Ross Wilkers

M&A

Huntington Ingalls pushes forward on services strategy with Alion acquisition

Huntington Ingalls Industries has steadily grown its government services business through acquisitions and an occasional large contract win since that segment called Technical Solutions was stood up in late 2016.

Technical Solutions is slated to become a larger piece of Huntington Ingalls -- about 25 percent of annual revenue to be more exact -- now that the shipbuilder has agreed to acquire Alion Science and Technology for $1.65 billion in cash.

Shipbuilding will make up for the remaining 75 percent of HII annual sales with Alion in the fold.

Both this deal for Alion and its alignment with Huntington Ingalls’ multi-year push to expand into services spurred one Wall Street analyst to ask HII executives this question in a conference call Tuesday morning: what does the company see itself as?

“We see ourselves as a security company that we have a big platform business that's been our core for 10 years and frankly for 130 years,” CEO Mike Petters responded.

“What we see happening in the big platform business is that the platforms are the base for enhancing a future Navy that's going to rely not just on the platforms but it's going to rely on unmanned, it's going to rely on a distributed operations and it's going to look for asymmetric solutions.”

HII’s accompanying investor presentation on the deal breaks out Alion’s business profile into three main tracks: training and simulation, cyber and electronic warfare, and C5ISR (command, control, communications, computers, cyber, intelligence, surveillance and reconnaissance).

Alion’s expected revenue for its current fiscal year is at around $1.6 billion with 33 percent of that from the Navy, 25 percent the Air Force and 28 percent in classified or other Defense Department agencies. HII will gain 3,200 new employees and that growth should push the Technical Solutions workforce past 9,000 staffers.

McLean, Virginia-headquartered Alion has likewise steadily remade itself since the defense technology integrator was acquired by private equity firm Veritas Capital in 2015.

Two main checkpoints in that evolution are seen in the acquisition of MacAulay-Brown in 2018 and subsequent sale of the Navy systems engineering business that long represented Alion’s core for many decades.

During the call with analysts, Petters said the paths that Huntington Ingalls and Alion have been on are similar from the standpoint of the companies’ process of identifying what areas to focus on.

“If you go back five or six years, they were kind of trying to be all things to all people and they did kind of what we did. We had seven or eight businesses in TS and we had to kind of pick through them and see what made sense for us,” Petters said.

“(Alion) did the same thing and they focused themselves down on a handful of significant lines of effort that are directly aligned with where the Department of Defense wants to go and where the Navy wants to go.”

Unmanned is another significant aspect of HII’s strategy with respect to its Technical Solutions business, given the company wants to be the same kind of leader in that domain as it is with aircraft carriers and other larger manned ships.

Two of HII’s most recent deals in the unmanned area have included the acquisition of vehicle maker Hydroid in early 2020 and purchase of the Spatial Integrated Systems autonomy business earlier this year.

Moving to acquire Alion comes on top of the footprints HII already gained in its defense and federal solutions business that includes C5ISR and training. Petters said those moves have helped HII increase its understanding of those markets, but Alion brings more scale into the equation.

“In some sense, this is a bit of a puzzle piece that fits right into what we have been strategically trying to do over the last couple years,” Petters said.

All parties involved expect the deal to complete in the second half of this year, pending regulatory approvals and other closing conditions.

Credit Suisse acted as financial adviser and Jones Day served as legal counsel to Huntington Ingalls. Renaissance Strategic Advisors and Arena Strategic Advisors also advised Huntington Ingalls.

Macquarie Capital acted as financial adviser and Milbank served as legal counsel to Alion Science. Covington is assisting Veritas on government contracts and other regulatory aspects of 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 connect with him on LinkedIn.

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