Online Extra: At CACI, bulking up defense management

CACI International Inc.'s proposed acquisition of American Management Systems Inc.'s defense unit will position CACI for work helping the Defense Department manage its outsourcing and transformation projects, the company's top executive said.

As the department changes how it operates and outsources more work to the private sector, it will need strong management tools, said Jack London, chairman and chief executive officer of the Arlington, Va.-based company.

"This positions us in growth areas that we see coming around the corner," he said.

CACI acquisition of AMS' defense business is part of a complicated three-way deal that is breaking apart AMS of Fairfax, Va. CGI Group Inc. of Montreal is acquiring AMS' commercial and nondefense government business for $858 million. As part of the deal, CACI will buy AMS' U.S. Defense and Intelligence Group for $415 million. Consequently, CGI's net cost is $443 million.

The deal is expected to close in May, following shareholder and regulatory approvals.

London said he was interested in acquiring AMS' defense business because it brings capabilities in procurement, financial management and logistics and new sets of customers.

"You need to have responsive modern software tools to manage the process of transformation and outsourcing," London said.

AMS' customers include all the major defense agencies and the Air Force, Army and Navy.

While CACI does business with many of the same organizations, the specific customer sets are different, London said. "There are a lot of cross-selling opportunities here," he said.

The AMS defense unit brought in about $250 million in revenue in 2003 and should do better than $270 million in 2004, London said.

"There aren't many defense businesses of that size that you can buy," said Jerry Grossman, a managing director of Houlihan Lokey Howard and Zukin of McLean, Va.

London said he expects the acquisition to push total CACI revenue during 2004 to about $1.4 billion. About 71 percent of that will come from defense and intelligence customers.

The company's goal now is to reach $2 billion in annual revenue by 2008, he said.

The AMS business unit also has attractive margins in the 15 percent to 17 percent range, London said.

The structure of the deal as an asset purchase will bring tax benefits of at least $60 million, London said. That benefit coupled with the higher margins made the purchase price attractive, he said.

"If he is getting margins of 15 percent, that puts the pricing at a level that you would expect," Grossman said.

The higher margins are driven by AMS' strength in software, said Thomas Meagher, an analyst with BB&T Capital Markets, Richmond, Va.

"At the same time, it gives CACI a large, installed base of [software] they can hopefully bring to new clients as well," he said.

With the acquisition, CACI is picking up 1,650 AMS employees, about 900 of which have security clearances.

The AMS defense business will become a unit of CACI that will report to President Ken Johnson.

"We don't see a lot of taking things apart and putting them in other places," London said.

The AMS deal is CACI's largest acquisition to date. While the company has kept up a torrent of deals, it has never made one larger than $85 million before, London said.

CACI will concentrate on integrating the AMS unit over the next quarter or two after the deal closes, but the search for more acquisitions will continue, he said.

"I don't want to give the impression we are out of the market," London said. "We will still be out there looking."

Senior Editor Nick Wakeman can be reached at nwakeman@postnewsweektech.com

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