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Tony Smeraglinolo, John Hynes on Engility’s Post-TASC Deal Outlook & GovCon Services Consolidation

Tony Smeraglinolo, John Hynes on Engility's Post-TASC Deal Outlook & GovCon Services Consolidation - top government contractors - best government contracting event

Engility-The government services market started to get a glimpse of what would eventually become an ongoing landscape shift in October 2014 when Engility Holdings announced its $1.3 billion acquisition of fellow Chantilly, Va.-based contractor TASC, a deal which closed in February 2015.

Since the TASC deal was announced, companies in the government services space have decided similar moves to consolidate with their peers are the way forward as federal agencies continue to emphasize price in contracts for technical and professional services.

Engility has sought to take advantage of it customers' emphasis on price since its July 2012 spinoff from L-3 Communications and has since developed a business model company executives believe balances quality of service, efficiency and affordable prices for agencies.

A second component of Engility's business strategy was to expand through acquisitions in a push to balance and diversity its customer base, add scale and increase footprints in addressable markets.

Tony Smeraglinolo
Tony Smeraglinolo

Company executives view those three goals as largely achieved through its acquisitions of TASC and Dynamics Research Corp., with the latter $120 million purchase announced in late 2013 and completed in January 2014.

Engility¬†CEO Tony Smeraglinolo and Chief Operating Officer John Hynes both spoke with ExecutiveBiz at Engility’s Chantilly headquarters to review the combined company’s activities¬†in the year since the TASC deal was announced, offer an outlook on potential growth opportunities and government services¬†market’s ongoing consolidation narrative.

DRC’s presence among civilian agencies and TASC's footprint across the intelligence¬†and space communities brings Engility a diverse set of offerings and customers that¬†helps in the combined¬†company's pursuits of¬†higher-end work and complements¬†its¬†original¬†value-for-price¬†focus to¬†customers, according to Smeraglinolo.

‚ÄúAffordable technical excellence is the value proposition we offer our customers,‚Äú¬Ě he said.

As a result of the DRC and TASC transactions, Engility's portfolio is divided into a 45-percent portion in defense with 30 percent in intelligence and 25 percent in civilian.

John Hynes
John Hynes

‚ÄúSince the day we spun, we knew we had to have a more diverse portfolio in this era of constrained budgets.¬†This kind of balanced portfolio is key to our growth¬†as it gives us different market channels we didn’t have prior to the acquisitions,” Smeraglinolo said.

Through three quarters, Engility has reported approximately $1.55 billion in revenue — $641 million from TASC — ¬†versus¬†$1.05 billion¬†for the same timeframe¬†in 2014 and the company forecasts full 2015 sales to be between $2.05 billion and $2.1 billion compared to the $1.4 billion posted in 2014.

One highlight for the combined company post-acquisition was the potential six-and-a-half year, $200 million contract awarded to the company for systems engineering services to the U.S. Air Force‘s GPS directorate, which Hynes pointed to as an example of larger market opportunities available now as a result of the merger.

“TASC had bid on that contract prior to the Engility merger, but we got an opportunity to put forth a final and more competitive proposal after we came together. The combination of our two companies really strengthened our technical position and enabled us to also be more efficient,‚Äú¬Ě Hynes said.

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Consolidation in the GovCon services arena has been an event some market observers and industry participants like Smeraglinolo and Hynes described as both inevitable and needed.

Smeraglinolo estimated there were about 45,000 federal services contractors in 2001 and close to 110,000 companies in that space in 2011.

“We came out a few years ago and saw there were too many of us chasing fewer opportunities. You had to make a decision at that point to be a consolidator or get consolidated. Our decision was to be a consolidator,” Smeraglinolo said.

Engility sought to establish itself as a first mover in the industry consolidation process with its acquisitions of DRC and TASC one year apart from each other.

Those¬†deals¬†have since been followed by others such as Science Applications International Corp.’s $790 million purchase¬†of intelligence community contractor Scitor¬†in May and the Nov. 30 launch of CSRA, a new company created through the combination of Computer Sciences Corp.’s U.S. government segment¬†and SRA International.

CACI made a play through its own $820 million purchase of defense technology services firm Six3 Systems in 2013 and industry is awaiting decisions on potential spin-offs or sales of the services businesses of Lockheed Martin and L-3.

Lockheed finance chief Bruce Tanner said Wednesday that company will extend¬†the¬†timeframe of a decision on its services business¬†to March 2016, while L-3¬†has¬†targeted the end of this year for a deal and BAE Systems‘ U.S. subsidiary decided in November to keep its services segment after reviews of external offers.

According to Smeraglinolo, the government services market is going through a natural shift and consolidating into what he called “the right level of competition” for business.

Smeraglinolo said market forces are driving this era of consolidation in GovCon unlike the aftermath of the famed “Last Supper” dinner in 1993, when then-Deputy Defense Secretary William Perry told defense industry executives their companies would likely have to consolidate in a post-Cold War drawdown and pending military budget cuts.

‚ÄúI am a big supporter of consolidation and the market is really demanding it. It’s good for the customer because they receive better technical solutions and good value ,” Smeraglinolo said.

A deal like the TASC and Engility transaction represents a preferred way of expansion because both companies recognized consolidation as a means to grow via access to new markets and offerings, Hynes said.

“Both companies had made the strategic decision that they wanted to expand and gain new capabilities, customers and opportunities. We both realized this was a great deal that accelerated the¬†strategic plan each company had by several years,‚Äú¬Ě he added.

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On the combined company’s integration efforts, both Smeraglinolo and Hynes described much of the “heavy-lifting” as complete¬†and¬†said their main priority since the transaction’s Feb. 26 closure¬†was to ensure transparency throughout the process for both companies' customers and employees.

“There have been regular communications with our employees and we have worked very hard to keep them informed, Smeraglinolo said.

“And for customers, this has been a seamless process. There have been no delays or impacts on the work we are doing for and with them. We really haven't missed a beat in running the business.‚Äú¬Ě

“From an internal perspective, we are very close to the finish line, which is amazing when you think about how much has to be done to merge two billion dollar companies doing business with the federal government,”¬†Hynes added.

“We have our teams in place, our business strategy for 2016 has been developed and we're now into implementation.‚Äú¬Ě

Both agreed that data migration and combining back-office IT systems is the last remaining initiative and expect this portion to finish in early 2016.

‚ÄúTo be at this point now speaks volumes about the high quality work that has been done by so many of our employees,‚Äú¬Ě Smeraglinolo added.

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