Ross Wilkers

M&A

Sizing up the General Dynamics IT-CSRA combination

A central thesis of General Dynamics' pending acquisition of CSRA is that the federal technology services market is increasingly rewarding bigger, more consolidated players with scale as a main differentiator in competitions for large IT jobs.

New regulatory filings from CSRA show how the government IT contractor saw their own growth continuing during this current and the following five fiscal years -- and highlight why they were so sought after by General Dynamics and CACI International in their now-ended public takeover battle won out by GD.

CSRA projected it would climb the $6 billion-revenue mark by its 2022 fiscal year, according to the proxy filings. That figure came from management carrying forward expected trends from its current 2018 fiscal year through 2021, the filings say.

The company expects revenue for its current fiscal year ending March 31 to be roughly $5.1 billion. Fiscal 2019 projected sales were $5.4 billion, followed by roughly $5.6 billion and then $5.9 billion for the next two fiscal years respectively, according to the filings.

When General Dynamics first announced its blockbuster deal for CSRA Feb. 12, the companies touted the combined IT services business as a $9.9 billion-revenue player based on expected sales this calendar year.

That would solidly put the General Dynamics IT-CSRA business alongside the $10.6 billion Leidos as the federal IT market's two largest competitors and also with a diverse mix of federal customers, which Leidos touted as a driver of its merger with the former Lockheed Martin IT business in 2016.

General Dynamics was formerly a "top one or two" federal IT player, Chief Financial Officer Jason Aiken said at a Feb. 21 investor conference hosted by Citi. GD has since found itself in federal IT's "middle of the pack" over the last decade amid other consolidation moves and agencies emphasizing lower-price contracting as services budgets declined, Aiken said.

Revenue is one way to measure a federal contractor's reach but one other measure is putting the General Dynamics IT-CSRA combination as far and away the largest government technology services provider.

A new analysis from public sector market research firm Govini found that a GDIT-CSRA entity held $22.7 billion in federal technology services contract obligations between the government's fiscal years 2014 through 2017.

Leidos by comparison would be the market's second-largest under that methodology with $17.2 billion in obligations over that period, according to the big data and analytics firm. That translates to a 32-percent difference in obligations between both businesses.

While Govini posted its report after CACI went public with its renewed bid, the firm noted that either combination of CSRA with GD or CACI would offer each bidder "an important opportunity to diversify its federal customer base and compete credibly for valuable new opportunities that today fall outside of the spheres in which General Dynamics and CACI traditionally perform."

Those opportunities are becoming larger and longer in duration, GD and CSRA executives said at the time they announced the deal. And scale helps manage costs around a larger business base to be more competitive for significant IT contracts, which they said Leidos has succeeded in taking more of since their deal with the Lockheed IT business closed.

CSRA's expected sales for fiscal 2022 were $6.1 billion and for fiscal 2023 were $6.4 billion. That implies a compound annual growth rate of 4.3 percent over six years including CSRA's current fiscal period.

Companies and analysts use the CAGR metric to forecast growth over longer time periods and evaluate potential investments. This is a way to account for any volatility in an outlier year and also make comparisons to industry peers.

For its outlook issued in January, General Dynamics forecasted a 5.5-percent CAGR through 2021 for its information systems and technology group that comprises the IT services division and mission systems business that builds communications hardware primarily for defense and space agencies.

When the CSRA deal closes, IT services and mission systems will become separate reportable business segments within General Dynamics. IT services is projected to be the largest GD segment at one-fourth of overall sales with mission systems representing 12 percent, according to an investor presentation on the transaction.

About the Author

Ross Wilkers is a senior staff writer for Washington Technology. He can be reached at rwilkers@washingtontechnology.com. Follow him on Twitter: @rosswilkers. Also find and connect with him on LinkedIn.

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