A slowdown in defense spending over the past five years has prompted a wave of sell-offs as huge contractors consolidate to stay competitive. The biggest deal yet closed on Tuesday when Leidos, the Reston, Va.-based IT services company that spun out of contracting giant SAIC in 2012, paid $4.6 billion for Lockheed Martin’s IT services business.
“The benefit of scale is well understood and a lot of people have viewed consolidation as a way of becoming competitive in the space,” Leidos chief executive Roger Krone said.
Leidos becomes easily the biggest player in federal information technology services. The combination almost doubles Leidos’s employee count to more than 33,000 — 13,000 of whom have sought-after security clearances necessary for classified government work. It brings the company’s annual revenue to more than $10 billion.
“This is one of the biggest consolidations in the federal sector that we’ve seen since the defense downturn began in 2011,” said Loren Thompson, chief operating officer at the Lexington Institute, a think tank. “Leidos now has the mass, the scale to go after pretty much any opportunity it wishes. Customers that would have been merely aspirational are now within their grasp.”
Krone says the combination is more about diversification than scale. Before, Leidos’s big contract billings primarily came from defense spending, but Lockheed’s business adds sought-after federal contracts with such civilian agencies as NASA, the Energy Department and the Department of Veterans Affairs.
It also gives Leidos more work outside the U.S. government by delivering more commercial and foreign clients. Krone says the new Leidos will derive about 9 percent of its revenue from foreign customers.
The sell-off largely takes Lockheed out of IT services, a lower-margin, higher-manpower bill-by-the-hour business centered on the Washington area. Lockheed, which will turn its focus to big weapons and software programs, took a major step in that direction last year when it said it would buy helicopter manufacturer Sikorsky for $9 billion.
Lockheed Martin “was a kind of complicated black box operation for big defense investors, and now that complication is removed,” Thompson said.
Krone and chief financial officer Jim Reagan retain their roles at the head of the combined company, which keeps its name and remains in Reston. Under the terms of the tax-free deal, Lockheed shareholders own 50.5 percent of the combined company. One industry veteran said the deal would allow Lockheed to put the proceeds of the sale to use.
“Lockheed did this because they wanted to use some of the proceeds to pay down debt they had taken out to buy Sikorsky,” said Bob Kipps, managing director at KippsDeSanto, an aerospace-defense investment bank.
Krone said he sees more consolidation coming in the federal contracting space.
Leidos’s acquisition “is the largest transaction in this space, but it’s only larger than the prior deal,” he said. “There could be others behind us.”
This story originally had an incorrect time reference to when the Sikorsky deal was announced. The story has been updated.