Post SAIC-Engility question: who and what next?
One of the fun things to do after a large deal such as Science Applications International Corp.’s planned acquisition of Engility is to speculate about who is next.
It should be noted that everyone is essentially for sale even if you aren’t a public company. Private equity-backed platforms and entrepreneur-led companies all have exit strategies. Often more than one.
So almost anyone could be the next takeover target. There are a select few public companies that are too big to buy: obviously Leidos and General Dynamics fit that description. Also include Booz Allen Hamilton, CACI International and now SAIC.
The second question -- who is the next big dealmaker -- is slightly easier to answer.
First let’s eliminate some buyers.
We have known that SAIC was ready to buy. When General Dynamics acquired CSRA, we learned quickly that SAIC and CACI International also were bidders. CACI of course mounted a hostile takeover effort and eventually withdrew.
I said then to watch SAIC and CACI because they both showed that they could marshal significant resources to make a deal.
SAIC has now made their deal, so we can take them off the table as a buyer of scale. They have to digest Engility and make that combination work as the federal IT environment continues to change and change fast, as Technology Business Research public sector IT analyst Joey Cresta wrote in a research note Monday.
"SAIC’s long‐term challenge will be no different than it is today: the automation of transactional tasks and the technology‐driven compression of windows of competitive advantage threaten its legacy business model," Cresta wrote. "(Intellectual property) monetization will help to define winners and losers amid these disruptive environmental factors."
GD is also off the board for a major deal as it integrates CSRA.
Perspecta is still coming together and has some major recompetes to focus on, so it would be surprising to see them make a deal for scale so soon.
Booz Allen Hamilton has never been a big acquirer. They like their $6 billion size and tend to focus on tuck-in, capability acquisitions. Northrop Grumman is working on Orbital ATK.
ManTech International has re-emerged as a buyer but their biggest deal was last year’s acquisitions of InfoZen and that was valued at $180 million. A nice deal but not a blockbuster size.
ManTech is at a size that would make them an attractive takeover target because of the scale and capabilities that they bring. But right now, an acquisition would surprise me.
Leidos has integrated the former Lockheed Martin IS&GS business and has indicated it is ready to make deals again. But does it really to make a large play for scale when it is at the top of the heap with GD? Both companies are each right at $10 billion each.
So that pretty much leaves CACI as the last pure-play government services company in a position to make a large deal. I put ManTech at a dark horse because they just haven’t pulled the trigger on a transformative acquisition. But they could muster the resources.
CACI touts M&A as a core competency so we all know they are looking and looking hard.
The company also is the one most capable of making a large deal. After all, they did marshal $7.2 billion in cash and stock in their attempt to buy CSRA. They have made several smaller deals in recent years, including more recently the former CSRA Navy systems engineering business that GD had to dispose of.
I expect them to be patient. They have said they are not driven by a desire to add scale for the sake of scale.
And of course, there are wildcard buyers out there.
Engility CEO Lynn Dugle said Monday there were other suitors for the company but SAIC was the best fit.
No word on who the other bidders were. We’ll keep monitoring filings to see if we can get any hints.
There are of course private equity firms like Veritas Capital and Carlyle Group. James Bach, Bloomberg Intelligence federal market analyst, raised that very possibility in a July research report and said Carlyle's adding of former CSRA CEO Larry Prior to the executive team could "helm a government services investment sometime down the road."
There also are other strategic buyers who aren’t traditional IT providers such as KBR and Parsons.
Both companies have diversified with IT buys in recent years. KBR acquired Wyle, Honeywell Technical Services and SGT. Parsons has made a series of smaller buys but has significantly scaled up with Polaris Alpha.
Many companies are trying to transform themselves to take advantage of growing federal budgets as well as disruptive technologies fueling IT modernization and a shift to the cloud among other trends.
M&A is one of the fastest and most powerful tools for companies in reposition themselves. And while we’ve focused on the large deals, a lot is happening at the small and mid-tier levels as well.
Be prepared because change is happening all around us.
Posted by Nick Wakeman on Sep 13, 2018 at 12:53 PM