SAIC makes $790M deal for Scitor

SAIC fills a void in its intelligence business with its offer to buy Scitor for $790 million.

The acquisition fits into several M&A trends we are seeing:

Science Applications International Corp. is filling a major gap in its portfolio with its planned $790 million acquisition of Scitor.

When SAIC split off from what is now called Leidos, it took very little intelligence business with it, but the deal announced today brings 1,500 employees with high level security clearances and what one source described to as an “untouchable reputation in the intelligence community.” The transaction is expected to close by May.

"Scitor is a recognized market leader with long-standing customer and industry relationships within the intelligence community and is aligned with SAIC's market expansion strategy,” said SAIC CEO Tony Moraco in a company statement.

SAIC is picking up $600 million more in annual revenue, which will push its total revenue to $4.5 billion and earnings to $321 million. The company also has identified $20 million in annual cost savings.

Scitor, owned by the private equity firm Leonard Green & Partners with some ownership interest held by employees and management, was not looking for a buyer but was approached by SAIC, who presented a convincing case that they were a strong strategic fit, a source said.

“This deal is a rare opportunity to unite two successful companies with shared core values, world-class employees, unbridled entrepreneurial spirit, dedication to customer mission, and complementary talent in the broadest and deepest technical capabilities,” said Scitor President Timothy Dills.

SAIC has had entry into the intelligence community as a strategic goal since the split and this acquisition accelerates that strategy, the company said. With Scitor, SAIC is getting access to new, classified contracts, cleared personnel and a security infrastructure.

Investment banker Jean Stack with Houlihan Lokey called the deal a perfect fit for SAIC and “a very logical exit for Scitor shareholders.”

“SAIC has been looking for larger acquisitions, and they couldn’t have found a better buy. Scitor is a premier acquisition for them,” said Bob Kipps with the investment bank KippsDeSanto.

Because of the highly classified work Scitor does, it is considered a national asset to the government, a source told me.

SAIC is getting additional capabilities in systems engineering and integration, cyber and security services, program management and IT. Scitor’s biggest customer is the National Reconnaissance Office, which accounts for 49 percent of revenue. Its next largest customer is the Air Force with 12 percent of revenue. The Army represents 4 percent.

Another 35 percent falls into “other intelligence community” customers, according SAIC’s presentation about the acquisition.

SAIC’s business mix will change most significantly in the intell space, where it jumps from 0 to 11 percent of the revenue mix. Defense revenue shifts from 70 percent to 63 percent, civilian from 26 percent to 22 percent. Other remains at 4 percent.

Scitor also brings higher margin business to SAIC, which will see its adjusted earnings before interest, taxes, depreciation and amortization, commonly called EBITDA, rise from $259 million to $321 million.

Interestingly, the two companies also share an employee-ownership history. Before its spin-off, SAIC had employee-ownership roots that stretched from 1969 to 2006 when the company became publicly traded. The company split in 2013 with the spin-off retaining the SAIC name and Leidos retaining the rest of the company.

Scitor converted to employee-ownership in 2002 before it was acquired by the private equity group Leonard Green & Partners in 2007. But after that deal, management and employees retained some management interest.

Financial advisors on the deal were Citigroup Global Markets for SAIC and Sagent Advisors for Scitor. Legal advisors were Arnold & Porter for SAIC and Latham & Watkins for Scitor. Twelve Rolling Capital served as an advisor to the executive management and employee shareholders of Scitor.

  • The attractiveness of the intelligence business
  • The need for scale as a way of lower the cost basis of doing business
  • Acquitisions as a way to again access to new markets

The deal also is the third one involving companies deep into the systems engineering world of the intelligence market.

Vencore, formerly the SI Organization, has gone the diversification route with the acquisition of QinetiQ’s North American services business, while TASC choose an exit with its sale to Engility.

Now, Scitor also has decided to exit through a sale to SAIC.

Vencore, TASC and Scitor all had private equity ownership, a source pointed out to me.

According to this source, it’ll be interesting to watch what happens to other private equity owned companies such as Wyle and Camber Corp. that are probably looking for an exit.

No deal happens in a vacuum, so we’ll have to watch how this influences other deals.

And a final interesting observation about the Scitor-SAIC deal is that they chose not to go the auction route. SAIC made a pre-emptive offer, and it was a good return for Leonard Green, my source said. What Leonard Green paid for Scitor was never publicly disclosed.

SAIC’s attractive offer also saved Scitor from having to entertain other potential buyers by making presentations and other requirements of a more competitive process. That process can suck up a lot of time, energy and focus from senior managers.

In this case, an attractive pre-emptive offer allowed Scitor to avoid that. SAIC avoided the added competition. A win for both companies.

Maybe we’ll see more of those kinds of deals, but we’ll definitely see more deals.