By Calvin Biesecker
Serco Group said yesterday that its United States-based division Serco Inc., has agreed to acquire federal services provider SI International [SINT] for $423 million in cash in a deal that would create a $1 billion-plus federal contractor serving the Defense Department, federal civilian agencies and intelligence community.
For United Kingdom-based Serco Group, the purchase would nearly double the revenues of Serco Inc. to over $1.3 billion, provide it with additional customers in DoD and the federal civil market, and give it an entr�e into the U.S. intelligence community, Ed Casey, chairman and CEO of Serco Inc., told Defense Daily yesterday.
Moreover, the deal would provide Serco Inc. the scale to compete on larger and more complex business opportunities, Casey said.
About 75 percent of Serco Inc.,’s $700 million-plus sales are to the DoD with the Army and Navy being the largest customers. The rest of the company’s business is in the civil space where the Federal Aviation Administration and, to a lesser extent, the U.S. Postal Service are the largest customers.
SI International, which expects to do between $570 million and $580 million in sales this year, adds the Air Force as a new customer and a more robust presence in the federal civil space where its key customers include the Departments of Homeland Security and State. Close to 60 percent of SI International’s business is in the civil market and most of the remainder is with DoD customers.
Earlier this year SI International won several prime contracts with the National Security Agency (NSA) to provide acquisition support. In addition, SI International is also a subcontractor under various contracts supporting other agencies within the intelligence community.
There is very little overlap between the two companies, Casey said.
Serco Inc.’s core business areas are human capital management, logistics, professional services, transportation, which includes work on air traffic control and aviation engineering, and engineering, which includes work developing integrated command and control centers at naval ports.
The deal has been approved by the boards of directors of both companies but must still win approval from U.S. regulators, including review by the Committee on Foreign Investment in the U.S. and SI International’s shareholders. Serco expects to complete the transaction later this year.
In 2005 Serco Inc., basically tripled its presence in the federal market to over $350 million in sales through the acquisition of Resource Consultants Inc. (Defense Daily, Dec. 17, 2004). Since then, Serco has increased its business strictly through organic growth, said Casey, who joined the company in January 2006.
To maintain the company’s strong organic growth rate, Serco needs to have the scale to compete with other top tier management services providers, Casey said. The SI International acquisition provides that scale, he said.
Well into 2009 Serco Inc. will be focused on integrating the SI International purchase but at some point plans additional acquisitions of companies similar in size to SI International, Casey said.
“Scale is important in North America if you’re going to be a serious player,” Casey said. Still, he added, “we’ll be deliberate” in doing deals. Smaller acquisitions are also possible, he said.
In addition to the expanded sales and customer base, the transaction also gives Serco more depth of capability, which will help it offer full managed services in the areas of program management, business process engineering, information technology and consulting, Casey said. SI International, which has 4,500 employees, has 500 people in applications development and 100 certified program managers, he said.
As part of the acquisition, Serco will acquire SI International for $32 per share, a 40 percent premium to the stock’s $22.89 closing price on Tuesday, and assume $87.3 million in debt. Casey said that SI International would be integrated into Serco Inc.
SI International’s financial performance of late has been on the bumpy side. The company failed to meet earnings expectations in its recent second quarter due to lower than expected volume on a contract with the U.S. Patent Trademark Office and higher than expected costs in ramping up its support of the NSA. Losses on the Patent Trademark Office work will continue in the second half of 2008. The work for NSA is dependent on how quickly it can obtain security clearances for its employees on those contracts.
Serco Group is a $6 billion international management services company whose stock is publicly traded on the London Stock Exchange.