Science Applications International Corporation (NYSE:SAIC) recently announced that it is on track to create one of the largest government-IT companies, as its buyout of Engility (NYSE:EGL) has been approved by shareholders of both the companies.
More than 98% shareholders of Science Applications and 99% of Engility voted in favor of the $2.5 billion merger. The transaction is expected to be completed within the next few business days.
The intent to acquire Engility was announced by Science Applications in September last year.
The deal will lead to $6.5 billion in revenues, placing Science Applications second to Leidos Holdings (NYSE:LDOS) , which had created $10.1 billion in annual sales with its acquisition of Lockheed Martin’s services unit.
Science Applications also has execution plans in place to achieve $75 million in annual cost synergies as a result of the combination.
Engility was the buyout target of five big companies in the past, including CACI International (NYSE:CACI) , which was apparently the runner up to Science Applications.
What it Means for Science Applications
At the end of June last year, the U.S. Senate approved the fiscal 2019 defense budget, reflecting 5% real growth from the fiscal 2018 budget. Such increased defense spending under the Trump administration and the Republican-led Congress has lately prompted U.S. defense contractors to expand their product portfolio, which, in turn, is driving companies like SAIC to pursue mergers.
Post acquisition, Science Applications is anticipated to have a stronger presence in the space and intelligence markets, and strength of 6000 cleared workers. It is also expected to produce an estimated $400 million of free cash flow in one year. With such an addition, the company’s combined workforce can speed up operations to modernize their information systems and serve a broader set of customers.
Furthermore, as Engility provides skilled personnel to the U.S. departments of defense, homeland security and justice, the acquisition is likely to speed up Science Applications’ growth in key markets, enhance its competitive position and provide significant financial benefits.
Moreover, the company expects to generate about 55% of total sales from the Pentagon and an additional 16% from the intelligence community. Management expects the combined companies' adjusted EBITDA margin to increase to almost 9% compared with Science Applications' current figure of 7%.
Management is also optimistic about its long-term strategy called Ingenuity 2025, which it expects to accelerate with the acquisition of Engility.
Science Applications currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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