Science Applications International Corp. [SAIC] on Thursday said it has agreed to acquire the federal division of Unisys [UIS] for $1.2 billion in cash in a deal that strengthens commercial approaches to serving federal clients and adds a business with strong organic growth.
SAIC said the deal, which is expected to close during the first quarter of its fiscal year will be accretive to adjusted earnings and free cash flow, and expands its footprint with existing customers while adding new ones.
Unisys Federal generated about $690 million in sales in the past year, achieving more than 10 percent annual organic growth the past two years with expectations of the same for the next two years, SAIC said. Unisys Federal has won $1.8 billion in business in the past three quarters, giving SAIC confidence in the near- and long-term outlook for continued organic growth, which will accelerate SAIC’s own organic growth, Charlie Mathis, the company’s chief financial officer, said Thursday morning on an investor call to discuss the deal.
SAIC’s organic growth target for its current businesses is around 3 percent and Mathis declined to discuss potential revisions to this objective based on the pending deal for Unisys Federal but said it will come up on the company’s fourth quarter earnings call in March.
There is very little overlap between SAIC and Unisys Federal, Nazzic Keene, SAIC’s CEO, said on the investor call.
Unisys Federal has a diversified federal client base with a strong presence in the Departments of Homeland Security (DHS), Treasury, and Commerce, as well as the Defense Information Systems Agency, Air Force and Department of Energy. The company has been involved in a number of border security initiatives managed by Customs and Border Protection, a component of DHS.
Unisys Federal goes to market in four key areas, including cloud and infrastructure modernization, software and analytics, information security, and information technology outsourcing.
Asked by an analyst on the investor call about the importance of Unisys Federal’s commercial business model in driving the deal, as well as increasing competition from non-traditional federal IT companies such as Amazon [AMZN] and IBM [IBM], Keene replied that “It absolutely was a critical part of what generated our interest in this particular asset. This has been a journey that SAIC has been on and we’ve demonstrated success, we’ve demonstrated some key wins being able to leverage what we’ve been able to do independently, but having a catalyst like Unisys Federal propel our position in this broader space of the commercial type delivery models is really fundamental to part of the interest in this particular asset.”
The federal government is early in the process but it is increasingly moving toward commercial buying practices, Keene added. She said that SAIC and Unisys Federal combined will be a “leader” in helping the federal government writ large migrate to the cloud.
Keene described expanded solution sets in several areas that will result from the acquisition, including broader and deeper cloud computing capabilities, a leading market presence in managed services, including enterprise IT as a service, and in DevSecOps, application modernization and migration.
Keene also touted Unisys Federal’s intellectual property, which SAIC plans to leverage for its legacy solutions.
Unisys Federal has about 2,000 employees and more than 1,500 cloud certifications and accreditations.
SAIC has completed the integration of the former Engility Corp., which it acquired for $2.5 billion in January 2019, which expanded its presence serving the intelligence community and military space markets. Keene said that operational integration is complete, cost synergies and margin gains have been captured, freeing SAIC to focus on Unisys Federal, which will be a direct report to the company.
SAIC isn’t forecasting any cost synergies from the pending Unisys deal and one-time transactions costs after expenses are pegged at $25 million. Mathis said in SAIC’s fiscal year 2022, which will begin in March 2021, the acquisition will be 10 percent accretive to the company’s current forecast of $500 million in free cash flow.
SAIC is also projecting that the deal will add 30 basis points to adjusted operating margin given Unisys Federal’s existing low-double digit operating margins. Earnings accretion is expected to be between 6 and 8 percent in the first year after the deal closes and 10 to 12 percent in year two.
SAIC said it will maintain its dividend policy and expects to use the cash accretion in the first year of the deal to pay down debt. After that, the company will have more financial flexibility, it said.
Unisys’ financial adviser is Centerview Partners LLC. Guggenheim Securities LLC is the lead financial adviser for SAIC and Citigroup is acting as co-financial adviser.
Unisys said it will use the sale proceeds to pay down debt and reduce its pension obligations.
The deal has been approved by SAIC’s board and still requires clearance by U.S. regulators.
The acquisition is the second sizeable deal announced this week in the federal space. Earlier, Leidos [LDOS], which was created out of a strategic separation from SAIC, agreed to buy the security and detection and related automation business lines from L3Harris Technologies [LHX] for $1 billion.