General Dynamics [GD] late Sunday night said it is sticking with the terms of its $9.6 billion cash offer to acquire CSRA, Inc. [CSRA] despite a nearly $10.4 billion unsolicited bid by CACI International [CACI] for CSRA consisting of stock and cash.

GD said its offer, which was agreed to by CSRA in February, is superior to CACI’s for a number of reasons, including being less risky given it is all cash while CACI’s bid is a hybrid of stock, just over 65 percent of the offer price, and cash, less than 35 percent of the terms. GD is offering $40.75 per share in cash while CACI is offering $44 per share, $15 per share in cash and the rest in stock.iStock Computer

CSRA on Sunday evening said its board, along with its legal and financial advisers, will consider CACI’s proposal. The company said it is still subject to the merger agreement with GD and that its board hasn’t changed its recommendation that CSRA shareholders tender their stock in accordance with GD’s offer.

GD’s proposed acquisition has already cleared federal regulatory clearances and is on track to close by June 30. CACI said it expects it could close a deal with CSRA by July 31.

Sheila Kahyaoglu, an aerospace and defense analyst with Jefferies, said in a client note on Monday that GD’s all cash bid is less risky than CACI’s stock and cash offer, and pointed to previous regulatory filings by CSRA following the merger agreement with GD saying its board preferred an all cash offer.

On Sunday, when it announced its proposal, CACI pointed to the higher overall value of its offer and said it expects $165 million in annual after-tax cost saving synergies by combining with CSRA, “a substantially greater figure than the synergies contemplated by the GD transaction, affording both CACI’s and CSRA’s shareholders the opportunity to participate in additional value creation.” CACI also said it has committed financing in place should its offer for CSRA be accepted.

GD expects to achieve pre-tax cost saving synergies of 2 percent of the combined annual sales by 2020. GD disclosed its offer on Feb. 12, saying it would combine CSRA with its GD Information Technology business unit to create a new $9.9 billion business segment.

If CACI ultimately prevails with its bid, its annual sales would be around $9.9 billion to $10 billion. On Monday the company raised its sales and earnings outlook for its fiscal year that ends June 30, with top line guidance between $4.4 billion and $4.5 billion, up $50 million from the prior low end of the range. Per share earnings are expected to be between $11.26 and $11.50, an increase of 31 cents from previous guidance.

In sticking with its offer price, GD also said that the stock portion of CACI’s proposal includes a fixed exchange ratio, 0.0184 shares of CACI common stock for each share of CSRA stock, “which is subject to daily market fluctuations and an estimated four-month delay at a minimum before its real value can be ascertained with certainty.”

GD also said that CACI’s debt would be burdensome if it combines with CSRA and that its offer price is about 25 percent dilutive to its pro forma earnings before cost saving synergies are factored in. GD also noted that with CSRA accounting for 55 percent of a combined organization with CACI, its shareholders will be responsible for 55 percent of the $204 million termination fee the company would owe GD if it withdraws from current merger agreement.

On Monday afternoon, CACI hit back at GD’s arguments, saying the the debt to earnings leverage ratio would be less than what GD claims, that its offer price factors in CSRA’s termination fee with GD, and that its after-tax cost savings target is consistent with the synergies obtained in its $550 million acquisition of the National Security Solutions business of L3 Technologies [LLL] in 2016.

CACI said its cost savings target hinges on integrating the organization and corporate enterprise systems within 90 days of closing.

For CACI, a successful acquisition would make it the second largest provider of IT services to the federal government, and give it scale to pursue larger opportunities. Leidos [LDOS] is the largest federal IT services contractor and expects sales this year between $10.1 billion and $10.4 billion.

When it disclosed its offer for CSRA last month, GD said one of the attractive features of the pending deal is CSRA’s strategy for delivering high operating margins.

CACI’s original press release on Sunday didn’t detail the operational benefits of a potential combination with CSRA. In Monday’s release, CACI said a deal would improve its exposure to the Defense Department, particularly in the areas of electronic warfare, cloud-based solutions, data analytics, machine learning, cyber and readiness and training. 

In its fiscal year 2017, about 65 percent of CACI’s sales came from the DoD, 28 percent from federal civilian agencies, and nearly 7 percent from the commercial and other sectors. About one-third of CSRA’s $4.5 billion in sales are with DoD.

CSRA would also strengthen CACI’s position with the intelligence community and with business serving government health agencies and the federal civilian sector. 

CSRA’s key strengths are in IT, professional, and cyber protection services. It also has core capabilities in training and large IT infrastructure programs. CACI’s capabilities are in technology services around C4ISR, enterprise IT services, cyber security, and logistics support, and healthcare IT.

CACI on Monday also said its margins would benefit from CSRA. Based on its $44 per share offer, CACI said it expects a deal to be “meaningfully accretive” to its adjusted per share earnings in the fiscal after a deal closes and thereafter.

“Our investors will experience value creation and the accelerated growth we expect from combining two market-leading companies with minimal contract overlap and whom possess highly differentiated offerings,” CACI said on Monday.

CACI and CSRA combined have $29 billion in backlog, and in the past year bookings of $14 billion. CACI said the two companies also have a combined business opportunity pipeline of $19 billion.

GD’s tender offer for all of CSRA’s outstanding shares began on March 5 and is set to expire on April 2 unless extended or terminated based on the merger agreement between the two companies.

Jefferies’ analyst Kahyaoglu said if GD’s deal for CSRA falls through, then investors could expect the company to pursue another large acquisition or make a significant repurchase of its shares.

CACI’s financial adviser on its proposal is J.P. Morgan.