Leidos CEO shares insight on tax free mergers as DXC preps for another

Federal contracting has seen four tax-free "Reverse Morris Trust" mergers in two years including the coming deal involving DXC's government business. Leidos' CEO shares insights into learning and educating others as his company did the same.

The federal contracting market already replete with terms and abbreviations has become very familiar recently with another concept from the world of mergers-and-acquisitions: the Reverse Morris Trust.

In the last two years, the market has seen four mergers use the Reverse Morris Trust structure that sees one company spinoff a segment that then subsequently merges into another company to form a new company.

The more recent example of the RMT structure in contracting is how DXC Technology -- also created that way -- will build a new government IT contractor through the spinoff and merger of its U.S. public sector business with Vencore and KeyPoint Government Solutions. DXC’s predecessor Computer Sciences Corp. helped build what we know now as CSRA also through an RMT.

That is how Leidos bulked up from $5 billion in revenue to $10 billion in sales last year through its merger with the former Lockheed Martin information systems and global solutions business. And that experience gives Leidos Roger Krone a unique window into the work needed to pull off a combination of that complexity and size.

Speaking at a Northern Virginia Technology Council breakfast event Friday in McLean, Va., Krone said Leidos learned shortly before the merger’s January 2016 announcement that it was the 13th company to undertake an RMT deal.

“When we went out to (Wall Street) we had to keep telling them ‘This is what a Reverse Morris Trust is,’” Krone said. “And we had to do a lot of educating along the way.”

“Most of these deals involved uncharted territory,” Krone said. “No matter how much experience you have, you’re going to run into something you’ve never seen before.

Krone also offered a glimpse into the time commitment both sides of the merger gave to make the agreement happen. Leidos and Lockheed negotiated the transaction’s terms over the 2016 Christmas holiday break, he said. 

“Large M&A transactions may appear fun on the outside,” Krone said. “But inside there's a lot of hard work by a lot of people. Many nights and weekends are sacrificed to make all this happen.”