Tony Smeraglinolo is convinced that government contracting consolidation is on the way — and he wants to lead the pack.
“Almost intuitively, you know that there will have to be consolidation,” the Engility chief executive said in an interview last week. “You have to make a decision: Are you going to be a consolidator or consolidated?”
Seeking to ensure that Engility is a consolidator, the company has taken what Smeraglinolo sees as a first-mover advantage, acquiring Dynamics Research Corp., an Andover, Mass.-based contractor with a significant D.C. area presence.
The roughly $120 million deal marks Engility’s first effort at growth after spinning off from New York-based defense contractor L-3 Communications in 2012. The move hints at future deal-making in the industry.
The public company has positioned itself as a cost-conscious contractor, built for tighter government budgets. It focuses on specialized technical consulting and analysis work as well as logistical support.
Engility spent much of its early days as a stand-alone company trimming costs, cutting its back-office staff and restructuring.
Now, company executives said, they are ready to expand. Last year, the contractor started a strategic planning process that sought ways to help it move into markets where Engility lacked a significant presence, such as the Air Force and the intelligence community.
Typically, Smeraglinolo said, winning that kind of work could take years, but an acquisition would speed that process. Executives made a list of about 50 potential target companies and eventually cut that down to about 10.
As the contractor was readying its shortlist, its executives got a call that DRC, with more than 1,100 employees and 2013 revenue of about $275 million, was available for sale, said Craig Reed, Engility’s senior vice president for strategy and corporate development.
About 75 percent of DRC’s revenue comes from customers who do not work with Engility. While the majority of Engility’s revenue comes from Pentagon customers, about half of DRC’s revenue is unrelated to Defense Department agencies, according to Engility.
The deal closed last month, and Engility immediately began welcoming DRC employees. Early last week, DRC employees arrived at their offices to receive Engility badges, lanyards and mugs, and Engility signs were hung in DRC facilities’ lobbies.
Smeraglinolo said the two companies will see immediate savings in areas such as its board of directors and risk insurance simply by combining. In the coming months, a steering committee that represents Engility and DRC executives will take a closer look at employees and facilities, looking for other ways to combine the two companies.
“You don’t need two CEOs, you don’t need two CFOs,” he said. “So we are looking at that.”
Key to the deal will be investing in DRC, which has produced low growth rates, said William Loomis, an analyst with financial services firm Stifel Nicolaus.
“Engility needs to invest money into DRC, around business development in particular, to actually start growing the business,” he said.
But if it can do that, the opportunities are substantial, Loomis added. “The good news about DRC is they have good contracts with good clients and they have established past performance in a lot of these new areas that Engility did not,” he said.
And as Smeraglinolo braces for industry consolidation, he said Engility will likely look into additional purchases.
“We never thought that this would be one and done,” he said.