General Dynamics said Monday it would buy CSRA in a $6.8 billion bet that increased federal spending will spur demand for government IT services.
As The Washington Post reports, General Dynamics “has classically relied on large government contracts for military hardware acquisitions such as the Columbia-class nuclear submarine and the M1 Abrams tank. The company also is a market leader in commercial business jets through its Gulfstream subsidiary.”
But the acquisition of CSRA will make General Dynamics the second-largest firm in the government IT sector behind Leidos and ahead of Booz Allen Hamilton, CACI, and SAIC. It has agreed to pay $40.75 per share for CSRA, a 32% premium to the closing price on Monday.
CSRA, which was formed in 2015 amid a wave of industry consolidation, provides IT, mission, and operations-related services to the Department of Defense, the intelligence community and homeland security.
“The acquisition of CSRA represents a significant strategic step in expanding the capabilities and customer base of GDIT,” Phebe Novakovic, CEO of General Dynamics, said in a news release, referring to the company’s IT unit.
“We see substantial opportunities to provide cost-effective IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies,” she added.
General Dynamics’s primary competitors among the “big five” defense contractors have largely exited the government services sector and GDIT’s business has flagged in the last few quarters, with revenue in that segment dropping by 2.8% from the previous year.
But according to the Post, 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.”
CSRA generated about 94% of its revenue in the fiscal year ended March 2017 from sales to the U.S. government either as a prime contractor or subcontractor.
“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.