.
- Leidos, a company providing technological services to federal projects, experienced a decline in its stock price due to the financial markets' bets on the potential success of DOGE.
- According to Amentum, a company providing various technical and IT services to federal projects, a division between their government services and private sector services units could improve shareholder value by 50%.
- The Department of Defense contractor KBR became a target of activist investor Irenic Capital, who advocated for this division to manage their slower growth rate.
- Ronald Reagan's Grace Commission, a previous example of a blue-ribbon advisory commission intended to reduce federal spending, faced policy disputes and bureaucratic resistance, limiting the implementation of its findings.