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Defense activity still strong
By James. H. Smith
December 20, 2005
In spite of ongoing talks in Washington about curtailing defense spending,
activity in the defense sector is still robust although there has been a t
least one surprise.
That surprise took the form of a delay in the proposed initial public
offering (IPO) of San Diego-based Science Applications International
Corporation (SAIC).
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The SAIC IPO was originally scheduled to launch in early 2006.
The deal has been delayed until at least mid-2006, following problems with a
US$305 million security contract awarded in May 2003 to SAIC by the Greek
Ministry of Defense to provide security for the 2004 Summer Olympic Games.
In a December 16 memorandum to employees and shareholders, Ken Dahlberg,
SAIC's chairman and chief executive officer, said: "I want to inform you of
the board's decision today regarding the postponement of the December 16
stockholders' meeting. The board and I have determined that the appropriate
course is to hold a new stockholders' meeting sometime after the company
files our annual audited financial statements (Form 10-K) in April 2006, and
then proceed with an IPO following the stockholders' meeting.
"The SAIC board and senior management unanimously believe that an IPO is the
best way to position the company for the future and address our long-term
capital needs. We remain on that course. We are, however, rescheduling the
stockholders' meeting and IPO timeline because the on-going inquiry
regarding the company's performance on the Greek Olympics contract may be a
significant issue for new investors who are trying to understand our
company. Given our strong financial position, we currently have the luxury
of deciding the most appropriate time to proceed with an IPO."
The IPO was expected to raise over US$1.7 billion -- making it one of the
largest IPOs in recent years.
SAIC reported record revenue of US$2 billion for the third quarter ended in
October, representing a 10 percent gain over the US$1.8 billion in sales the
company posted for the same quarter last year.
But a US$61 million loss related to the company's Greek Olympics contract
decreased SAIC's operating income to US$108 million, compared with US$130
million for the same quarter last year.
However, postponement of the SAIC IPO does not reflect lethargy in the
defense sector.
As has been noted in this column on a number of occasions, prime defense
contractors continue to look at smaller players to increase their
penetration of the market.
Last week, Falls Church, Virginia-based General Dynamics and Fairfax,
Virginia-headquartered Anteon International, both listed on the New York
Stock Exchange, announced a definitive agreement for General Dynamics to
acquire Anteon for US$55.50 in cash for each outstanding Anteon share. The
cost of the transaction would be approximately US$2.2 billion, including the
assumption of Anteon’s US$100 million of net debt.
Anteon is a systems integration company that provides mission, operational
and IT enterprise support to the US government. It designs, integrates,
maintains and upgrades systems for national defense, intelligence, emergency
response, infrastructure and other high-priority government missions. It
also provides many customers with the systems engineering and program
management skills necessary to manage the development and operations of
their mission-critical systems.
The transaction will expand information technology services offerings and
presence with the US Department of Defense. The transaction is expected to
be accretive to earnings and cashflow.
Anteon has a current business backlog of US$6.6 billion and anticipates 2006
sales of US$1.72 billion.
General Dynamics is not the only company to boost its presence in the IT
sector.
New York Stock Exchange listed prime defense contractor Lockheed Martin
Corporation has agreed to buy privately owned Aspen Systems Corporation, a
provider of business services, for an undisclosed amount. Aspen, based in
Rockville, Maryland mainly serves federal agencies, providing information
technology support and records management.
The company said it does not expect the acquisition to have a material
impact on its financial position or cashflows. Aspen's revenue was about
US$165 million in 2004. The deal is expected to be completed in first
quarter 2006.
Although US defense companies have an estimated cash balance of US$45
billion, recent mergers and acquisitions among larger companies mitigate
against a continuing flow of large high-profile deals.
However, there appear to be at least two potential acquisition targets for
the near term: CACI International, with a market value estimated at about
US$1.8 billion and SI International, with a market value of about US$340
million.
While there are several other potential deals, the fact is that the large
names have recently spent a pile of money on acquisitions.
Lockheed Martin has spent about US$1 billion since 2003 to acquire the
government technology business of Affiliated Computer Services; Northrop
Grumman spent an estimated US$220 million to acquire Federal Data
Corporation and Integic Corporation. General Dynamics spent about US$1.2
billion in 2003 to acquire Veridian. And, earlier this year, L-3
Communications bought Titan Corporation for US$2 billion.
While there may be fewer mega-deals in the future, analysts predict that
deal-flow involving smaller companies, especially in the lucrative and
seemingly immune to cutbacks IT sector.
Disclaimer
James Smith is an independent columnist for this web site. James Smith may
hold long or short positions in any of the stocks mentioned in this article
and those positions can change at any moment.
InvestorIdeas.com Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp, InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article. James
Smith is a freelance writer. Nothing in the articles should be construed as
an offer or solicitation or recommendation to buy or sell any specific
products or securities. Past performance does not guarantee future results.
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