September 23, 2018
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General Dynamics embarks on $9.6 billion deal to capture new defense spending

Evan Vucci | AP
Evan Vucci | AP
General Dynamics CEO Phebe Novakovic listens as President Donald Trump speaks during a meeting with manufacturing executives at the White House in Washington, Feb. 23, 2017. General Dynamics is buying CSRA for almost $7 billion. Novakovic said in a printed statement that the deal will help it provide cost-effective IT solutions and services to the Department of Defense, intelligence community and federal civilian agencies.
By Aaron Gregg, The Washington Post
Updated:

WASHINGTON — Government contracting giant General Dynamics announced Monday that it is buying CSRA, a government IT services conglomerate that formed in 2015 amid a wave of industry consolidation.

The $9.6 billion deal includes $6.8 billion cash and $2.8 billion debt. General Dynamics will buy all shares of CSRA for $40.75 under the terms of the deal, a 32 percent premium from Friday’s closing price. The transaction is scheduled to close in the first half of 2018.

The deal turns General Dynamics into a $9.9 billion-a-year behemoth in government IT services, making it the second-largest firm in that sector behind Reston-based Leidos and ahead of Booz Allen Hamilton, CACI and SAIC. The tie-in comes at a time when the government services market is projecting a resurgence after years of sequestration-induced consolidation, as the Trump administration moves to expand the size of the military and move IT systems to the cloud.

“We believe that this combination creates a clear, differentiated leader in the Federal IT sector, with a full spectrum of enterprise IT capabilities, including unique depth in Next-Gen offerings in conjunction with our commercial IT alliance partners,” General Dynamics chief executive Phebe Novakovic said in a statement.

Such an aggressive move into the government services sector was seen as a surprise move for General Dynamics, which has classically relied on large government contracts for military hardware acquisitions like the Columbia-class nuclear submarine and the M1 Abrams tank. The company is also a market leader in commercial business jets through its Gulfstream subsidiary.

General Dynamics Corp. is also the parent company of Bath Iron Works in Bath, Maine, which builds U.S. Navy warships like the Arleigh Burke-class destroyer.

The government IT services industry has seen significant consolidation in recent years, as sequestration put a damper on defense spending and a focus on low-priced contracting arrangements put a damper on margins. General Dynamic’s primary competitors among the “big five” defense contractors have largely exited the government services sector, with Lockheed Martin spinning off or selling its primary services units.

CSRA was formed in 2015 as part of that wave of consolidation, through a tie-in of the government services business of Computer Sciences Corp. and Virginia-based government contractor SRA. In recent years, it has focused on new opportunities such as cloud systems integration in an attempt to double down on sub-sectors that are growing, winning a $498 million contract for the Defense Department’s “milCloud 2.0” program.

General Dynamics’ information technology segment, based in Fairfax, Virginia, and known as “GDIT,” is a $9.3 billion division within the $31 billion General Dynamics business. GDIT’s business has flagged in the last few quarters, with revenue in that segment dropping by 2.8 percent from the previous year.

Novakovic has used budget uncertainty and the Trump administration’s failure to fill key government positions to explain the slow-down. Novakovic, who has avoided major acquisitions since she became chief executive, characterized the CSRA acquisition as a bid to strengthen her company’s core business by expanding to new opportunities.

In a Monday conference call to discuss the deal, she shrugged off investors concerns that she is doubling down on a sector that has seen lackluster growth, saying that last week’s budget deal put an end to concerns about budget uncertainty.

“What we’re doing with this transaction is taking our good GDIT business and making it [a] better, stronger, more viable competitor over time – immediately frankly we believe — in that IT services space,” Novakovic told analysts. “We’re adding to our core … makes a lot of sense to me.”

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