CACI seeks scale and depth in acquisitions

Consolidation strategy opens new doors for integrator

CACI International is back on the acquisition track. The company had been missing from the acquisition market since inking a deal in May 2004 to purchase the defense and intelligence operations of American Management Systems for $415 million.

But lately CACI has revved its engine again. It has purchased two companies and is in the process of buying a third.

In October 2005, CACI completed the purchase of National Security Research (NSR), a company specializing in homeland security and command and control. Two months ago, the company closed the acquisition of Information Systems Support (ISS), a solutions provider pursuing communications and logistics projects.

Also in March, CACI agreed to purchase AlphaInsight, an information technology services firm. That deal is expected to close by the end of June.

“We consider ourselves, at this point, a strategic consolidator,” said Jack London, president, chief executive officer and chairman of CACI. He called the company’s merger and acquisition program a key component of its growth plan, adding that half the company’s expansion during the past five years can be attributed to acquisitions.

Industry watchers said CACI and similar companies that operate below the top-tier firms in the systems integration universe want the ability to undertake larger projects.

Other companies trying to grow through acquisitions lately include NCI Information Systems, SI International and Anteon, which General Dynamics is now acquiring, said Larry Yanowitch, a partner in the Northern Virginia office of Morrison and Foerster and co-leader of the law firm’s Mergers and Acquisitions Group.

“All of those companies are thinking that they need to get to a certain size to be going after the largest procurements,” he said.

“The government is consolidating more and more opportunities and shifting more of the responsibility for managing programs to vendors like CACI,” said Bob Kipps, a managing director at Houlihan Lokey Howard and Zukin, an investment banking firm that specializes in middle- market mergers and acquisitions.

Kipps, who oversees the firm’s aerospace, defense and government group, said contractors need to get bigger to keep up with their government customers’ procurement approaches. Kipps places CACI at the top of integration’s second tier. The top tier includes Computer Sciences Corp., EDS, Lockheed Martin and similarly sized firms, he said.

Wall Street also emphasizes growth, Yanowitch said. Publicly traded companies are under constant pressure from shareholders to grow and thereby increase investment returns. Acquisitions let the companies achieve higher growth rates than they could if they limited themselves to expanding their existing operations. Such organic growth rates typically fall in the 8 percent to 12 percent range. In contrast, CACI reported revenue growth of 44 percent in the fiscal 2005 quarter that ended last March, citing its AMS acquisition.

The AMS deal, the largest acquisition at CACI, lifted the company to the $1 billion revenue mark. The deal also caused the company to put its acquisition efforts on hold temporarily in order to integrate the AMS operations into the firm, Kipps said.

But CACI officials signaled renewed interest in acquisitions a year ago, particularly of companies involved in warfighter support, homeland security and intelligence.

London said CACI considers a company’s market niche and client base when choosing targets. NSR and ISS complement CACI’s national security focus.

Yanowitch said consolidators generally aim to achieve greater depth with a particular customer set, rather than breadth, as they make acquisitions. “Consolidators don’t want to be spread too thinly among customers,” he said. “In most cases they are going for more depth.”

Projects in the national security arena require contract employees with security clearances. CACI’s most recent acquisitions bring in hundreds of such employees.

The majority of NSR’s 100 employees have clearances, while more than 70 percent of ISS’ 1,000 employees hold clearances at the secret level or above. AlphaInsight employs 360 people, and 94 percent of them hold clearances.

“We continue to brand ourselves as a national security government IT services contractor,” London said, adding that companies with a “high content of security clearances” are in demand.

CACI is a buyer of small and midsize companies, London said. Its latest transactions involve companies spanning a revenue range from $17 million to more than $200 million.

The recent string of deals may give CACI an edge at the negotiating table. A potential buyer’s transaction history ranks among the factors a seller considers, Kipps said. Buyers request confidential information from acquisition candidates during the due diligence process.

Buyers with a record of closing deals gain credibility among sellers, who are wary of suitors that are merely fishing, Kipps said.

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