Ross Wilkers

M&A

Where Leidos' next M&A play could be

Leidos is past its transformational integration of the former Lockheed Martin IS&GS business and in mid-August marked the two-year anniversary of that blockbuster deal.

So what is next for Reston, Virginia-based Leidos as a dealmaker? Particularly as others like General Dynamics through its April CSRA deal have seemingly taken a page from that playbook to scale up in hopes of grabbing a bigger share of a growing federal spending pie.

Step one for Leidos was the August hire of a new mergers-and-acquisitions head in Randy Phillips, a former senior executive from several defense and industrial companies. He is also a longtime adviser on transactions for companies, private equity firms and other investment groups.

Step two and beyond will be what Phillips will do. During a Citi-hosted investor conference Friday in New York City, Leidos Chief Financial Officer Jim Reagan outlined Phillips marching orders: “His job is going to help us translate the strategies that we have developed at the operating group level and figuring out where the inorganic growth opportunities are.”

But based on Reagan’s comments Friday, another transformational deal like IS&GS is not on the horizon. That is because such a move “would imply that we’re doing something just for the sake of scale… this next one would not be a scale play,” Reagan said.

A more likely move for Leidos would be a business whose products “have some very close assimilation to the work that we do in the services world,” Reagan said.

This is Leidos’ thesis for that scenario as Reagan laid it out: “Same customers, similar platforms except instead of just more services we would be able to bolt in some products in the services that we’re already delivering so that’s one idea.”

A strictly services-focused acquisition would bring in “technical capabilities and technology that we don’t have today for customers where we need a broader footprint,” Reagan said.

Other government market players are also playing that game of finding potential deals of all shapes and sizes, as former CSRA Larry Prior told attendees of our Aug. 17 Power Breakfast event focused on M&A.

The market has been in a “summer lull” but “under the surface there’s a lot going on,” Prior said at the time. Another wave of consolidation is coming and Leidos could “go bigger in terms of scale” Prior added. He even threw in a hat tip to Leidos’ new hire: “If you don’t know Randy Phillips, my God, get ready marketplace.”

Other government IT and services companies have also said as such that scale is not the defining attribute that makes a deal worth doing. CACI International’s tuck-in, capability-focused strategy led it to acquire a Navy systems engineering unit in August from GD-CSRA whose main business includes shipbuilding design support.

Booz Allen Hamilton is one that has resisted the notion of scale as a driver for its M&A strategy and also opted for the tuck-in approach. Science Applications International Corp. believes the notion of scale has merit in certain areas of the market but not in others.

The underlying thesis for deals whether for scale or capability is the same: more money stemming from overall budget growth at least through next year with attention going to large upgrades of government technology environments.

That means companies have to place their bets to where that money and attention aligns whether that be cloud computing, artificial intelligence, data analytics and cybersecurity.

For companies that believe in scale as a differentiator, that means greater resources and ability to spread their costs over a wider customer base and be more competitive for larger, more complex contracts coming out in line with that anticipated growth in government technology spending.

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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