How firms use M&A to protect their base

Merger-and-acquisition activity in the government market is often spoken of in terms of going on offense to bulk up and add scale, plus pursue growth channels in emerging markets by adding new services or customers.

But what about the defensive part of the business strategy? Particularly in terms of how competitors react when one of their rivals makes a large acquisition and causes the others to respond and possibly rethink overall market approaches?

Dealmaking to play defense is a tool along with offense that contractors have at their disposal to defend market share and keep acquisition targets away from others, a panel contractor executives and an investment banker said Friday at a Washington Technology Power Breakfast in Tysons, Virginia.

Michael Lewis, chief development officer at CACI International, laid out that scenario for the audience as one of many angles he and his peers in industry look at to forecast how one company’s action can set in motion actions by others.

Take for instance if a major acquisition happens -- and there has been plenty of that in the past two years beyond just the blockbusters. Lewis said that after a deal is announced, one of the first questions he asks for CACI is: “How does that change the dynamics of our market position?”

Then there is the follow-up question Lewis posed: “Do we need to go and become more aggressive in going after an asset in order to protect (our market position)?”

The general thinking behind that is knowing whether a competitor becomes the dominant player in a market space after an acquisition, Lewis said.

Sometimes that leads to an aggressive auction process: just look at the three-company bidding contest for CSRA that General Dynamics eventually won in the spring over CACI and another large company.

David Brannon, vice president of corporate strategic development at Leidos, said the company first looks at potential updates to its strategy after a deal by a competitor or competitor is announced.

Leidos itself of course -- through its merger two years ago with the former Lockheed Martin IS&GS services business -- caused others in the space to take a refreshed look at the market and their positioning in it.

Another component Leidos examines is how it pursues a particular contract where prospective bidders undertake large-scale, transformative deals. The timing of a request for proposals’ release largely determines how to pursue that contract, Brannon said.

“Let’s say two big competitors come together and it’s before the RFP is due and those two companies can put together a solution that’s going to be pretty competitive, we may not bid or be less likely to bid,” Brannon said.

“Conversely… if the RFP comes out before the companies come together, so those companies still have to issue separate bids, that puts an uncertainty in the marketplace (and) we may be more likely to bid in that case.”

Leidos came out on the losing end in one particular contract where it had to put in a separate bid from IS&GS due to the timelines both of award and the transaction itself, he added.

Marc Marlin, a managing director at aerospace, defense and government services investment bank KippsDeSanto, said defensive thinking in potential acquisitions especially comes into play with respect to the publicly-traded companies.

“The last thing you need is to start being on the outside looking in on a new contract vehicle, and the next thing you know… you’ve got organic growth pressures,” Marlin said. “The stock price hit you’ll get from the Street for that revenue decline far outweighs typically what it will take to buy and protect your position.”

That scenario came into play eight years ago when the former Computer Sciences Corp. missed out on awards for the Defense Intelligence Agency’s $6.6 billion “SITE” IT services contract. CSC later that year joined the SITE program through its acquisition of contract holder CenTauri Solutions, which was advised in the transaction by KippsDeSanto.

“We knew a handful that were really trying to protect their market share within that customer set,” Marlin said. “Therefore the capabilities or contract vehicle (CenTauri) had would be uniquely important to folks positioning and protecting their base.”

Tim Hurlebaus, president of CGI Federal, said the subsidiary of global IT company CGI Group emphasizes cultural fit when selling itself as a good home for a business it is negotiating with to acquire.

Within the last two years, CGI has made six acquisition of commercial companies that have brought in “a couple federal contracts out of it,” Hurlebaus said.

CGI’s approach is to make owners feel comfortable about their business’ legacy within the larger CGI and the potential growth opportunities that can be created, he said.

“While we’ll certainly be competitive, we want (them) to choose us not only for the price we’re offering but for those other things as well,” he added.