Alcatel to spin off LGS business

Another large business spin-off has hit the government market, this time with Alcatel-Lucent signing a deal to sell its federal business, LGS Innovations LLC, to an investor group.

The private equity group Madison Dearborn Partners, along with others including CoVant, will acquire LGS for $200 million. CoVant is the private equity group led by Joseph Kampf. It also owns A-T Solutions.

Alcatel-Lucent is in the midst of a transformation strategy it calls the The Shift Plan, and divesting LGS is part of a move to reposition the company as a specialist in IP networking and ultra-broadband access.
The company is making divestments and other moves to shed about $1.4 billion in costs by 2015 while making other investments to raise the same amount in revenue, according Alcatel-Lucent.

The deal with the Madison Dearborn group is all cash, with $100 million being paid at closing, and the final payment will be based on 2014 results. The transaction is expected to close by the end of the first quarter, subject to the usual regulatory approvals.

LGS Innovations provides secure networking, satellite communications, VoIP, optical routers and other solutions for the U.S. national security, defense, and advanced research communities. The company’s history stretches back 60 years, and includes portions that were once part of Bell Labs under the pre-breakup AT&T. Bell Labs Innovations is the company’s tag line.

The company’s management team, led by CEO Kevin Kelly, remains at the helm of the company, which operated as an independent entity because Alcatel-Lucent is a foreign-owned company.

Kelly said that while LGS operated as an independent company the divestiture will provide more freedom for the company in the kind of business and markets it pursues.

While details are yet to be worked out, the expectation is that Madison Dearborn and CoVant will use LGS as a platform for acquisitions, Kelly said.

A particular target will be companies that can take LGS’s technologies and bring them to new markets such as public safety, state and local, foreign governments and large enterprises.

For example, first responders have a need to hardened communications gear that use commercial cellular networks. LGS builds that kind of technology for the U.S. military.

“That’s an area where we have products and expertise but we don’t practice in the first responder community,” Kelly said.

So a company that makes radios or antennas or other technologies for first responders and has the customers relationships would be a good acquisition target, he said.

Ironically, LGS will also be able to work more closely on opportunities with Alcatel-Lucent once they separate. Because of restrictions on their relationship because of the foreign-ownership by Alcatel-Lucent, LGS could not share much of the technology it was developing.

But if both companies are independent with separate ownership, cooperating on projects will be easier, which could open opportunities for LGS to work with foreign governments, he said.

Being acquired by private equity also was attractive by LGS because it allows them to continue to build on their technologies and not work on integrating their technologies with the offerings of the acquiring company, Kelly said.

“This is about the ability to invest in our technologies,” he said.