Engility’s acquisition of TASC diversifies its customer base and adds high-value solutions to its portfolio — all acquired for a bargain price
John Caucis, Public Sector Senior Analyst, TBRI
NOV 06, 2014 01:57 AM
A+ A A-

2014 has been a busy year for Engility on the acquisition front

Engility's latest purchase, TASC (formerly known as The Analytic Sciences Corporation), is the former technical advisory and engineering services unit of Northrop Grumman's Information Systems business group, spun off by Northrop in late 2009. The divestiture was made following the 2009 Weapon Systems Acquisition Reform Act (WSARA) that tightened organizational conflict of interest (OCI) regulations by prohibiting federal contractors from acting as advisers on and developers of major defense acquisition programs (MDAPs). Engility's genesis traces back to another similar spin-off that its former parent, L-3 Communications, completed in July 2012. Nearly two years after Northrop Grumman responded to the federal government's increased scrutiny on OCI by carving out and divesting TASC, L-3 Communications sought to avoid future OCI entanglements with the spin-off of Engility.

The purchase of TASC will be an all-stock deal valued at $1.1 billion, and Engility will assume about $613 million in net debt and the net present value of TASC's tax assets.

Engility's acquisition of TASC follows its $120 million acquisition of Dynamics Research Corporation (DRC), which enhanced its technology services and management consulting capabilities for U.S. federal government clients significantly, in January. DRC expanded Engility's footprint in federal healthcare, homeland security, research and development, C4ISR (command, control, communications, computers, intelligence, surveillance and reconnaissance), financial reform and regulation and defense logistics. Engility gained 1,100 employees, between $270 million and $280 million in revenue (based on TBR estimates) and a book of business where DRC was the prime contractor on 80% of its federal awards.

The price of TASC reflects persistent challenges in the federal IT space over the last several years

In 2009 Northrop Grumman sold TASC to private equity backers General Atlantic LLC and Kohlberg Kravis Roberts & Co. for $1.65 billion. The agreed-on price for TASC to Engility, nearly $550 million less than what TASC's owners paid five years ago, likely reflects how challenging the federal IT environment has been since 2009. Additionally, TASC employs about 4,000 employees versus 5,000 at the time of the spin-off from Northrop. TASC's projected revenue contribution to Engility in 2014 of $1.1 billion is down 31% from $1.6 billion in 2009 and implies a nearly flat 1x multiplier for the acquisition price.

TASC has a strong reputation as a capable federal contractor, especially in the intelligence and national security arenas, but it has struggled against the market headwinds of contracting spend and budget turmoil since the split from Northrop Grumman. Despite several major federal awards during its tenure as an independent company — such as an $828 million deal with the FAA in October 2010; a $97 million award in March 2011 with the Defense Threat Reduction Agency; a five-year, sole-source, $600 million IDIQ with the Defense Threat Reduction Agency in April 2011; and a $54 million award in May 2012 with the Department of Homeland Security — TASC was unable to realize consistent top-line growth. In June 2011 TASC acquired TexelTek, an Annapolis Junction-based cloud computing and cybersecurity specialist, but in 2013 TexelTek lost its main federal contract, and it was rumored TASC did not retain the legacy TexelTek employees after the contract loss.

Despite the bargain price, TASC is a high-value asset that will enhance and diversify Engility's solution set and propel Engility upmarket in federal IT quickly

TASC has been serving the federal government since its founding in 1966, providing advanced systems engineering and integration, decision-support services, mission operations support, systems and policy analysis, data analytics, cloud computing, testing and evaluation and cybersecurity solutions, primarily to the Department of Defense (DOD) and intelligence agencies. TBR believes TASC is particularly strong in the intelligence community and has been expanding its capabilities in the public safety arena, an area where TBR has observed recent investments from several top-tier defense and aerospace contractors such as Lockheed Martin, Raytheon and General Dynamics.

TASC boasts that the majority of its employees, predominantly software developers, software engineers, systems engineers, network engineers and intelligence analysts, hold advanced degrees and certifications in fields including engineering, computer sciences and economics. TASC also made a number of high-profile executive hires during its five-year stint as an independent company, recruiting executives from competitors such as CACI and Veridian. Mark Forman, who served as administrator of the Office of e-Government and IT (a position regarded by many in federal IT as the first federal CIO) from June 2001 to August 2003, joined TASC's signals intelligence, infrastructure and security business group in April to expand the sector's capabilities in cyber, cloud, analytics and mobility.

