Credit: Shutterstock photoScience Applications International Corporation SAIC inked a definitive agreement to buy Reston-based Scitor for $790 million, marking its re-entry into the intelligence market and its first acquisition since its spin-off from namesake parent company in 2013.
Slated to close in May this year, the acquisition is in sync with SAIC's strategy to deepen its foothold in the intelligence and Air Force markets. The deal will give SAIC access to classified contracts with the Air Force, the National Reconnaissance Office and many intelligence agencies, and will augment the company's federal clientele.
Scitor, owned by private equity firm Leonard Green & Partners LP, has a remarkable reputation in the intelligence community, with most of its employees holding high-level security clearances with the government.
The deal makes sense as the business models and cultures of the two companies are consistent with each other, with low capital requirements, similar services portfolios, and stable cash flows.
The acquisition, which SAIC will fund through cash on hand and increased borrowings, is expected to be accretive to its EPS in the first year, excluding amortization of intangibles and $15 million in transaction costs. The deal will add $600 million in additional revenues, pushing SAIC's total revenues to $4.5 billion, with earnings of $321 million. Also, SAIC expects to unlock a minimum of $20 million in annual pre-tax cost savings.
Restricted spending by the U.S. government, particularly in the areas of defense and security, has taken a toll on companies that depend on government servicing contracts. The SAIC-Scitor deal is a part of industry-wide consolidation, as companies seek to chase new markets via the inorganic growth route. For instance, Chantilly-based Engility completed its $1.3 billion buyout of TASC last week.
In 2013, the former SAIC spun off its services arm and rebranded itself Leidos Holdings, Inc. LDOS to eliminate government organizational conflict of interests. After a shaky start, SAIC is now on a strong earnings growth trajectory, and is building on its momentum with the Scitor buy.
SAIC presently holds a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the information technology services industry include CDW Corp. CDW and Fair Isaac Corp. FICO , both carrying a Zacks Rank #1 (Strong Buy).
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
