Science Applications Int'l Corp (SAIC)

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SAIC CEO offers a window into the consolidation wave taking over the government market

Five years ago this month, Science Applications Engineering Corp. executed a complex corporate split that saw SAIC spin off a $4 billion government IT services business under that decades-old name while a new $6 billion company, rebranded Leidos Holdings Inc., took the national security and commercial health and engineering markets.

The idea, as original FedBiz writer Jill Aitoro documented in a cover story at that time, was to move away from being a confusing single entity where a thousand flowers bloomed, where many ideas from many sources were pursued but without a core strategy in place to be sure the pieces fit well together.

A clean break would allow both to drive their respective value propositions — simply put, Reston-based Leidos (NYSE: LDOS) would design government tech, SAIC (NYSE: SAIC) would implement it, free from conflicts of interest.

Fast forward five years and SAIC, which got smaller and more focused, is making an aggressive growth push with its deal announced Monday to acquire Chantilly-based Engility Holdings for $2.5 billion in stock. And so during a media call with executives, a question was put to SAIC CEO Tony Moraco: In so many words, is everything old new again?

Moraco said this SAIC feels a lot different than the one before the split and he’d know; he ran that company’s government solutions business. And not just because of the impacts of scale the union will bring to a competitive and rapidly consolidating market, led by the aforementioned Leidos, which shook the industry with its 2016 deal to acquire Lockheed Martin's information services business and double in size.

“It’s around the portfolio itself,” he said of the difference, emphasizing the opportunities in the space and intelligence markets that open up now for Reston-based SAIC as it integrates Engility (NYSE: EGL) and becomes a $6.5 billion government services company, third-largest in the market (and second if you focus solely on the so-called pure plays and remove General Dynamics, which is known as much for selling Gulfstream jets and tanks as it is IT services).
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The company, he added, has been very focused since the split but sees this kind of corporate evolution “as a natural progression.”

“We’re not doing anything that’s a right turn off of what we started with,” he added. “I believe it’s very much in line and not a change in strategy. Whereas I think some of our peers in the market, [with] some of the market consolidation, were a bit more transformative to reposition companies, where we think we’re well positioned now and want to continue in that some position in the marketplace going forward.”

Moraco’s comments offer an interesting window into the consolidation wave that’s gripping the government contracting market. They also highlight a challenge that will face Moraco when the deal is complete, expected by next February. While Wall Street will be watching closely for the company to deliver $75 million in annual cost savings and boost margins to 9 percent, Moraco will also need to articulate SAIC’s new value proposition to the market.

How will it compete with the big players that can also spread costs over a wider revenue base and offer a more competitive cost structure when going after complex five- and 10-year deals that top $500 million? And how will it take on the smaller, agile players with the kinds of technical capabilities (cloud, artificial intelligence, analytics and the like) that are increasingly in demand?

Its space business will be fundamental to crafting that go-to-market narrative because of the opportunity to sell a range of services, from architecture and engineering to payload support and launch and ground systems, all at a time when the federal government has talked not just of increasing funding but even standing up a new space command. Combined, the company has a space portfolio of more than $1 billion in contract value, Moraco said, including work with NASA, the National Reconnaissance Office and the National Oceanic and Atmospheric Administration.

Engility, meanwhile, will see the culmination of its own corporate evolution, a journey that began in 2012 when L3 Communications spun out its government services division and Engility was born. In February 2015 it made a transformative $1.1 billion acquisition of Tasc Inc. Former Raytheon exec Lynn Dugle was lured out of retirement in March 2016 after an earnings revision in January of that year spooked Wall Street. Dugle set out to rebuild that goodwill, pay down debt and grow organically, and shift from lowest price, technically acceptable contract work to higher margin, specialized best-value work.

Dugle sees huge potential in taking the combined company’s work in areas such as systems integration and modernization and training and simulation and then boosting those service offerings with things like data analytics, high-performance computing and applied machine learning.

“That gets exciting really quickly,” said Dugle, who, when the deal is complete said she envisions herself “on a beach with a drink and an umbrella in it.”
https://www.bizjournals.com/washington/news/2018/09/11/saic-ceo-offers-a-window-into-the-consolidation.html?ana=yahoo&yptr=yahoo