M&A

Engility plans $120M acquisition of DRC

Engility Holdings has signed a $120 million deal for Dynamics Research Corp. that takes out one of the oldest brand names in the federal market.

DRC, which was founded in 1955, brings complementary services to Engility, particularly in the area of systems engineering, management consulting and technical assistance services for government customers.

Some of DRC’s specific market niches include health care, homeland security, research and development, intelligence, surveillance and reconnaissance, financial regulation and reform and defense readiness, logistics and command, control and communications.

Engility is paying $11.50 a share for DRC, which is $4.25 higher per share than the close on Dec. 20. Before the deal was announced, the company’s 52-week high was $7.69 and its low was $4.89.

The acquisition brings Engility several attractive contract vehicles, including Eagle II, which is embroiled in bid protests, and the General Services Administration’s Continuous Monitoring as a Service contract, a $6 billion vehicle for cybersecurity services.

DRC will expand Engility’s reach into the Air Force, Navy, Health and Human Services, Veterans Affairs, Homeland Security and other agencies.

About 80 percent of its work is through prime contracts.

Engility, a spin-off from L-3 Communications in 2012, is pursuing a strategy to expand and diversify its offerings and its presences with certain customer sets, President and CEO Tony Smeraglinolo said.

“Long-term success in today’s consolidating federal services market will depend on both organic growth and strategic mergers and acquisitions to derive the benefits of scale and provide contracting flexibility to our customers,” he said.

The acquisition should close in the first quarter of 2014, following regulatory reviews.

The sale brings to a close DRC’s 58-year history as an independent company serving the federal market.

In recent years, it has tried to diversify its position in the market, using acquisitions and strategic hires to move into new areas.

But like many others in the government market, DRC has struggled to find revenue growth and has seen much of its traditional business shrink.

In 2011, DRC acquired High Performance Technologies Inc. to more further into the health care, cyber and intelligence areas.  In 2008, it acquired Kadix, a management consulting company that also brought DRC a spot on the Homeland Security Department’s Eagle I contract.

“DRC’s leadership team has successfully repositioned the company in high priority market areas,” Smeraglinolo said. The acquisition “significantly expands our combined market opportunity in areas where we currently do not have an existing customer relationship or where we are currently underrepresented.”

DRC’s health care business has been a real bright spot for the company and is the only portion of its business that showed top line improvement this year with revenue growing from $42.7 million for the nine months ended Sept. 30, 2012, to $46.8 million for the same period in 2013.

But the growth in the health care business was not enough to offset declines in its other lines of business. Total revenue dropped from $243.5 million for the first nine months of 2012 to $213.2 million for the first nine months of this year.

DRC’s bottom line, however, improved this year, with its net income rising to $3.8 million, compared to a loss of $24.9 million.

Engility expects the acquisition to be accretive to its earnings in 2014 and “significantly accretive” in 2015 and beyond.

Bank of America Merrill Lynch is providing financing to Engility. SunTrust Robinson Humphrey served as an advisor to DRC and the investment bank Stifel Nicolaus provided a fairness opinion to DRC.

Engility’s legal counsel is Bass, Berry & Sims PLC; Holland & Knight and Nixon Peabody LLP represented DRC.

About the Author

Nick Wakeman is the editor-in-chief of Washington Technology. Follow him on Twitter: @nick_wakeman.

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