The story behind Engility’s recent $120 million purchase of Dynamics Research Corp. is as much about two companies looking for transformation as it about a larger company buying a smaller one.
First from DRC’s perspective: This is a company that had been on a transformation path for several years and had been making its own acquisitions to move it along the path toward growth and higher margin business.
Its most notable acquisition was of High Performance Technologies Inc., which it bought in 2011 for $143 million. The deal brought them health care and intelligence work.
The work brought in by the acquisitions of HPTI and, earlier, of Kadix were often the bright spots for DRC as other parts of its business contracted.
For Engility, its story started in July 2012 when it was spun-out as a public company from L-3 Communications.
Its challenge was to build a new company; “We started with a clean sheet of paper,” said President and CEO Tony Smeraglinolo. “To be honest, we still weren’t hitting on all cylinders by January 2013.”
And while Engility went to market with a strategy and story to investors that it would be growth company, it ran into 2013. “Probably one of the hardest years for government contractors,” Smeraglinolo said. “It’s hard to take market share when the customer isn’t coming out with contracts.”
But there was a silver lining; “It gave us a chance to get our policies and procedures down, get our people comfortable and mature our operations,” he said.
That process was complete by June 2013, and the company’s leadership finally could lift its head up and decide where they should go as a company.
They felt good about the company, its customer set and capabilities, “but there were certain competencies and market channels we didn’t have,” Smeraglinolo said.
Following a strategic planning process, the company identified areas for growth. They knew it could take years to build organically, so getting involved in mergers and acquisitions were necessary. DRC quickly landed at the top of Engility’s list.
The deal made sense for four reasons:
- New competencies in cyber security and health IT
- New markets in the Air Force and with intelligence agencies
- Scale: DRC brings 1,100 people and about $270 million in revenue.
- Engility had the resources to make the deal.
“Nothing is ever perfect, but this is close,” Smeraglinolo said.
The acquisition also helps Engility’s transformation story in that when L-3 spun out the business, the story was that it was the low-end services that the company was getting rid of.
“But 80 percent of what we do is higher-end services, so we want to take Engility further in that direction,” he said.
DRC was in a similar mode and recognized the need to move toward the hiring end several years ago, which led to the Kadix and HPTI acquisitions.
“We were both going through a transformation process, but where DRC was struggling was with getting to the scale necessary to be successful,” Smeraglinolo said. “We were attractive to them because we have the scale.”
The pace for transformation will quicken for both companies as Engility gets new customers and contract vehicles through which to sell its services, and DRC gets the same. There are a lot of cross-selling opportunities, he said.
“Combined, we can heighten the transformation, and they get the scale and investment they need to hone their capabilities to a fine edge,” Smeraglinolo said.
Scale is very important for today’s services industry because it gives companies a larger base across which to spread their fixed, corporate costs. The wider the base to spread those costs, the more efficient a company can be.
“That’s an important element of success in today’s market,” Smeraglinolo said.
With the addition of DRC, Engility will now have annual revenue approaching $1.7 billion.
The plan for now is to keep DRC as a subsidiary, but eventually it will be fully integrated into Engility. The senior management team is staying in place, and Chairman and CEO Jim Regan is taking on an advisory role to Smeraglinolo.
Posted on Feb 04, 2014 at 12:40 PM0 comments
There are several things not to like about CACI International’s quarterly report:
- Revenue is down ($894.2 million compared to $941.6 million)
- Operating income is down ($66.5 million versus $69.6 million)
- Net income attributable to CACI is down ($35 million versus $39.7 million)
But CEO Ken Asbury points to other statistics that he says put the company on good footing going forward, particularly its contract wins.
The value of its contract wins in the company’s second quarter is up 40 percent compared to the same quarter a year earlier. That follows a first quarter where the number also was up from the first quarter a year ago.
While those values haven’t translated into revenue yet, they set the stage for future growth, he said.
“If we set sustain that going forward and we have a stable budget, I like what the future holds for us,” he said.
The contract wins included a lot of recompetes, but 25 percent were new business, and in this market, that means taking work away from incumbents, Asbury said.
Winning the recompetes, taking business from competitors and making the Six3 Systems acquisition show how CACI’s strategy has come together since Asbury became CEO in February 2013, he said.
“Some of the strategies we put in place a year ago converged here in this quarter,” he said.
Those strategies include a focus on business development. The company has a two pronged approach. Donald Fulop was brought in from Lockheed Martin as executive vice president of business development. He runs day-to-day BD operations.
Suzan Zimmerman came from QinetiQ North America to be senior vice president of business development.
She’s focused on pursuing large projects that any single CACI business unit couldn’t pursue on its own. Most of these are single-award type projects in the $600 million to $2 billion range.
“We are identifying ones where the customer is looking to do something different,” Asbury said.
Currently, the company is starting to work on one such project, a large infrastructure job. CACI has responded to a request for information and is putting a team together.
He declined to identify it because he doesn’t want to tip off competitors yet.
The merger and acquisition portion of CACI’s strategy obviously was active in the last quarter with the $820 million purchase of Six3 Systems, the largest M&A transaction in company history.
Analysts have questioned the high price CACI paid the company, but Asbury expressed no regrets.
The company has always said that the acquisition would be accretive in the second half of CACI’s fiscal year 2014, and so far, it is on target, Asbury said.
The company also is diving deeper into Six3’s capabilities in ways it couldn’t before the deal closed in November.
“The more we see of it the more we love it,” he said.
The company’s goal is to try to get ahead of its customers emerging needs, and with its cyber and signal intelligence capabilities, Six3 does that, Asbury said.
“We can look at the market in a different and exciting way now and that’s the part I’m thrilled about,” he said.
Six3’s acquisition also will help CACI show revenue growth for the year, but organic growth will continue to be hard in 2014, Asbury said.
“I think in the relatively short term we can see a return to organic growth, so I’m cautiously optimistic for 2015,” he said.
Posted on Jan 31, 2014 at 1:13 PM0 comments
Is MicroTech's nightmare over? Kind of.
The company is back at work now that the Small Business Administration has lifted its suspension, but CEO Tony Jimenez isn’t. Part of the deal to let MicroTech get back to selling goods and services to the government is that Jimenez must take a 30-day suspension from his own company.
The company also faces the task of rebuilding its reputation.
In the administrative agreement with SBA, MicroTech admits no wrongdoing, and SBA doesn't exactly say they are guilty of anything either.
Both SBA and MicroTech agree that the company's application in 2005 to join the 8(a) program didn’t accurately describe the relationship between MicroTech, MicroLink and GovWare. The companies shared investors, which is apparently what bothered SBA.
Repeatedly in the agreement, MicroTech is quoted as affirming that its connection with those two companies didn't run afoul of any SBA regulations. And SBA seems to agree.
It is prohibiting MicroTech from entering into mentor-protégé agreements, teaming agreements and joint ventures with 8(a) companies while the agreement is in place.
The agreement is for three years but will be reviewed annually.
The company also will have to create an ethics program and hire an outside company to evaluate the program.
While I haven’t talked to Jimenez since the debarment in December, we talked in the immediate aftermath of a Washington Post series of stories exploring how the company used small business programs to grow. In our conversations, he has been adamant that neither he nor his company has done anything wrong.
I’ve questioned the Washington Post’s pursuit of Jimenez, and how the SBA process suspends a company and threatens its viability as a business without much due process. That still is a bit puzzling to me, but that's how the system works.
The whole thing still doesn't make sense to me. Where's the smoking gun? Where's the corruption? Let me know what I've missed.
Posted on Jan 30, 2014 at 2:10 PM3 comments