CSC, Lockheed talk deal

On the block

Computer Sciences Corp.

El Segundo, Calif.

2005 revenue: $14 billion

Government revenue: $4.6 billion

Chairman and CEO: Van Honeycutt

Acting head of government business: Michael Laphen, president and COO

Lines of government business: Health care, enterprise modernization, homeland security, managed services, base operations and range services, telecommunications and networking, training and simulation
Asking price: $10 billion

Suitors: Lockheed Martin Corp. for the government business

Blackstone Group LP, Texas Pacific Group and Warburg Pincus LLC for the commercial business

Private equity groups want commercial business

Computer Sciences Corp. may be the next big acquisition candidate in the realm of non-stop mergers and acquisitions in the federal IT market.

Lockheed Martin Corp., along with private equity firms Blackstone Group LP, Texas Pacific Group and Warburg Pincus LLC, are reportedly in the early stages of a plan to buy CSC for $10 billion and split up the company. If a deal were to materialize, Lockheed Martin likely would get CSC's federal government business, which accounts for one-third, about $4.6 billion, of the company's revenue. The equity firms would take the commercial business.

The acquisition of CSC, which has overall annual revenue of $14 billion, would solidify further Lockheed Martin's position as the top systems integrator in the government market. The company has ranked No. 1 on Washington Technology's Top 100 for 11 years. CSC, which has consistently placed in the top five for several years, this year held the No. 4 position.

Contacted by Washington Technology, spokesmen for the companies and the investment groups declined to comment.

Local defense industry analysts and merger and acquisition professionals were not caught off guard by the report, which appeared in The Wall Street Journal Oct. 27 and cited unnamed sources.

Although it has a market capitalization of more than $9 billion, CSC has hit a few low points the last few years, some analysts said. CSC hasn't been able to deliver as much value to shareholders as it did during previous years of stable, double-digit revenue and earnings growth, they said.

In February, CSC sold parts of its DynCorp business units for $850 million to private equity investment group Veritas Capital Management LLC. CSC bought DynCorp in March 2003 for about $914 million. Veritas is planning to take DynCorp International Inc. public, and is "going to do very well off that," said a source close to the company.

In July, Paul Cofoni, president of CSC's federal division, resigned and was said to be retiring, but instead joined CACI International Inc. as president of the Arlington, Va., contractor's federal division.

Also in the federal arena last year, CSC was criticized heavily for its work on big IT modernization projects for IRS and FBI.

Another factor driving the acquisition is the growing federal deficit, which likely will lead to cuts in defense spending. That would mean cuts in new systems, ships, aircraft and missiles ? all major parts of Lockheed Martin's business, said Jerry Grossman of investment bank Houlihan Lokey Howard & Zukin's aerospace, defense, government group in McLean, Va.

CSC's federal sector would expand Lockheed Martin's ability to get more business, because "services and software will represent bigger opportunities going forward and a bigger piece of defense [spending]," Grossman said.

Bill Loomis, an analyst at Legg Mason Wood Walker Inc. in Baltimore, said he doubted a deal between Lockheed Martin and CSC would take place, but that the talk would be good for CSC's shareholders, because it would refocus company management on generating higher cash flow.

Part of Lockheed Martin's strategy is to buy companies that have capabilities and customers in those areas where it needs to strengthen its presence in the federal government arena. The company failed last year in its $2.2 billion bid for Titan Corp., but since has bought a handful of other companies in the United States and United Kingdom to fortify its offerings.

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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