Since the September 11, 2001, attacks on the World Trade Center in New York City, the global security industry has exploded into a $140 billion juggernaut, increasing nearly 600 percent. And this growth will not likely slow anytime soon. Over the next four years, the U.S. private defense market is estimated to hit $28 billion, according to Washington D.C. based research group Homeland Security Research. Yet beyond the notorious exploits of Blackwater Worldwide in Iraq, little is known about the companies that collect those billions by supplying the security industry with both training and toys. Most are privately held and have kept their operations, their clients, and their financial dealings close to the vest. Now The O’Gara Group, a Cincinnati-based surveillance and defense company that opened for business in 1982, is stripping off its protective armor in a bid to raise cash through an initial public offering. The move demonstrates how defense contractors are scrambling to get their share of the growing defense market, and the proxy O’Gara filed with the SEC offers a rare glimpse into the shadowy world of military contractors, how they earn their money, and how they plan to expand.

On September 21, 2000, the O’Gara Group spun off from the risk management firm Kroll Inc., which advises companies on restructuring deals, corporate management, technology systems, employee screening, and physical security, to focus on the armor and optics sector of the market. Since then, O’Gara has built a lucrative business with the U.S. government, mostly in high-tech optics and military training. It develops remote tracking devices, night goggles, and gun sights for the U.S. Army, Navy, Air Force, Marines, and the intelligence community and Department of Homeland Security. It also trains U.S. marines and army in the deadly arts of hand-to-hand combat and sniping. In 2007, its sensory division took in nearly $23 million in revenues from government contracts and its training division racked up more than $10 million, figures that are likely to increase along with the U.S. defense and homeland security budgets. Since 2001, the U.S. Government has allocated more than $636 billion on the war on terror and is requesting $66 billion for 2009. During the same time period, it has spent nearly $30 billion on emergency response and training, and projects another $5 billion in 2009.

But the majority of O’Gara’s revenues come from international commercial clients. In 2007, nearly 80 percent of the firm’s $282 million in sales came from overseas, most from its transportation division, which bulletproofs Mercedes and BMWs for corporate executives and wealthy individuals in the Middle East, Africa, and Russia. Corporations operating in unstable regions are buying more armor plated cars for their executives, according to Jeremy Johnson, owner of ArmoredCars.com., and demand is spilling into the U.S. market. “The increases in kidnapping, especially in Latin America and Mexico, has led to more U.S. customers demanding armor services,” Johnson said. And the weaker dollar makes U.S.-based armored car companies attractive to foreigners. Other private clients in search of armor for their vehicles include Italian made Ferraris, British cars like Rolls Royce and Bentley, as well as Canadian railcar manufacturer Bombardier and Italian aircraft builders Agusta and Aermacchi. More than $126 million of O’Gara’s revenues, nearly 45 percent of total sales, came from these types of clients.

Perhaps the most surprising revelation in the proxy statement is that security isn’t as profitable as the Department of Homeland Security budget might suggest. Despite strong international demand and steady government contracts, O’Gara has been losing money, posting a $1.4 million net loss in 2007 and $1.8 million in 2006. O’Gara plans to use the nearly $95 million raised through the IPO, along with a new $54.8 million loan, for acquisitions that will allow the company to shore up its core businesses and reducing manufacturing costs. O’Gara will likely spend $230 million in cash, stock, and assumed debt to buy three companies that will expand its global reach and beef up government contacts. Isoclima is an Italian company specializing in bulletproof glass with strong links across Europe. TPS Armoring is a Mexican defense firm that O’Gara hopes will bolster its South American business. Pennsylvania based OmniTech develops advance optics and has a tight connection to the U.S. military.

While the volatile global political environment might be driving O’Gara’s growth, it is the volatile U.S. capital markets that could ultimately sabotage its public offering. Public offerings are down nearly 75 percent from the same time last year, according the website IPO Monitor. The second quarter of 2008 saw 18 deals versus the 56 recorded the second quarter of 2007. And with proven blue chip companies getting clobbered by the current credit meltdown, it seems doubtful that investors will take a gamble on a new company that is drenched in debt and hasn’t seen positive earnings in more than two years.

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