How Leidos gets M&A ideas 'from the line'

Both in internal discussions and events with an investor audience, Leidos has increasingly used the words “M&A” -- and with that at times “product” -- as it has turned the page on integrating the Lockheed Martin IT services business acquired three years ago to focus on organic growth.


Mastering Stakeholder Engagement

We have joined with MBDi to offer a one-day course on Mastering Stakeholder Engagement as a way to foster closer relationships and win more business.

DATE: June 7

WHERE: Valo Park, McLean, VA

Click here for more info.

How Leidos thinks about that question of where and how to identify its next acquisition opportunity was the subject of analyst inquiry Tuesday at the company’s investor day presentation in New York City -- the first since that deal to create government services’ largest player at $10.2 billion in annual revenue.

The market looks drastically different and more consolidated since Leidos doubled its size: thanks not just to deals like General Dynamics IT-CSRA and Science Applications International Corp.-Engility Corp., but the creation of Perspecta, twin acquisitions by CACI International, and increased presence of Jacobs Engineering Group thanks to its pending KeyW Corp. transaction.

But when asked about what is next for Leidos, Krone opted to not give an over-arching answer for Leidos’ M&A thought process from a corporate-wide angle. Rather, Krone’s response can be seen as a nod to his long career at Boeing before he joined Reston, Virginia-based Leidos as CEO four years ago.

“Most of the great ideas in this company come from the line,” Krone said in reference to the company’s four business segments. “We don’t sit around in Reston and think about ‘Hey we should do this or that.’ What we do is, we talk to the groups, we understand their strategies and where they want to go.”

With that in mind, here is how the four Leidos group executives went down the line in describing their strategy with respect to M&A.

All within the context of Leidos’ new three-year financial targets: 5-percent organic revenue growth on a compound annual basis and adjusted profit margins greater than 10 percent. And all within the context of the digital transformation and IT modernization thrusts that are sweeping across the federal government.

Civil President Angie Heise said that group’s core market areas are in digital transformation, logistics, and security products and services. M&A deals for the civilian business should “help us close some gaps as well as provide some complementary technology for us,” Heise said.

Any transaction in the health group would largely follow that same thesis. Its core businesses or “just one-step” adjacent areas are where it would “like to find good values that we could build girth in what we do,” Health Group President Jonathan Scholl said.

Operating services and platforms are another health market area of growth with margins Leidos finds attractive. “We’re looking for installed base and also with companies that are in that space that we could put on to our platform and capabilities,” Scholl said.

The defense group led by Gerry Fasano particularly shares the logistics market with the civilian business and they often “work that strategy together,” Fasano said, “so that is one area that we are looking for increased differentiation.”

Possible area number two for defense regarding M&A is in “C4ISR” products -- command, control, communications, computers and intelligence, surveillance, and reconnaissance -- a key capability called out in the National Defense Strategy to collect and distribute data.

“When you look at the overall corporate strategy, growth with deeper double digit margins, we believe the C4ISR product market is an area of thrust to continue to assess,” Fasano said.

The intelligence group has three angles through which it approaches possible M&A. One is the tuck-in variety at $200 million or less, group president Vicki Schmanske said. That would “augment some of our existing capabilities in our markets or bring additional scale to a customer,” she said.

Option number two is what she referred to as the “gap filler,” or “customer spaces that we’re not penetrating,” Schmanske said. “There are unique companies out there in the $500 million range that could maybe help us grow faster in those markets.”

A transformational deal for that group also cannot be discounted. “There’s an ISR market out there in some of our customers… (defense) is looking at space, we are too and there might be something transformational out there that would align with ours and it might be an enterprise capability,” Schmanske said.

The slide show given to investors indicates that over the next three years including this year, Leidos expects to have $2.7 billion of deployable cash to work with. About 55 percent of that, or $1.5 billion combined, is slated for M&A deals and repurchases of stock.

Leidos has also taken down its debt to slightly below 3 times earnings before interest, earnings, taxes depreciation and amortization expenses. Publicly-traded government services companies typically aim to have debt-to-EBITDA ratios of no more than 3.5 times. That indicates Leidos has more room on its balance sheet for an acquisition if it sees something that makes sense.

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 connect with him on LinkedIn.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above.

WT Daily

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.