"QuesTech is a tremendous strategic fit," said Jack London, chief executive officer of CACI. The purchase positions the combined company "in the very important information warfare and intelligence markets." "This is a big deal for us," added Jim Allen, CACI's chief financial officer. "We need to catch our breath now. We're not out of the acquisition game totally, but we need to take the time to focus on internal growth."
Analysts agree with CACI's strategy.
"Not only is this their biggest acquisition, but it also takes them into a new area," said Bill Loomis, an analyst with Legg Mason Inc. in Baltimore. "They really need to familiarize themselves with information security."
If all goes as planned, the deal between the two companies should take three or four months to complete. Allen said that because information technology jobs far outweigh the number of qualified personnel, layoffs from the consolidation should be minimal - less than 5 percent.
Furthermore, the two companies have almost no overlap in government work, Allen added. CACI does half of its work with the Defense Department, 30 percent with civilian government agencies (primarily the Department of Justice) and the rest in the commercial sector. QuesTech does more than 90 percent of its work with the Defense Department, and much of that is in the intelligence business.
"DoD work is very attractive," said one industry watcher. "That department spends more than other agencies, and it is full of smart shoppers."
Sources said there were several companies interested in buying QuesTech, giving the company some bargaining power. Although CACI only began talking to QuesTech several weeks ago, the smaller company has been in play since January.
Modern Technologies Corp. of Dayton, Ohio, and its chief executive, Rajesh Soin, initiated the interest in QuesTech by buying just over 5 percent of QuesTech's outstanding stock on the open market for $700,000. Soin sent a Jan. 21 letter to Vincent Salvatori, QuesTech's chairman and CEO, indicating that his company was interested in buying a majority of QuesTech for $11 a share.
In early February, QuesTech responded to the offer by saying it was in the process of "evaluating strategic alternatives" and that the offer was passed along to Legg Mason Inc., QuesTech's investment banking firm. "While the evaluation process is continuing, QuesTech intends to maintain its independence and is not for sale," read a January document filed with the Securities and Exchange Commission.
The initial bid for the company sent the stock price climbing on speculation of a takeover, from $5.50 in February to as high as $15.25 in midday trading May 18, the day before CACI's deal with the company was announced.
Just last week, Soin sent another letter to Salvatori saying he was raising his bid for QuesTech to $13 a share.
CACI's offer far exceeded that amount. In addition to offering $18.38 a share, CACI will assume QuesTech's debt, and QuesTech owners will get to keep a commercial subsidiary that manufactures plastic packaging.
Although Salvatori declined to comment on Modern Technologies' offers, Allen said he believes the offers were "completely unacceptable."
While CACI's offer is more than three times higher than QuesTech's market value just three months ago, Allen said his company did not overpay. "This is just such a good fit," he said. "That stock was really undervalued."
Salvatori agreed. "The market never gave us a good value because we had such a small [stock] float and because of our investment in that plastics business." The plastics business, which has not yet generated any sales for the company, has drained $2 million a year from QuesTech's bottom line.
"CACI is very careful on the acquisitions they make," Loomis said. "This was a good deal, because even with the [run up in the stock price], QuesTech was still priced well below most of its peers."
Loomis added CACI has been much slower on the acquisition front than its competitors, having focused on smaller deals until now.
