A bidding duel in the Washington suburbs for a relatively small cybersecurity and analytics company underscores the intensifying competition for lucrative contracts to handle data for the federal government.
CSRA Inc. agreed to sell itself to defense giant General Dynamics Corp. a month ago for $6.7 billion in cash -- only to receive a $7.2 billion bid on March 18 from a much smaller suitor, CACI International Inc.
The would-be acquirers are battling for CSRA’s cybersecurity and data-analytics skills as defense spending rises under President Donald Trump -- and information-technology contracts get bigger and more complex.
Adding CSRA would make General Dynamics the No. 2 federal IT provider. For CACI, a deal would boost government contract work and, the company says, allow for cost savings of $165 million.
“While at first blush CACI offers a higher bid, the lower-risk nature of GD’s bid could be attractive to shareholders,” said Sheila Kahyaoglu, a Jefferies Group analyst who covers General Dynamics, in a note. There’s only about a 25 percent chance that General Dynamics, the maker of Abrams tanks and nuclear submarines, will raise its offer, she said.
The bids set up a David-and-Goliath contest pitting CACI and its $3.88 billion market value against General Dynamics, a diversified contractor some 17 times its size. General Dynamics said its cash offer of $40.75 a share and assumption of $2.8 billion in debt provides “ superior value.” CACI said its $44-a-share offer, with cash of $15 a share and the rest in stock, allows CSRA investors to gain more upside from the combination.
“A deal would generate significant scale for CACI, making them more competitive in the long-run,” said Krishna Sinha, an analyst at Vertical Research Partners, in a note to clients. “While CSRA provides some of these same benefits for GD, we think GD is already a high-capability, fairly high-margin provider of complex services to the government.”
The purchase would leave CACI with about $6 billion of long-term debt and combined earnings before interest, taxes, depreciation and amortization of $1.18 billion, or a debt-to-EBITA ratio of 5 times. That ratio could worsen if the merged company loses business when rebidding contracts, Sinha said.
General Dynamics, whose offer expires April 2, is valued at $6.7 billion. It has secured all necessary regulatory approvals and has the funding in place to complete the transaction in early April, it said in the statement. General Dynamics called into question CACI’s estimate for cost savings.
“CACI’s estimated synergies are, we believe, aggressive at best,” Falls Church, Virginia-based General Dynamics said in a statement on March 18. “General Dynamics has a long history of successfully executing acquisitions in a timely and efficient manner.”
CSRA’s board and advisers will review and consider the new proposal from CACI, the target company said in a statement. The board hasn’t changed its recommendation that shareholders tender their stakes in accord with the General Dynamics offer, according to the statement. A General Dynamics unit already has begun the tender offer.
The competing offer from CACI is comprised of $15 cash and a fixed ratio of 0.184 of its own shares for each share of CSRA. In a statement Sunday, Arlington, Virginia-based CACI said its plan would “unite two businesses with long-term customer relationships, complementary capabilities and substantial presence in high-growth markets.”
CACI ended last week at a record closing price of $157.45 a share and gained about 27 percent in the past year through March 16.
An acquisition of CSRA by General Dynamics would create a computer-services provider with $9.9 billion in sales, the defense giant said previously. The combined companies would be the second-largest federal IT provider behind Leidos Holdings Inc. and ahead of Booz Allen Hamilton Holding Corp., according to a Feb. 12 General Dynamics presentation based on 2018 estimated revenues.
On the other hand, if CACI’s bid is successful, it would foil the biggest-ever acquisition by General Dynamics, whose previous largest deal was for business-jet maker Gulfstream almost 20 years ago.
CSRA was formed in 2015 from the combination of SRA International with the government business of Computer Sciences Corp. The company is expected to have $5.4 billion of revenue in fiscal year 2018 ending March 31 and has about 19,000 employees, according to the presentation. Revenue is split in almost equal thirds among health and civil, defense, and intelligence.
By Thomas Black