KeyW CEO on why Sotera was the right deal

KeyW scored a twofer when it bought Sotera Defense. It added significant scale but also increased its presence with its biggest customer set, the intelligence community.

Success in the government services sector is defined largely by scale and reach across the federal community and that emphasis was been reflected in last year’s merger-and-acquisition activity.

Many buyers sought to have a diverse mix of customers in light of increased price-focused buying approaches by agencies that puts pressure on margins. Leidos’ blockbuster merger with the former Lockheed Martin IS&GS is last year’s main example of that trend.

Non-traditional buyers KBR and Huntington Ingalls also sought revenue and customer diversity in their services-focused buys. CACI International and Science Applications International Corp. both pursued new intelligence community footprints.

In the case of KeyW Corp., the nine-year old company viewed itself as an intelligence- and national security-focused contractor already. The Hanover, Md.-based technology services provider sought to combine both added scale and specific market focus through its $235 million acquisition of Sotera Defense Solutions.

The result: a now $535 million-annual revenue contractor with 1,100 new employees added for a combined 2,100-strong workforce. The additional scale pushes KeyW higher into the middle tier but with the distinction of being the only pure-play company focused on the intelligence community.

“Business is holistically easier at $535 million combined than at $300 million or $235 million,” CEO Bill Weber told Washington Technology at the company’s Falls Church, Va. office.

“You don’t need double the resources to run that business and have a bigger, stable platform to move people when programs come to their natural end or need to ramp up. There’s a larger pool of employees to draw from.

“Operating in those worlds at the size we are now is significantly different than at half that size.”

With Sotera, KeyW grows its reach in the intelligence community from 25 percent to 60 percent of IC agencies. Slides from KeyW’s March presentation to investors indicate 83 percent of revenue from intelligence agencies and 17 percent from the Defense Department and other agencies. The pre-transaction split was 87-13 in terms of intelligence versus others.

That chart tells an incomplete picture of KeyW’s intelligence-focused work, Weber said, who characterized IC activity as “much higher.” Weber offered up the company’s contracts with the Air Force Research Laboratory, Naval Research Lab and Defense Advanced Research Projects Agency as examples of work that feeds into the intelligence community.

“The pie chart says it’s non-intell but the reason that piece is interesting to us is because the same kind of technical challenges before their scientists and engineers are the same things the IC faces.” Weber said.

“Our interest is not in a defined set of agencies that call themselves the IC but in serving the intelligence, counterterrorism in cyber missions.”

KeyW’s next chapter as a solutions-focused provider in the IC also coincides with a trend that goes against the widely-held perception of a federal government slow to innovation. According to Weber, that trend sees IC and other national security agencies as the drivers of innovation in cybersecurity.

“Innovation goes back to what problem you’re trying to solve,” Weber said. “The acute need to find the next attackers of a 9/11-type of activity wherever they are as quickly as possible doesn’t exist in the commercial market.”

In that construct, IC providers have to be their “Silicon Valley” and push development efforts both with and at the agencies, he said.

“Sometimes that means we have to spend our own internal R&D money to solve a problem.”

Prior to the Sotera deal, Weber has led KeyW through its transition into being a pure-play IC and national security-focused contractor. He joined in October 2015 and KeyW’ shift has included last year’s divestitures of its former Hexis commercial cyber and systems engineering and technical assistance businesses.

“My determination coming in was that focus is an ally for KeyW, and to see if there are any natural markets we aren’t in that we should serve,” Weber said.

As part of that shift, KeyW put together what Weber called a “draft board” of nearly 40 companies for a potential acquisition and gradually narrowed that list down as the company’s stock price climbed and cash built up on its balance sheet.

Sotera fulfilled the “size and scale” aspect of what KeyW sought and that added IC footprint, Weber said. Technical skillsets in Sotera workforce and its expanded contract base also fit KeyW’s checklist, he added.

“All of these criteria start to shorten the curve and timeframe we were planning on doing this organically. We got to stay in the intelligence community and went four-for-four on our top criteria for Sotera.”

KeyW would consider deals to add new footprints with other national security agencies with a “clean draft board,” Weber said.

“At some point, we’ll have more than a beachhead presence at those agencies and will be looking for more growth markets. We’ll be there eventually but right now, we have more than enough to keep us occupied.”

Weber also came on board in the midst of KeyW’s own transition after the death of its iconic founder and CEO Len Moodispaw four months prior. Moodispaw named the company and gave it the iconic parrot logo in reference to his beloved Key West, Fla., destination.

“I don’t know that I would have picked the parrot as a logo for an intelligence community, but it says a lot of how we’re not like any other company,” Weber said.

Moodispaw actually was in conversations with Sotera “years ago” over the prospects of such a combination, Weber said.

KeyW has targeted $3.5 million in cost synergies from the combination this year. The company’s long-term synergy goal has savings in the range of $7 million-$10 million from consolidation of IT and other back-office systems along with real estate.

Much like Leidos, KeyW has brought in outside consultants and put an integration management office in place to oversee the system consolidation and synergy efforts. In charge of that office is Chris Donaghey, vice president of corporate strategy and development. Donaghey was part of the team that led KeyW through its 2010 initial public offering.

“It’s important enough to get this done that I wanted someone on it full-time until we’re in execution mode,” Weber said. “We meet with the board every two weeks on this subject.”

The decisions on real estate footprint and other areas involving the IT and back-office systems are the process of being made and not finalized, Weber said.

Sotera’s team is representing themselves as “KeyW – Sotera” in the interim as part of the integration process with a gradual transition back to the singular KeyW name and parrot identity.

“We expect by the beginning of 2018 to go forward as a combined company.”