CSGov-SRA Monster Merger Creates $5.5B Public Sector Giant

Computer Sciences Government Services, or CSGov, has agreed to join forces with competitor SRA after splitting from CSC's commercial business, spawning the world's largest pure-play U.S. government solution provider.

Shareholders of publicly traded CSGov will have an 85 percent stake in the new company, while SRA's shareholders -- led by private equity power Providence Equity Partners -- will own the remaining 15 percent. Providence Equity and other SRA shareholders will receive $390 million in cash as part of the deal.

Increased scale achieved through the deal will help with deploying next-generation solutions and broadening CSGov's reach in health and civilian agencies, said Mike Lawrie, CSC president and CEO.

[Related: CSC Buys Two Firms, Hints Public Sector Business Could Be Acquired]

"I do think this industry is going to consolidate," Lawrie told investors during a conference call Monday. "We wanted to be an early mover in creating a platform that is almost solely dedicated to IT services."

Larry Prior, CSC North American public sector general manager -- who was selected in July to be CEO of CSGov -- will lead the combined company once the merger with SRA is complete. That will happen once CSGov closes its split with CSC's commercial business, which has been pushed back from October to November as a result of the SRA deal.

Bill Ballhaus, who has served as SRA's president and CEO since July 2011, will assist with the transition and integration process until at least late November, according to Lawrie. Additional members of the executive team will be selected from both CSGov and SRA and named at a later date, CSC said in a statement.

Headquarters for the combined company are expected to remain in Northern Virginia. CSGov, which as part of CSC was ranked No. 5 on the 2015 CRN Solution Provider 500, has $4.1 billion of sales, 13,000 employees and is based in Falls Church, Va.; SRA has $1.4 billion of sales, 5,600 employees and is based in Fairfax, Va.

CSGov and SRA will derive three-fourths of its revenue from cybersecurity, software development, cloud and IT infrastructure, according to a CSC statement. The combined company is expected to have margins of 14 percent -- the highest of any IT firm in the public sector space -- thanks to aggressive cost-cutting efforts by both CSC and Providence Equity in recent years, Lawrie said.

The combined company expects to save $80 million to $100 million annually by consolidating real estate, governance and administrative functions, with $51 million of that savings passed along to shareholders and the remaining proceeds shared with government clients, according to Lawrie.

"That was not the driver [of the merger] here," Lawrie said. "This is a clean, well-driven asset."

CSGov will also be able to leverage some of SRA's infrastructure and personnel rather than having to create something from scratch post-split, saving money in the process, Lawrie said. The deal is being bankrolled thanks to a $3.5 million financial commitment from Mitsubishi UFJ Financial Group and RBC Capital Markets, according to a statement.

CSC didn't consider teaming up with SRA until it announced plans in May to split its $8.1 billion commercial business from its U.S. public sector business, Lawrie said. CSC had been considering other businesses far more seriously before the split, with Reuters reporting in February that the entirety of CSC was being pursued by private equity firm Carlyle Group and solution provider giant Capgemini.

"SRA was not on our radar that much over the past year or two," Lawrie said.

But that all changed when CSC decided to separate its U.S. government business from the rest of the company, which Lawrie said created new opportunities for financial and strategic alliances with public sector solution providers.

"The split, if you will, enabled the [SRA] transaction because it would have been much more difficult to do with the way CSC was structured before," Lawrie said.

Virtually no overlap exists between the clients of the two companies, with more than half of SRA's business coming from health and civil market segments. CSGov, meanwhile, does the majority of its business with the defense and intelligence departments.

Health care is the strongest-performing segment of SRA's business and has seen growth of more than 20 percent in the past year. As a whole, though, SRA has struggled since going private in 2011, shedding more than 1,500 jobs, and recording only modest revenue growth this year after sales fell by 8 percent in the fiscal year ending July 2014.

"The last several years have been difficult from a top-line growth perspective," said Lawrie, who projected just low single-digit growth for SRA in the coming year.

While CSGov has outperformed the company's commercial side, it hasn't exactly been going gangbusters either. The sector reported a 1 percent decline in revenue for the fiscal year ending March 31, and then saw year-over-year sales plummet 6 percent in the quarter ending June 30 because of reduced tasking and wind-downs on several programs.

Although CSC will continue to look for smaller, tuck-in acquisitions on the commercial side of its business, Lawrie told investors not to expect additional M&A activity in the near future for CSGov.

"For right now, we probably have our plate pretty full for our government services business," Lawrie said. "We are where we need to be."

PUBLISHED AUG. 31, 2015