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By Nick Wakeman

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Nick Wakeman

Lockheed-Leidos merger too risky for Army Corps of Engineers

Nearly every announcement that a publicly traded company releases includes boilerplate verbiage at the end, warning about the risks of forward-looking statements.

The warnings are there to satisfy Securities & Exchange Commission requirements, but does anyone actually read them?

Apparently, though, the Army Corps of Engineers does read them, and they were sufficiently concerned that they deemed Lockheed Martin too risky for a $564.3 million contract.

And the Government Accountability Office backed up the Corps' decision and ruled against a Lockheed protest, clearing the way for Science Applications International Corp. to claim its prize.

The contract is for a wide-range of IT services and was awarded under the GSA Alliant contract. Lockheed and SAIC were two of several bidders competing for the work.

But the timing proved poor for Lockheed because it was in the middle of the procurement that the company announced it was divesting its IT business.

The GAO decision in favor of the Army Corps of Engineers cites two press releases. The first was Lockheed’s decision to divest its IT business, and the second was the announcement that the business would be sold to Leidos. It was the second press release that apparently concerned the Corps' acquisition shop.

That release included a section, “Cautionary Statement Regarding Forward Looking Statements,” that talked about the uncertainties of the combination of the Lockheed IT business with Leidos. The uncertainties included the possibility of “business disruption, operational problems, financial loss, legal liability to third parties, or similar risks, any of which could have a material adverse effect on LM’s or Leidos’ consolidated financial condition, results or operations or liquidity.”

It’s a worst-case scenario type thing, but no one really expects that to happen. Kind of like the warnings at the end of a Cialis commercial.

But apparently, the Corps took those warnings very seriously. Its source selection evaluation board worried about unknown impacts on the proposed rates because of the combination of Lockheed Martin’s IT business with Leidos, “since the rates are based on present company history and budget information.” 

In essence, they were concerned that a new prime – Leidos – would actually be the one doing the work, not the bidder, Lockheed Martin.

The source selection advisory council was able to determine a dollar amount for that risk--$7.275 million, which they added to Lockheed’s proposed pricing. The addition helped bring Lockheed’s price to $567.7 million, compared to SAIC’s price of $564.3 million.

Armed with this information, the contracting officer determined that the Leidos-Lockheed combination represented too many unknowns, so the officer wasn’t able to determine the realism of the Lockheed Martin proposal. With that, Lockheed was eliminated from the competition.

In a twist that probably can only happen in the government market, SAIC’s proposal included Leidos as one of its teammates. (Proposals were submitted before Lockheed and Leidos announced their deal.)

Here, too, the evaluation team calculated the risk of Leidos being part of SAIC’s team after its acquisition of Lockheed Martin was completed.

The source selection advisory council determined that Leidos would only be responsible for 6.3 percent of SAIC’s proposed cost. They concluded that the Leidos-Lockheed acquisition represented minimal risk to SAIC’s proposed cost.

In its protest, Lockheed tried to argue that the acquisition by Leidos shouldn’t have been an issue. For one, the Lockheed business was not being broken up and absorbed into Leidos but would be a subsidiary. The Corps should have looked at the SEC filings; that way, it would have understood that structure, the company argued.

But GAO did look at the filings and pointed to the use of the term “merger” throughout the documents. “It is not clear that even if the agency had considered these documents it would have reached a different conclusion as to the nature of the transaction,” GAO wrote in a footnote.

GAO ruled that the Corps was acting reasonably when it concluded that the transaction “created some element of risk regarding the protester’s actual performance.”

GAO made a similar decision in 2014. Ironically, that decision went against SAIC, when Wyle protested a NASA award to SAIC. SAIC was in the midst of splitting and creating Leidos and the new SAIC.

GAO ruled that the new SAIC was a new prime contractor and that NASA didn’t adequately evaluate the impact of that change. They sustained Wyle’s protest and Wyle eventually won the $1.4 billion contract.

There is a cautionary tale here given all the mergers and acquisitions in the market. You need to be able to explain to your customers and contracting officers the risks your transaction creates and how you are mitigating them.

Once a deal is announced, both the buyer and the seller should be talking to customers about it and not just offering words of reassurance, but rather something concrete: this is what it means, this is how it’ll impact operations, etc.

Don’t leave it to those boilerplate statements that you think no one reads because, obviously, they do get read.

Posted by Nick Wakeman on Oct 13, 2016 at 9:28 AM

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