Justice reviews slow Anteon acquisition

General Dynamics exec says deal to close this month

At a glance

General Dynamics Corp.

Location: Falls Church, Va.

Leader: Nicholas Chabraja, chairman and CEO
Employees: 72,700

2005 revenue: $21.2 billion

2005 net earnings: $1.5 billion

Top100 ranking: 4

Anteon International Corp.

Location: Fairfax, Va.

Leader: Joseph Kampf, president and CEO

Employees: 9,500

2005 revenue: $1.5 billion

2005 net earnings: $78.7 million

Top100 ranking: 12

Joseph Kampf, Anteon Corp. president and CEO

Rick Steele

Justice Department concerns over possible conflicts of interest have slowed General Dynamics Corp.'s $2.2 billion acquisition of Anteon International Corp., but company officials and analysts remain optimistic that the deal will get done this month.

General Dynamics is working on the issues with the Justice Department, said General Dynamics Chairman and CEO Nicholas Chabraja.

"The concerns we are resolving pertain to organizational conflicts of interest and identifiable and discreet parts of Anteon's overall business," Chabraja said, speaking June 1 at Sanford C. Bernstein & Co. LLC's annual strategic decisions conference in New York. "We will complete the transaction this month."

The Anteon acquisition, which was announced in December 2005, would plug gaps in General Dynamics' IT services capabilities portfolio. In March, the Justice Department requested more information from both companies for its review of the acquisition.

Although the Justice Department usually approves most mergers and acquisitions within 30 days, some deals take longer.

"There's become an expectation that everything gets done quickly," said Jon Kutler, CEO of Admiralty Partners Inc., a Los Angeles private investment firm that invests in aerospace and defense industries. "The reality is that a lot of deals get pushed off for review."

The reviews can result in divestitures, agreements with regulators, or the deal can fall through.

Focus on conflicts

The Justice Department's concerns center on organizational conflicts of interest involving systems engineering and technical assistance work at Anteon, Chabraja said.

Organizational conflicts of interest in an acquisition occur when a business unit in one company is charged with monitoring the performance or a project held by the other company.

General Dynamics extended the deal's completion deadline to July 31 from its original date of April 30 to accommodate the government's review.

Anteon, a Fairfax, Va., IT and systems engineering and integration company that primarily works with the federal government, has said it expects the deal to close by June 30.

The deal's potential organizational conflicts of interest are manageable and "were assessed closely by General Dynamics during due diligence, so it is quite unlikely that any [conflicts] uncovered by the government would be significant enough to derail the transaction," wrote Jason Kupferberg, an analyst at UBS Securities LLC, in his most recent reports on Anteon.

The most likely sources of possible conflicts of interest between the two companies are programs involving the Naval Sea Systems Command, from which Anteon earned $64 million in 2005, and the Littoral Combat Ship program, Kupferberg wrote. Under the latter program, Anteon won a five-year, $47.6 million contract from the Navy in April 2005 to provide acquisition and engineering services support.

The two companies can resolve the conflicts of interest either by creating a firewall between their respective employees working on the affected programs, or by divesting parts of the business that are affected by the conflicts, he wrote.

Marisa Thompson, an analyst who covers Anteon at Morningstar Inc., also said the transaction will go through despite the delay, and that the company will continue, as part of General Dynamics, its streak of winning government contracts.

Anteon has more than 1,000 contracts with 50 federal agencies and retains 90 percent of its business when it is the incumbent during award renewals, she wrote in a recent report.

"Anteon's relationships with the federal government and its technical expertise, which should flourish under General Dynamics' management, will allow the firm to continue to win new business," Thompson wrote in the report.

Money changes most

The deal's $2.2 billion price tag includes the assumption of $100 million in debt. Anteon stockholders will get $55.50 in cash for each share of common stock they own when the deal closes.

The acquisition also will consolidate two Top 15 companies on Washington Technology's Top 100 list of federal prime contractors. General Dynamics, with 72,700 employees and 2005 revenue of $21.2 billion, ranks No. 4 on the list, based on its government IT revenue. Anteon, which has more than 9,500 employees and had 2005 revenue of $1.5 billion, is No. 12.

But the acquisition won't necessarily push General Dynamics ahead of the largest defense systems integrators that have government IT components, Admiralty Partners' Kutler said.

"Lockheed Martin Corp. and Northrop Grumman Corp. both developed a substantial presence in the IT marketplace well in advance of General Dynamics and its acquisition of Veridian Corp., so they've been at it longer, and they've been continuing to make tactical acquisitions along the way," Kutler said.

Anteon acquired Veridian for $1.5 billion in cash in 2003. Veridian brought with it communications systems and Internet-based networks to the U.S. military, and expanded General Dynamics' information systems and technology business unit.

General Dynamics of Falls Church, Va., is working on completing two other acquisitions: ammunitions producers Chamberlain Manufacturing Corp.'s division in Scranton, Pa., and SNC Technologies Inc.

In May, General Dynamics inked a definitive agreement to acquire, for an undisclosed amount, the Chamberlain division, which makes artillery projectiles and 120mm mortar bodies. The second of the two planned purchases, SNC Technologies, a wholly owned subsidiary of SNC-Lavalin Group Inc. of Montreal, will cost General Dynamics about $275 million. Both companies will complement General Dynamics' ordinance and tactical systems business unit, Chabraja said.

In January, General Dynamics completed its acquisition, for an undisclosed amount, of FC Business Systems Inc., a privately held IT services company in Fairfax, Va. FC Business Systems became part of General Dynamics' network systems business unit, which provides engineering and IT services to government customers.

Anteon will boost General Dynamics' network systems business and fill the IT service capabilities gap that so far has kept General Dynamics from being a first-tier player, Chabraja said.

"But when combining their capabilities, they cover every base from design upfront, which Anteon does very well, to integration skills, installation and support across the board," Chabraja said.

Anteon also has a good business development group with methodology and metrics for measuring performance, which will help General Dynamics with indefinite-delivery, indefinite-quantity contracts, he said.

These two factors will give General Dynamics' network systems business unit "a real shot in the arm in the future," Chabraja said. "That's what drove the acquisition."

Staff Writer Roseanne Gerin can be reached at rgerin@postnewsweektech.com.

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