Questions and some answers about the CSC-SRA deal
The acquisition of SRA International by Computer Sciences Corp. is the latest example of the rapid change going on in the government market, but it is also a story of two legendary companies that helped shape the market.
Some great leaders have been attached to both companies. SRA, of course, is known for its Ernst Volgenau, but also Ted Legasey and Renny DePentima. CSC had Al Nashman and Milt Cooper.
Going forward, the company will be led by Larry Prior, who will serve as CEO. He’ll have a lot on his plate over the next couple months and beyond as he prepares for the split from CSC and the integration of SRA.
There are several questions that will be answered over the coming months. Some more serious than others and some questions that will only be answered over time and will either prove or disprove the rationale behind the split and the acquisition of SRA.
What’s the name of the new company?
When I interviewed Prior today I was told that the ultimate name of the company that will combine CSC’s North American public sector with SRA hasn’t been picked yet. When CSC announced the split in May, the company said the name would be Computer Sciences Government Services or CSGov.
Now, they aren’t so sure.
“We have a great name and brand in CSC and a great name and brand in SRA,” Prior said.
The plan will be to somehow tap into both of those legacies as a new brand is created. He joked that the new name “will be so good, you’ll want to wear the tattoo.”
Where will the headquarters be?
It is undecided whether the combined companies will remain in Falls Church, Va., where the CSC public sector business currently is based, or if it will use SRA’s Fairfax, Va., headquarters. The only for sure, according to Prior, is that it will be somewhere in Northern Virginia.
Who will run the business under Prior?
As of now, there have been no announcements of who the business leaders reporting to Prior will be, but he told me that he wants to start with people.
“I’m going to start with culture and values and dedication to the mission of the federal government. If we build a team around that we’ll do well,” he said. “But all of that starts with people.”
He plans to have a management team that includes people from both companies. “We have the best athletes on both sides,” he said. “We’ll have a merged team.”
Before the plan to acquire SRA, Prior was already looking at how to ramp up the organization to be a publicly traded company. SRA was going through the same process as it prepared to go public itself. So, the two organizations will have shared experiences in that area, Prior said.
“We’ll roll out our top level team in quick order, and we’ll make sure we have the best talent and best leadership in the right jobs,” he said.
What are strengths does each company bring?
Both companies have good capabilities in enterprise resource planning. CSC has worked on SAP-based projects, while SRA has been more of an Oracle shop. “So we’ll have a very sound shop around helping with ERP,” he said.
Both companies are strong in Agile development. “That is something the government desperately needs, so you can’t have too much of that,” Prior said.
The two companies also have been doing a lot of work with software as a service providers such as Salesforce and ServiceNow. “We’ll build on that,” he said.
The cloud will be an important growth opportunity, and Prior pointed the CSC’s recent FAA win to provide cloud services. Their team includes Amazon Web Services and Microsoft Azure.
Prior attributes CSC’s lean cost structure to helping attract partners like AWS and Microsoft. The plan is to continue building on those partnerships.
A particular strength that SRA brings is its business development capabilities. “SRA has done unbelievably well. We are coming up to speed, but we need to catch up with them,” Prior said.
Why is scale so important?
During his call with investors and Wall Street analysts, CSC Chairman and CEO Mike Lawrie spoke about how important scale is in today’s market. So I asked Prior what scale means, and how it’ll help him compete.
“We’ve spent three years working on leaning out our overhead costs and operating in a very efficient manner, whether it is a cost-plus contract or fixed price,” he said.
Offering next generation IT solutions “enables that in a profound way,” he said, and the cost structure also helps attract partners like Amazon, Microsoft and others.
“But scale also gives you the advantage of letting you spread out your costs as you cut them,” he said.
Another important aspect of scale that CSC has used to its advantage is that it has allowed the company to make investments in new offerings such as the datacenter consolidation at the Homeland Security Department or the Army’s Flight School XX1.
“When you make those investments, you can expect a return as you build your business around it,” Prior said. “Scale gives you the balance sheet to do that.”
Cloud, managed services, Agile development and cybersecurity will be important areas of investment going forward. Partnerships will be a critical component as well.
In many ways, Prior has the easiest and the hardest job in town right now. It’s easy because both SRA and CSC have gone through the cost cutting phase. Both companies are pushing new technology solutions such as Agile development and the cloud. Both have bounced back from financial troubles and damaged reputations.
It’s hard though because the market is hyper competitive. No matter how cost effective your operation, you can’t let up on the pressure in that area. He also has not one but two huge legacies to live up to, but those legacies can also be a huge source of strength as well.
One interesting financial tidbit
Often with acquisitions there is talk about financial synergies and costs savings. In this deal, they say they have only identified about $51 million in cost savings. Prior said most of these will revolved around things such as general and administrative costs, facilities consolidation and integrating how the company buys things.
"This deal wasn't driven by achieving cost synergies," he said.
The new company will have $5.5 billion in revenue and they could only identify $51 million in cost savings. In many ways, that ratio of $5.5 billion to $51 million validates a lot of the hard choices the companies have made in recent years.
Now, the focus and the challenge will be around growth, not cost cutting.
Posted by Nick Wakeman on Sep 01, 2015 at 9:30 AM