Booz Allen, CACI not feeling consolidation pressure

General Dynamics’ megadeal for CSRA along with several other mergers and acquisitions in the market over recent times lead to an inevitable question of who is next to buy or sell -- or consolidate.

In fact, that question traces in part back to Leidos’ merger with the former Lockheed Martin IS&GS business two years ago to create the largest government services player at now $10.6 billion in revenue.

The entity being formed from the combination of General Dynamics’ IT services business and CSRA is anticipated to be a $9.9 billion-player by comparison. And General Dynamics’ finance chief Jason Aiken has even described the thesis behind the CSRA deal as one driven by the question of whether to “consolidate or get consolidated out.”

So what of the publicly-held government services contractors just below Leidos and the future GDIT-CSRA on the revenue food chain? Particularly amid the notion that more scale translates to more cost savings across more businesses and thus greater ability to compete for contracts, which adds more scale.

Third-largest Booz Allen Hamilton for one does not feel the need to catch up and remains focused on deals of the “highly selective” and “capability tuck-in” type, Chief Financial Officer Lloyd Howell told investors Tuesday at the Raymond James Annual Institutional Investors Conference in Orlando, Florida.

This recent round of consolidation is “not anything new to us” and comes after another round of consolidations that took place when agencies changed their buying habits and shifted to low price-technically acceptable contracting, Howell said.

And at almost $6 billion in revenue, Howell said the Booz Allen’s “current size in no way has been an inhibitor” and the firm has “taken a slightly different take on the future” compared to other scale plays in the market.

“We already think we’ve got plenty of scale to do what we need to do, we’re invited to the opportunities that we want to play in (and) we’re shaping the opportunities we feel need to be shaped,” Howell said.

The firm’s most recent acquisitions included software development firm SPARC in 2015 for $51 million. Booz Allen then acquired digital services outfit Aquilent in January of last year for $250 million. In both deals, Booz Allen cited its next-generation “Vision 2020” strategy that focuses in part on emerging technologies and higher-end engineering work.

“We look at the bigger opportunities that are out there but frankly it would take us off strategy, it would transform us into something we’re not and we feel it would distract us from the market if we try to integrate and absorb into our culture,” Howell said to investors.

Similarly and at the same conference, CACI International CEO Ken Asbury signaled his company’s scale at $4.5 billion -- making them the services market’s fourth-largest -- has not held them back from success or positioning in the market.

“There’s very few jobs that we cannot address in the markets that we serve today” Asbury told attendees. “Scale for scale’s sake, that’s just not our cup of tea. Scale with a background of new technologies and where different customers are going… all of that is going to be of great interest.”

But for others down the market, Asbury said focus on scale may make some sense. “I think that’s true if you’re a billion-dollar company in this market because there are economies of scale.”

From a bookings standpoint, Booz Allen and CACI would appear relatively well-positioned to take their share of the market even without a large scale-focused deal.

The trailing 12-month book-to-bill ratio for Booz Allen stands at 1.5x as of the firm’s more recent quarter ended Dec. 31, 2017. CACI’s reading for the same metric was 1.1x as of its more recent quarter also ended Dec. 31. Meaning both companies are adding contracts to their backlog faster than they draw down from that backlog to recognize revenue.

CACI’s choice not to emphasize scale in its acquisition strategy does not mean the company is ready to stop being a strategic integrator in the marketplace. As Asbury pointed out, CACI has made 67 acquisitions over its 56-year history and “that’s served us extremely well.”

And “our number one priority for cash is doing M&A,” he said.

In Leidos’ fourth quarter and year-end earnings call Feb. 22, CEO Roger Krone said he was not surprised by the GD-CSRA announcement and that consolidation was not over.

The rationale of consolidations such as Leidos’ for the IS&GS transaction was through the “the value capture (and) the synergies we’re able to create when you put two smaller entities together,” Krone told investors at the time.

“Not to be said there won't be some very strong players who decide that being at $5 billion for instance is where they want to be and then that's fine with them. We look at the market differently. We made a different choice.”