Justice seeks to stop Booz Allen's Everwatch acquisition

Booz Allen Hamilton’s acquisition of Everwatch is being challenged by the Justice Department, which has filed a lawsuit to block that $440 million transaction because of antitrust concerns.

Booz Allen has been a long-time provider of signals intelligence modeling and simulation services to the National Security Agency.

According to Justice's complaint filed in U.S. District Court-Maryland, Booz Allen has held the work for more than 20 years through all three iterations of the contract called MASON.

No other company bid on that contract when it was last competed in 2014.

But Everwatch has been making inroads in the modeling and simulation niche since its unveiling to the market four years ago.

Private equity-backed Everwatch identified weaknesses in Booz Allen’s approach and is challenging for the new contract to be called Optimal Decision.

NSA needs a contractor that can provide signal intelligence modeling and simulation services. The winning team much understand the collection, processing and analysis of signals intelligence.

DOJ alleges that Booz Allen recognized it was being challenged for the contract and decided to move on acquiring Everwatch.

Originally announced in March, that transaction is expected to close later this year.

The complaint calls the transaction a “merger-to-monopoly” because it leaves no competitor in place to challenge Booz Allen.

“When the companies agreed to merge, it no longer made sense to bid aggressively against each other. No matter which company NSA awards the contract to, the post-merger Booz Allen ultimately would provide the services and earn the profits,” Justice writes.

Everwatch declined to comment, but a Booz Allen spokeswoman said in a statement to WT that they "strongly disagree" with how DOJ characterized the transaction and the company will defend it.

"The transaction would accelerate technology development cycles and enable faster delivery of classified software development and analytics for national security clients, including AI, full-spectrum cyber operations, mission analytics, 5G, and TechSIGINT capabilities," the statement reads.

"This transaction would drive major digital and cyber transformation in the intelligence community and beyond, creating a more comprehensive portfolio of offerings to a wider range of intelligence and defense clients."

DOJ's complaint outlines the nature of the competition: companies competing with each other for talent, designing solutions and driving toward the best-value for the customer.

Folding Everwatch into Booz Allen would eliminate any incentive to do that, DOJ writes.

“Because of this proposed merger, both companies now are incentivized to reduce their investments and other terms and increase prices to NSA,” according to the complaint.

Justice's move to raise an antitrust issue in the government technology and services market is unusual because of its fragmented nature with thousands of companies competing for share.

For the Booz Allen-Everwatch matter, Justice cites the concept of a “relevant market” under Section 1 of the Sherman Act and Section 7 of the Clayton Act that are the primary laws for antitrust enforcement.

DOJ says the complexity and knowledge needed to provide the modeling and simulation services to NSA means there is no easy replacement for Everwatch in the competition.

The department is arguing there needs to be a deep understanding of the hardware and software that gathers signals intelligence, the nature of the data and the many ways the data is processed.

By acquiring Everwatch, Booz Allen is eliminating its only competitor as DOJ sees it.

We have to note that DOJ's filing is just the government’s side of the case. The department still has a heavy burden to prove that there is an antitrust issue, even with just a single bidder.

It isn’t uncommon for an agency to compete a contract but then only receive one bid.

Acquisitions among services firms such as Booz Allen and Everwatch generally breeze though the regulatory review process because of the large number of companies in the market and lower barrier-to-entry.

DOJ is arguing in this case that the expertise needed to work at the NSA creates a high barrier-to-entry.

The lawsuit was filed Wednesday, so Booz Allen and Everwatch have not made filings of their own yet.

We’ll follow this one closely because if the court rules in favor of the Justice Department, it could have a broad impact on mergers-and-acquisitions.

The impact may vary with each individual agency, depending on what is determined by the relevant market analysis.