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By Nick Wakeman

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Nick Wakeman

CACI-L-3 deal adds more intell, defense work

When it comes to making major deals in the government, it should come as no surprise that CACI International is right there in the mix.

Two years ago, it made the biggest deal in company history – the $820 million purchase of Six3 Systems – and after digesting that chunk, CACI is again proving it isn’t afraid to reach.

This time, it is a $550 million deal to acquire L-3’s National Security Solutions business. The unit had about $1 billion in revenue and 4,000 employees, with 90 percent of those holding security clearances.

With the addition of NSS, CACI will have more than $4 billion in annual revenue.

“The NSS acquisition strongly reinforces our strategic growth plan. I am confident the complementary, high-end solutions gained will strengthen our competitive position,” CACI CEO Ken Asbury said.

The deal adds depth and breadth in areas such as intelligence, cyber, and C4 solutions and services, the company said. Intell and cyber especially are considered strong growth areas in the government market.

L-3 NSS holds positions on several large IDIQ contracts including DISA Encore, DHS Eagle II, the Army’s ITES-2, GSA OASIS, the Army’s R2-3G, GSA Alliant, and the Army’s Global Tactical Advanced Communications Systems and Services contract.

The business is broken into six operating units: Defense Solutions, Global Solutions, Federal Solutions, Intelligence Solutions, ASA Ltd – UK and L-3 Data Tactics.

CACI Executive Chairman Jack London also cited a strong cultural fit between the two companies. “The corporate culture of NSS fits ideally with the principles of CACI’s culture – an unwavering commitment to good character, integrity, ethics, and innovation,” he said.

The company is financing the deal with term and revolving debt. It is expected to close by the end of March, subject to the usual regulatory approvals.

With the sale of its NSS business, L-3 will be focused on its three remaining business segments: Aerospace Systems, Electronic Systems and Communication Systems.

In a statement, company CEO Michael Strianese said that L-3 was “in the midst of a business transformation aimed at reshaping our portfolio, strengthening our focus on markets where we have leading positions, and improving our top-line growth and margin profile.”

He called the remaining businesses “higher returning,” which fits with comments I’ve heard about the deal that the NSS business had lower margins compared to the rest of L-3. Excluding NSS, L-3 expects 2015 revenue of $10.4 billion.

In 2014, the NSS business had sales of $1.2 billion, compared to $1.3 billion in 2013. Through the first three quarters of 2015 (ended Sept. 25), the business had revenue of $768 million, compared to $945 million through the same period in 2014.

Its operating margin also dropped to 3.6 percent from 5.9 percent.

Those numbers likely explain the price CACI is paying -- $550 million for about $1 billion in revenue.

But the plus side is L-3 NSS’s contracts, experience and customer base, plus those 90 percent of the 4,000 employees with security clearances.

Obviously, CACI will be looking to inject growth into the business, so the first step will be plugging NSS into CACI’s business development engine.

And despite NSS's lower margins, CACI says that the deal will be accretive during this fiscal year, which ends June 30. So, that means that the acquisition will add to CACI’s bottom line from the get-go.

But the challenge will be growth and improved margins over the long haul.

“We expect NSS’s deep subject-matter expertise and proven technologies to provide significant advantages in pursuing and priming larger opportunities,” said John Mengucci, CACI chief operating officer and president of U.S. operations.

That’s it in a nutshell right there: the proverbial "one plus one equals three."

Posted by Nick Wakeman on Dec 08, 2015 at 9:32 AM

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