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By Nick Wakeman

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Nick Wakeman

SAIC taking long view in combo with Engility

Science Applications International Corp. is touting that its $2.5 billion acquisition of Engility Corp. will create a top-three IT and professional services provider to the federal government behind Leidos and General Dynamics.

But what exactly does that mean?

In a call with reporters Monday afternoon, SAIC CEO Tony Moraco and Engility CEO Lynn Dugle said the combination bolsters their companies' abilities to take advantage of the growing budget environment in the soon-to-end 2018 fiscal year and FY 2019.

“When I looked at the market and how robust the budgets were, it was obvious if we wanted to take advantage of that then we had to get into the market immediately,” Dugle said.

The common cultures, structure and strategies should make integration very straightforward and allow the larger SAIC to focus resources on winning new business and not on a complicated integration path, she said.

The budget picture gets cloudier after 2019 and the expiration of the current budget deal. But Moraco said the combination strengthens SAIC’s position in areas that should be more immune to the ups and downs of the federal budget, he said.

“We are investing in areas that are enduring,” Moraco said. These include space, modernization of tactical systems, command and control and enterprise IT modernization.

“For example, we are investing in data analytics, which is a precursor to machine learning on the way to artificial intelligence,” he said.

“The combination allows us to access new and bigger markets with more differentiated capabilities,” Moraco said.

Budgets eventually have to come down after they go up, Dugle said. But in areas such as space and intelligence, she said investments have to continue.

In a Thursday report for clients, Technology Business Research's public sector IT analyst Joey Cresta wrote that adding Engility helps SAIC "compete more aggressively in the short term" amid the current growth.

"But there will be no time for (SAIC) to rest on its strategic laurels after the deal closes," Cresta wrote.

Customer-wise, AIC is picking up more Air Force work plus customers with space and intelligence agencies. Bolstered capabilities SAIC is touting include intelligence analysis, launch support and high-performance computing.

Moraco said that the number of SAIC employees with security clearances will grow by 50 percent after the deal closes. Overall, SAIC stands to have 23,000 total employees post-close.

Engility’s cleared employees and its base of intelligence customers were two of its most attractive attributes for SAIC. Thirty-seven percent of Engility’s customers are in the intelligence community, compared to just 7 percent for SAIC.

Moraco also said the new SAIC will have a $1 billion portfolio of space work.

SAIC has wanted to move deeper into the intelligence market and this acquisition allows the company to make a move that brings scale and multiple intelligence customers, Moraco said. The company lost much of its intelligence work in the 2013 Leidos-SAIC split then regained some through the Scitor acquisition three years ago.

Intelligence market will be the most significant shift for SAIC’s business mix, according to company data. SAIC's intelligence business will go from 7 percent to 16 percent. The other segments of the business are only making smaller shifts. The civil business is going from 30 percent to 28 percent. Defense moves from 61 percent to 55 percent. "Other" goes from 2 percent to 1 percent.

On the contract side of the house, the percentage of the fixed-price contracts stays at 15 percent post close. Cost plus work rises from 46 percent to 52 percent and time and material goes from 26 percent to 23 percent. SAIC’s fixed-price supply chain business will drop from 13 percent to 10 percent of revenue.

In the areas of specific contracts, the companies have several large multiple award contracts in common, including DHS EAGLE II, Alliant 1 and 2, Human Capital and Training Solutions, CIO-SP3, Seaport-e and OASIS.

But new contracts for SAIC include the Netcents 2 Application Services (SAIC holds other parts of Netcents). Engility also is bringing FAA ETASS, the Army INSCOM Global Intelligence Support Service contract, and multiple contracts with Defense Technical Information Center.

One sign that Engility and its board believe in the combination is that the $2.5 billion transaction value is all stock. No one is walking away with huge amounts of cash. Engility shareholders will own 28 percent of the combined company. Its major investors KKR and General Atlantic will collectively own 7 percent.

“We believe the combination is strong and will only get better over time,” Dugle said.

Posted by Nick Wakeman on Sep 10, 2018 at 9:46 AM

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