TBR believes there is minimal overlap between the customer portfolios of Engility and TASC, while the respective solution portfolios of the two will be complementary. TASC will add 850 new contracts and task orders to Engility's award roster and fill solutions gaps for Engility in intelligence analysis, space systems solutions, cybersecurity forensics, data analytics, C4ISR solutions, geospatial intelligence, cloud and mobility. TASC is also a prime contractor on 85% of its federal contract awards and will expand Engility's customer base into the U.S. Air Force, the National Aeronautics and Space Administration (NASA) and the Defense Information Systems Agency while enhancing Engility's position with agency clients including the Department of Homeland Security, Defense Threat Reduction Agency, the Federal Aviation Administration, the Missile Defense Agency and the Naval Sea Systems Command (NAVSEA). The portfolio boost will enhance Engility's competitive positioning against stalwarts in these solution areas: Northrop Grumman Information Systems, Lockheed Martin Information Systems and Global Services, Raytheon Intelligence and Information Systems and General Dynamics Information Systems and Technology. The acquisition of TASC will also enable Engility to quickly narrow the gap with many second-tier (but still leading) federal IT contractors, such as CACI, ManTech, Harris Corp. and, in particular, Booz Allen Hamilton, which has also been investing organically and inorganically in engineering, rapid prototyping, predictive intelligence, program management, cyber, analytics, digital and open platform solutions. TASC's management advisory capabilities will help Engility compete more effectively against not only Booz Allen Hamilton but also Accenture and Deloitte Consulting — all of which have gained traction with consulting-led approaches in the federal IT and professional services contracting space.

The acquisition of TASC will cause Engility's customer mix to shift from heavily weighted to the DOD and with limited focus on the intelligence community to more balanced across the DOD, intelligence clients and federal civilian agencies. Engility derives 64% of its revenue from the DOD, 35% from federal civilian customers and 1% from the intelligence community; however, Engility's pro-forma 2014 revenue of $2.5 billion will be split between 48% DOD, 24% federal civilian and 28% intelligence.

Engility's M&A activities in 2014 may hint at a coming period of consolidation among federal IT contractors

TBR observed the overall pace of acquisition activity in the federal IT market diminished in 2014 compared to 2013; we witnessed very few large, strategic acquisitions similar to Engility's purchase of TASC. In 2013 the largest federal IT-focused acquisition made by one of the 21 companies in TBR's Public Sector IT Services Benchmark was CACI's $820 million purchase of Six3 Systems in 3Q13. Many of the observed acquisitions have been $100 million or less in total transaction value with a primary solutions focus on niche companies offering unique IP or capabilities in emerging areas of federal IT spend such as cybersecurity, cloud, big data or analytics. Throughout 2013 and 2014 federally focused IT contractors contemplated acquisitions cautiously and pursued them selectively. TBR believes the pervasive turmoil in the federal IT budget and contracting environment (especially the series of continuing resolutions, sequestration and the government shutdown in October 2013) dissuaded many leading contractors from making acquisitions, especially large-scale purchases. The tumultuous market environment has generated tremendous uncertainty and clouded the outlook for top-line revenue and margin performance for federal IT contractors, making accurate valuations of potential acquisition candidates difficult. Federal contractors have preferred to use their cash to reward shareholders via increased dividend payouts, repurchase shares or improve balance sheet health by reducing debt leverage.

In the wake of contracting federal IT budgets, activity among private equity buyers also significantly ramped down after a flurry of acquisitions of government contractors between 2007 and 2010. During this time, notable buyouts by equity investors included the purchase of the federally focused operations of Booz Allen Hamilton by the Carlyle Group for $910 million in 2008 and the purchase of Lockheed Martin's Enterprise Integration Group by Veritas Capital for $815 million in 2010. The onset of austerity in federal spending and the corresponding turmoil in the contracting environment have also made it increasingly challenging for private equity firms to relinquish and recoup their investments.

As a result, TBR believes the timing of the Engility/TASC merger may indicate the federal IT market is on the cusp of a renewed period of consolidation. While the outlook for federal IT spending in 2015 is for more of the same (i.e., flat to marginal growth, with most agencies cutting IT spending and only a handful of agencies expecting to increase investments in IT and other professional services), other contractor performance metrics suggest a modest improvement. For example, TBR has observed backlog contraction moderate for several federal IT contractors after several years of persistent and often precipitous declines as well as modest backlog growth for some contractors — perhaps a harbinger of better times ahead. The prospect of even a modest rebound in the beleaguered federal IT space leads TBR to believe the low-water mark in company valuations, despite the continued uncertainty in making accurate assessments, may have been reached in 2014. This may have prompted the Engility acquisition of TASC, with possibility for more acquisitions. Other federal IT contractors with a history of frequent M&A activity, such as ManTech, have indicated they also plan to revive their acquisition efforts in 2015.

 

Technology Business Research, Inc. is a leading independent technology market research and consulting firm specializing in the business and financial analyses of hardware, software, professional services, telecom and enterprise network vendors, and operators. Serving a global clientele, TBR provides timely and actionable market research and business intelligence in a format that is uniquely tailored to clients' needs. Our analysts are available to further address client-specific issues or information needs on an inquiry or proprietary consulting basis. 

FIRST
PREV
NEXT
LAST
Page(s):
[%= name %]
[%= createDate %]
[%= comment %]
Share this:
Please login to enter a comment:
 

Computing Now Blogs
Business Intelligence
by Drew Hendricks
by Keith Peterson
Cloud Computing
A Cloud Blog: by Irena Bojanova
The Clear Cloud: by STC Cloud Computing
Careers
Computing Careers: by Lori Cameron
Display Technologies
Enterprise Solutions
Enterprise Thinking: by Josh Greenbaum
Healthcare Technologies
The Doctor Is In: Dr. Keith W. Vrbicky
Heterogeneous Systems
Hot Topics
NealNotes: by Neal Leavitt
Industry Trends
Internet Of Things
Sensing IoT: by Irena Bojanova

 

RESET