Why Jacobs’ KeyW acquisition shouldn't surprise anyone

Amid their ongoing transformation and pending acquisition of KeyW Corp., Jacobs Engineering Group likes to remind government market watchers that they have been in the arena for many decades.

That includes engineering and technical support work for NASA hubs such as the Langley Research and Marshall Space Flight centers, the military service branches and other defense agencies, plus the Energy Department for example.

“I see us already as an established player at very high ends of the value proposition around technology-oriented services offerings, test and evaluation, mission support, acquisition, engineering etc.,” Jacobs Chief Operating Officer Terry Hagen told me in a phone interview.

Hagen also is president of Dallas-based Jacobs’ $4.4 billion-revenue aerospace, technology and nuclear business known as “ATN” that will house KeyW, the Hanover, Maryland-based defense technology provider founded in 2008.

Adding KeyW helps further Jacobs’ push toward higher-end government work and gives access to a relatively steady base of revenue in programs “underpinned by national priorities,” Hagen said.

“Even if there’s some reduction in overall government funding, we’ll be playing in areas that are going to continue to enjoy funding because of how important they are to those priorities,” Hagen said. “KeyW hits all of those.”

Jacobs certainly has become a more noticeable competitor over this decade in many of the same domains and customer sets as pure-play government IT and services contractors, both through a series of acquisitions and a string of takeaway contract wins over longstanding incumbents.

Jacobs posted $15 billion in total revenue during its last fiscal year but on Monday divested its $4.2 billion energy, chemicals and resources business.

The addition of KeyW gives Jacobs more of a footprint in the intelligence community, given that is almost three-fourths of KeyW’s expected $520 million revenue this year. Jacobs also grows its cleared workforce by 50 percent through the transaction. KeyW has 1,790 total employees and 76 percent of them have a “Top Secret” clearance or higher.

What KeyW also brings to the table for Jacobs is more of a “technology as a product” business, Hagen told me, specifically around intelligence and data collection.

“That’s something Jacobs doesn’t do right now, and they (KeyW) do it in a way that’s tailored around specific unique requirements,” Hagen said. “Not only does that give us access to a very large market that we see getting even bigger going forward around national security requirements, that fundamental capability that KeyW has around developing data acquisition technology is actually very applicable across the entire Jacobs customer set.”

While KeyW has many classified programs in the portfolio, Hagen offered me an example of one they view as in line with how the government is moving in a more agile development direction. KeyW brings more ability to prototype and deploy on a “significantly more compressed timeline and in this context for the good of responding to a dynamic requirement,” Hagen said.

That approach can also be seen in KeyW’s work to build their space-based intelligence, surveillance and reconnaissance portfolio. The government’s demand is increasing for smaller, more agile solutions to complement what Hagen termed “bigger exquisite capabilities” that can take between five and seven years to develop.

“That’s the trend in the way it looks like the Department of Defense and intelligence community is going to acquire some of the space-based surveillance technology that we really like,” Hagen told me.

Owing to its larger scale, market watchers see Jacobs as being well-positioned to bring KeyW’s technologies to customers within the cost structure of a larger entity.

“(Jacobs’) larger balance sheet and scale of military ops should allow it to invest in KeyW’s ISR proprietary hardware and tech, with a more competitive cost structure,” KeyBanc Capital Markets' Tahira Afzal wrote in an April 22 note for clients.

Credit ratings agency Moody’s Investor Service pointed out that as a middle tier company, KeyW often found themselves often positioned against larger competitors with more ability to spread out overhead costs.

“Maintaining its position has required resourcefulness, solid contract performance scores, and willingness to sometimes invest up front, proposing compelling bids for projects or missions that may be complex, modestly sized, but nonetheless profitable and enduring,” Moody’s Senior Analyst Bruce Herskovics wrote in an April 24 note.

And in an April 22 research note, Cowen & Company's Lucy Guo estimated Jacobs and KeyW to have an almost $1 billion classified portfolio when put together.

Outside of day-to-day work with customers, one immediate task for Jacobs post-close will be to realize cost synergies from the transaction. Jacobs is targeting run rate cost synergies of $15 million, then revenue synergies north of $100 million.

Hagen told me the company can quickly realize a large portion of the cost savings through real estate consolidation and by taking out duplicate costs related to KeyW’s corporate structure and governance as a public company.

KeyW will then operate as a bolt-on acquisition for the first six months after close, anticipated for the end of August. Then comes the part of carrying out what Hagen called a “very disciplined integration planning effort” led by leaders from both sides.

Jacobs opted for the bolt-on method in order to better determine the longer-term approach on bringing both businesses together and preserving cultures, Hagen told me.

“What I’ve been committing to in my discussions with KeyW employees is we want to unlock the best of these two companies together, so that means we need to come together.”