CACI’s Six3 Systems deal named best of the year

From among the 70 mergers and acqusitions that closed during 2013, CACI's acquisition of Six3 Systems stood out as the single best deal. Here's our analysis of what made the transaction special, and what it says about today's market.

From the moment CACI International’s acquisition of Six3 Systems was announced last year, it had all the markings of a top deal of the year.

So, I wasn’t surprised when our panel of experts picked it as the single biggest deal of 2013 as part of our annual M&A special report.

To be considered a top deal, a transaction has to include several elements including the impact it has on the buyer, the price, what the exit means to the seller, and other so-called intangibles.

The CACI-Six3 deal has many of those in spades. Let’s consider three of them: price, impact and exit.

PRICE

The price tag of $820 million didn’t make the transaction the biggest of the year, though only a couple were larger.

I heard plenty of comments from people that CACI overpaid for Six3, and CACI executives heard some of the same comments, even from some of their analysts.

Earlier this year, I had the chance to hear CACI chief financial officer Tom Mutryn speak about the process the company went through to acquire Six3.

He was candid about how CACI had to go up against much larger bidders, so CACI had to fight to level the playing field. Plus Six3, with its product and deep intelligence business, would expose CACI to new markets - markets that CACI didn’t have the native talent to completely assess.

“We brought in outside consultants,” Mutryn said.

The benefit was two-fold; it showed the sellers that CACI was serious, and it also gave CACI confidence in the future performance of Six3.

That confidence allowed CACI to structure the debt it needed and bid the price that ultimately carried the deal.

IMPACT

The company was willing to pay that price because of the upside the Six3 brought with it. CACI is a strong and well respected contractor, but it is primarily a services company. Services today are increasingly under growth and margins pressure.

CACI executives, from Chairman Jack London on down, have made it clear that improving margins is a top priority.

Not only did Six3 have higher margins, but it also added a technology and product element to CACI’s business that many see as critical to revenue and margin growth in the government market.

Wrapping technology and products around your solutions is a way of increasing margins because of the differentiation it can bring to a company. In essence, it allows them to offer something unique to their customers.

In the case of Six3, those products and technologies are serving the intelligence community with signal intelligence systems and involvement with intelligence operations and precision geo-location solutions.

THE EXIT

Six3 Systems was barely a five-year old company, but with the backing of the private equity group GTCR, it made several of its own deals and was hitting about $470 million in annual revenue.

The company was founded by Robert Coleman, a former ManTech International executive.

For GTCR, it was successful run and is another example of why private equity likes the government market so much.

But the exit isn’t a ride into the sunset for Coleman. When the deal was announced, CACI CEO Ken Asbury made it a point of pride that Coleman and the rest of Six3’s management team were staying.

“I feel very good that we’ll preserve the core management team for two or three years,” he told me.

The deal just closed in November, so it might be too early to see specific increases in CACI’s numbers, but the long-term view is that Six3 will be a transformative deal for CACI.

CACI has never shied away from making acquisitions, and the acquisition of Six3 is the biggest in its history, but I wouldn’t think of it as a stopping point.

Given CACI’s record as an acquirer, I wouldn’t be surprised to see more deals in the coming years that build on Six3.

It might be the biggest single deal of 2013, but it also lays a foundation for the future.

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