Reston-based government contractor Science Applications International Corp. (SAIC) has agreed to purchase midsize IT contractor Engility in an all-stock deal valued at $2.5 billion, the companies announced Monday. It will create what SAIC described as the second-largest independent government technology integrator, with $6.5 billion in annual revenue. The deal is expected to close in February.
SAIC chief executive Tony Moraco said the move would expand Engility's market access to include key defense and intelligence agencies, while broadening both companies' suite of technology offerings.
"As both companies approached this partnership, it became clear the companies would be stronger together, and a combined enterprise was in each other's interest," Moraco said in a call with investors.
The combination will turn SAIC into one of the largest IT employers in the Washington region, with more than 23,000 employees.
The deal was also the latest in a wave of consolidation in the D.C. area's government IT industry, an important source of local technology jobs. The industry saw years of depressed revenue after a 2013 budget deal put new limits on defense spending, causing numerous small and midsize IT firms to pursue mergers and acquisitions in search of greater scale.
Large companies such as SAIC — the 15th-largest recipient of 2017 federal contract dollars — grew larger as a result. The company reported revenue of $1.1 billion in its most recent quarter, a 3.4 percent increase over the same quarter last year.
More recently, the government IT industry has benefited from looser defense budgets and a soaring stock market, spurring a flourish of activity. In January, a federal IT contractor called ECS Federal was bought for $775 million by a California-based recruiting firm called On Assignment, indicating commercial interest in the government IT space. Then in March, General Dynamics became a leader in the government IT space when it bought midsize contractor CSRA in a $7.2 billion deal.
Bob Kipps, an investment banker with the aerospace-defense investment bank KippsDeSanto, said General Dyanmics’ purchase of CSRA was “probably a catalyst” for SAIC’s purchase. Such deals are attractive to executives in part because the government has been pursuing larger procurements, leading companies to one-up each other when it comes to scale and cost-competitiveness.
“There are bigger procurements coming down the pike, where being a larger organization with more depth is perceived as advantageous,” he said. “I think we’re going to see even more of a feeding frenzy moving forward.”
In a call with investors, Engility chief executive Lynn Dugle said her company received interest from multiple suitors, underscoring broader interest in the government IT market.
"I was not interested in scale for scale's sake, but clearly understood that we were experiencing the best market conditions we have seen in a decade," Dugle said.