Peraton, the name given to the former information technology services business that Harris Corp. [HRS] divested earlier this year, is going to go after some big contracts to build scale and increase exposure to different customers, according to Stu Shea, a long-time veteran of the technology services and solutions industry and the recently installed chief executive of Peraton.
Under Shea’s leadership, Peraton has already scored a significant win with a potential five-year, $578 million award from the Transportation Security Administration to sustain the agency’s security equipment at airports nationwide, a contract that would increase the company’s revenue by about 10 percent annually. For the TSA award, Peraton in October beat out incumbent Leidos [LDOS], who is protesting the decision to the Government Accountability Office.
“I’ve always been a guy that’s gone after big programs,” Shea told Defense Daily in a phone interview on Nov. 1.
Shea spent nearly two decades with The Analytic Sciences Corp., better known as TASC, which has operated independently and as part of larger companies, including Northrop Grumman [NOC] and now Engility [EGL].
In 2005, Shea joined Science Applications International Corp. [SAIC], serving in various executive roles, including chief operating officer (COO) through the separation into two separate publicly traded companies, SAIC and Leidos. After overseeing the split, he became president and COO of Leidos before resigning in 2014 and doing consulting work until June of this year, when he was hired to run the former Harris IT business, which was named Peraton in July.
“I’ve won several billion dollar programs at each of those companies, and I tend to move up the value chain and begin to focus on larger pursuits,” Shea said. “When I got to Peraton, one of the things I realized is, this in many ways is ‘death by a thousand cuts.’”
The small contracts that make up Peraton’s roughly $1.1 billion in annual sales are “great,” Shea said, providing positioning and intimacy with customers, and helping to develop the company’s technology base. But, Shea want to use take the “collective power” of these contract and use them as enablers for the bigger pursuits.
Peraton will continue to pursue the smaller deal but will change its mindset to also go after the $100 million to $500 million contracts, Shea said.
The big contracts have “huge benefits in terms of a better, I would call, ownership or relationship with the customer environment, more impact on your financials, and so we’re going to begin to move our programs up the value chain to larger more significant pursuits,” he said.
On its website, Peraton lists seven principal markets that it serves, including space, intelligence, cyber and signals intelligence, communications, defense, homeland security, and electronic warfare. Even though the recent TSA award is company’s largest, if it survives the protest, Shea is honing the company’s focus “on emerging warfighter domains,” space, intelligence, cyber/SIGINT, and electronic warfare.
These are areas where “our warfighting establishment is operating in a new operational paradigm,” Shea said. For example, he said, space has been an enabler for communications and imagery collection but “in the future space will be the battleground.”
Shea calls Peraton’s space business “great,” intelligence “really solid,” and cyber and electronic warfare “good.” He said the company is better recognized for its work in the space market than in the electronic warfare space where Peraton does a lot of really good work here but I don’t think we’re recognized in that business as much as we should be.”
Peraton is a portfolio company of the private equity firm Veritas Capital. Like any private equity firm, Veritas as some point can be expected to divest Peraton after generating a sufficient return on its investment.
Outlining a potential five year planning horizon, Shea said general growth goals for the company are aimed at getting it to an attractive valuation so that it is in a position for Veritas to have options for what it wants to do with Peraton. Those options could include selling to a strategic buyer in industry, another private equity firm, or taking the company public, he said.
Once he gets the “engine running” and is able to score large contract wins like the TSA job, Shea believes Peraton can grow 10-plus percent organically annually, adding that he wants to grow operating earnings at an even higher rate than sales.
“Because that gives me the capacity I need for investments [and] for the return on investment to the ownership,” he said. “That’s really my goal.”
To achieve the growth objectives,” Shea said the company needs to be “best in class,” which would position it to grow faster than the overall government market, which he sees growing upwards of 3 percent “at best.” At a minimum, he wants to grow “at what the market is bearing, and hopefully better.”
Mergers and acquisitions will be part of Peraton’s growth plans. Typically, Veritas acquires a “platform” like Peraton to build on, then adds several small acquisitions that might provide a new customer, enhance its position with an existing customer, a new technology or capability, Shea said.
Veritas often adds a “significant” strategic acquisition to the platform company as well, Shea said.
While Peraton will be opportunistic with acquisition opportunities, Shea said that based on his priorities in the emerging warfighting domain, “it’s probably a good bet that at some point we would look at doing” deals in the space, intelligence, cyber/SIGINT or electronic warfare areas.
In the area of opportunistic deals, Shea said that even though an acquisition in the homeland security space is “not going to be the central thematic of our M&A strategy … If something came up that positioned us well for future work” with the Department of Homeland Security or Department of State, that might drive a deal.
Being a “really profitable” $1.1 billion company “only gets you so far,” Shea said. If Peraton can grow 10 percent organically, add on a $500 million strategic acquisition and possibly some small deals, and then in about four or five years the company may have $2.5 billion in sales, he said. And if it is “efficient in generating cash and paying off its debt in a way that makes it attractive, then I can get a good valuation” for the company, he said.