Can General Dynamics Beat CACI To Acquire CSRA For $9.6B?

General Dynamics Corp. (NYSE:GD) recently entered into a bidding war with CACI International for acquiring IT service provider CSRA Inc. (NYSE:CSRA) . While General Dynamics offered last month $9.6 billion, including a $2.8 billion of debt, for the CSRA buyout, CACI proposed $7.2 billion in cash for the takeover.

What’s CACI offering?

Apparently CACI’s offering seems to be more profitable for CSRA’s shareholders, with the company offering $44 per share of CSRA compared with the General Dynamics proposal of $40.75 a share. This indicates that CACI’s offer will give investors an 8% premium over General Dynamics’ bid.

General Dynamics vs. CACI: Who’s the Favorite?

In spite of the unsolicited offer that CACI made to acquire CSRA, General Dynamics remains confident of the deal and plans to proceed with its tender offer to acquire CSRA’s all outstanding shares. Notably, the tender offer for CSRA shares has commenced on Mar 5, 2018, and is scheduled to expire on Apr 2. With General Dynamics having secured the necessary regulatory approvals for the transaction, the chance of CACI snatching the deal from this shipbuilder is highly unlikely.

Moreover, General Dynamics believes that CACI’S offer overstates the real value to the CSRA shareholders and understates the involved risk. The company is also of the opinion that CACI's proposal would burden the CSRA with approximately $6.8 billion of debt, once acquired.

Another implication of the deal is time value of money for investors as CACI would close the acquisition formalities by July 31, 2018. This means that if CACI wins the bid for CSRA, investors will incur significant opportunity cost due to the four months lag, whereas General Dynamics aims to complete the transaction by early April.

Also, the real value of CACI’s stock tends to remain uncertain due to the market risks associated with the CACI transaction closing four months in the future with more than 65% of its stock consisting a fixed exchange ratio.

Our View

Per a report published by Forrester, global purchases of technology software and services by businesses and governments will grow by 4% and software and tech consulting services by 6% in 2018. Such increasing demand of technology services on a global scale will encourage businesses and governments to be more aggressive in their tech spending plans and companies like General Dynamics with their big customer base, through CSRA’s takeover will benefit hugely.

General Dynamics’s Information Systems and Technology unit posted revenues of $2.49 billion in the fourth quarter, which was up 9.5% year over year. Subsequently, the company believes that CSRA’S acquisition will open doors for it to become a premier provider of high-tech IT solutions to the Government Technology Services market that will in turn boost this unit’s revenues.

Price Movement

General Dynamics’s stock has returned about 16% over a year, compared with the broader industry’s gain of 42.8%. The underperformance may have been caused by the intense competition that the company faces in the aerospace-defense space.

Zacks Rank & Key Picks

General Dynamics currently carries a Zacks Rank #3 (Hold).

A few better-ranked stocks in the same sector are Boeing (NYSE:BA) and Huntington Ingalls (NYSE:HII) , each of them sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks.
here.

Boeing recorded an average positive earnings surprise of 20.69% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by $3.06 to $14.05 in the last 90 days.

Huntington Ingalls recorded an average positive earnings surprise of 3.85% in the last four quarters. The Zacks Consensus Estimate for 2018 earnings has risen by $5.42 to $17.38 in the last 90 days.

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