Lockheed Martin, ACS swap IT units

Lockheed Martin Corp. will acquire Affiliated Computer Services Inc.'s federal government information technology business, and will sell its commercial IT business to ACS, the two companies announced today.

The deals were approved by the boards of directors of both companies. Bethesda, Md.-based Lockheed Martin will pay about $658 million for most of ACS' federal business, including $70 million payable pursuant to a five-year, non-compete agreement. Dallas-based ACS will pay about $107 million for Lockheed Martin's commercial information technology business. The net value of the deal is $551 million to ACS.

Revenue from ACS' divested federal business were approximately $700 million for the year ended June 30. Lockheed Martin's sales for its divested commercial IT business in 2002 were approximately $300 million.

The sales allow both companies to focus on their core markets, officials said.

"It is clearly a real benefit to both Lockheed Martin and ACS as we achieve better alignment of our business portfolios," said Vance Coffman, chairman and chief executive officer of Lockheed Martin.

Analysts agreed.

"I think an opportunity arose to align [Lockheed Martin's] IT effort more along the government lines, which it is predominantly anyway, and for ACS to do the same thing on the civil side. They are really concentrating on what they do best," said Paul Nisbet of JSA Research.

Lockheed Martin will get increased capability in business process outsourcing and managed services, expand its federal customer base and gain about 5,800 ACS employees, the company said. Lockheed Martin's federal IT customers include the departments of Defense, Interior, Labor and Veterans Affairs and intelligence agencies.

"It's a fairly significant deal. There are not very many opportunities to acquire $600 million to $700 million in defense and government-related IT revenue. Not only that, the ACS defense business has significant presence in the intelligence community, which is considered highly attractive today," analyst John Allen said of Lockheed Martin's purchase. Allen is co-chief executive officer of Windsor Group LLC, an investment banking firm in Reston, Va.

ACS will gain four data centers across the United States, approximately 1,000 Lockheed Martin employees and clients in manufacturing, automotive, retail, financial services and communications.

ACS' state and local government business is not included in the sale to Lockheed Martin. ACS will also keep its contract with the Department of Education to provide student loan processing services. The contract brings in annual revenue of about $172 million. It is being re-competed, and an award is expected in October or November.

In addition, ACS will continue subcontracting on portions of its business sold to Lockheed Martin, according to ACS officials.

The transactions are expected to be accretive to Lockheed Martin, the company said. ACS will use its after-tax proceeds from the divestiture to pay down debt and for general corporate purposes, officials said. They said the transactions are not expected to not dilute the company's projected fiscal 2004 earnings per share of $2.57 to $2.66. ACS estimated its 2004 revenue will be $4.1 billion to $4.25 billion.

The transactions are subject to government approvals and should close in the fourth quarter of 2003, according to the companies.

Analysts had differing predictions about Lockheed Martin's future acquisition activity.

Unlike competitor, General Dynamics Corp. of Falls Church, Va., which has made four acquisitions since March, Lockheed Martin isn't like to follow its ACS acquisition with a string of other deals, Nisbet said.

"I think they had such a horrible time recovering from their string of acquisitions that ended with Loral [Corp., in 1996] that they are very reticent," Nisbet said. "The Loral acquisition was a disaster for them. They tried to integrate forty-some independent fiefdoms within Loral, and they failed miserably." [Ten units were then spun out into L-3 Communications Holdings Inc.]

Allen, on the other hand, said he anticipates Lockheed Martin will seek other acquisitions.

"If you look at Lockheed Martin as a whole, it is a series of major acquisitions that have worked out very well for them," he said. "You have to work at them and integrate them, and Lockheed has done that in a methodical way, making some divestitures along the way. Their stock performance and market share show their acquisitions have been a success."

In June, Lockheed Martin acquired systems integrator Orincon Corp. of San Diego, boosting its capabilities in intelligence, surveillance and reconnaissance. Lockheed Martin bought OAO Corp. of Greenbelt, Md., in 2001, gaining additional intelligence and NASA business.

Lockheed Martin employs about 125,000 people worldwide. The firm conducts research and develops, manufactures and integrates advanced technology systems, products and services. The company had 2002 sales of $26.6 billion.

ACS employs more than 40,000 people supporting operations in nearly 100 countries. It provides business process and information technology outsourcing solutions. Its revenue for the year ended June 30 was $3.8 billion.

Lockheed Martin has been a major IT player in the government space for many years, ranking No. 1 on Washington Technology's Top 100 for nine years. ACS, which ranks No. 16 on the Top 100 this year, gained its entry to the federal market by acquiring Computer Data Systems Inc. in 1997.