SAIC Closes Engility Acquisition — and Looks for More Growth

SAIC finalized its acquisition of Engility this week, a move that will allow the firm to compete for classified work across the U.S. Defense Department and intelligence community, executives say.

The acquisition — which was announced in September — creates a $6.5 billion company that is the No. 2 U.S. government services contractor by revenue, leapfrogging Booz Allen Hamilton and trailing only Leidos. SAIC had previously been No. 3; Engility, No. 7.

The acquisition “allows us to show capacity to compete and win larger classified contracts,” SAIC CEO Tony Moraco said in a Jan. 7 interview after an investor conference in New York.

Nearly 70 percent of the company’s 23,000 employees are cleared to work on classified government projects. That’s important because the U.S. government increasingly wants to bidders to name the employees who would do the work. In the past, Moraco said, companies did not have to provide this level of detail.

“We have a much larger pool of cleared people with the right accesses to deliver mission, whereas some may put forward a proposal that says ‘we have 10 people, but we’re going to hire 90 of the incumbents just because we’re going to take them away from the other company that loses’,” he said. “We have the capacity to manage the risk of transition. So it allows us to bid larger programs with lower risk and higher confidence of execution because we have the personnel already employed versus a contingency of we’ll hire them.”

The company already holds more than $1 billion in contracts that required cleared employees with the National Reconnaissance Office, CIA, and other government agencies, according to briefing slides presented to analysts last week.

At last week’s conference, Moraco and other SAIC and Engility executive took the stage at a midtown Manhattan hotel to an upbeat soundtrack featuring David Guetta, Sia, Imagine Dragons and James Brown. Beneath dimly lit chandeliers, they touted the soon-to-be-finalized deal and the new company’s prospects for growth to Wall Street equity analysts.

“We have significant flexibility in our ability to do further strategic acquisitions when the time is right to fill potential gaps in areas … whether it be public sector health [or] additional intelligence agencies,” Moraco said.

Areas for Growth

Moraco believes analytics and cyber security will drive growth. Another promising area is training, as the military looks to boost readiness without breaking the bank. He cited training for IT modernization; he also noted the military’s increasing use of virtual reality and simulations.

“We’ve been able to have the Navy certify certain positions through virtual and simulated environments while you’re still at the pier and not deployed,” he said of one contract. “In some cases, their kind of final exam is when they’re actually deployed.…But you’ve saved significant fuel and operational costs of not having [to do] circles out in the Atlantic to try and train up a carrier group. There’s a number of significant simulation training events that really provide real operational dollar savings.”

Moraco is more skeptical about artificial intelligence’s prospect of eliminating human work.

“I’m still skeptical on the whole AI, how artificial intelligence plays into it, but machine learning and analytics will definitely drive outcome,” he said. “I’m not sure — particularly in our market — [we’ll see] the elimination of human in the loop in our lifetime.”

“I think we’ll see some areas where we can automate, but we’ll have to see,” Moraco said. “I don’t think we’ll see artificial intelligence drive missile defense.”

Competing for Talent

Amazon’s decision to open a 25,000-person headquarters in Northern Virginia, a region that is home to about a quarter of SAIC’s workforce, has company executives looking at how they attract and retain talented employees.

“I think we still have to be competitive on compensation and benefits,” Moraco said. “[It] creates some challenges based on how the commercial companies operate to some degree. I think our appeal has been end-user mission oriented than just taking a generic software job at some random company.”

One-quarter of SAIC’s workforce are military veterans.

“From a business perspective, it’s diversifying the geography to actually provide resources from different locations so that we mitigate say a high concentration in the National Capital Region,” Moraco said. “We’re going to have to manage that, but the technical skills that are in demand across commercial and government markets is so high.”

SAIC executives are focusing on mentoring and developing employees.

“I also think — from a thought-leadership perspective and mentorship — people like working with other smart people and they see that opportunity to be part of a much broader team than somewhat isolated,” Moraco said. “We’re trying to manage it on different dimensions, but it’s a challenge.”

Not Giving Up on Ground Vehicle Work

Despite two losing bids to build Amphibious Combat Vehicles for the Marine Corps and light tanks for the Army, SAIC is not giving up on the ground vehicle sector.

“I think we’ll continue to look at [vehicle] modernization programs,” Moraco said. “I still believe that we differentiate on complex technology integration programs more so than just staff augmentation across a wide dimension of areas. It has to be compatible with our services business model. We’re not going to be a production and a factory.”

He said SAIC team is “digesting” the Army’s decision to select General Dynamics and BAE Systems for the next phase of the light-tank program, and is rethinking its vehicle strategy.

Byron Callan, a Capital Alpha Partners analyst who joined SAIC’s conference last week, said he expects the company to seek more teaming arrangements on vehicle projects.

“This may just be a return to an older posture—SAIC had teamed, for example, with Boeing for the Army Future Combat System program in the 2000s,” Callan wrote in a note to investors. “The Engility acquisition offers a path to higher operating margin and so there may be less impetus to pursue higher margin weapons systems platforms contracts.”

Organizing Government Space Projects

Moraco expects increased Pentagon spending on satellites, launch systems, and communications gear. He’s keeping a close eye on the debate over a merged Space Force, and — like other space vendors — wondering how the new outfit will structure its purchases.

“If the Air Force maintains a prominent position that’s interesting and probably a good thing, yet how does the NRO and other space systems support get aligned—or not—is really going to be the battle,” he said. “There’s a lot of unknowns.”

Moraco said SAIC is uniquely positioned to offer advice to the government since it does space-related work for both the Pentagon and intelligence community.

“We can give them some situational awareness, we obviously can’t drive the outcome, but we can at least give them consequence of what it’s going to look like,” he said. “We think that that’s a service that creates a business opportunity from a system engineering umbrella.”