Leidos to acquire Lockheed Martin’s Information Systems & Global Solutions Business

January 26, 2016

On January 26, 2016 Lockheed Martin (Lockheed) announced that it has entered into a definitive agreement to separate and combine its Information Systems & Global Solutions (IS&GS) business segment with Leidos Holdings, Inc. (Leidos) in a tax-efficient Reverse Morris Trust (RMT) transaction. The transaction, which is expected to close in the second half of 2016, is anticipated to unlock approximately $5.0 billion in estimated enterprise value for the Lockheed stockholders, including a $1.8 billion one-time special cash payment to Lockheed. The RMT transaction requires Lockheed shareholders to maintain majority ownership of the combined company. As such, Lockheed stockholders will receive approximately 50.5% of the outstanding equity of Leidos, on a fully diluted basis, with an estimated value of $3.2 billion. Leidos shareholders will retain the remaining 49.5%. The transaction also contemplates that Leidos will pay a special dividend to its shareholders of approximately $1 billion, contingent on closing of the transaction. The special dividend to Leidos shareholders is expected to be funded through new borrowing by Leidos and cash on hand.

Lockheed’s business segment IS&GS, with estimated annual revenue of $4.7 billion, is a premier provider of IT infrastructure, mission and business solutions, facilities M&O and logistics to the US federal government. The segment generates 90% of its annual revenue through prime contracts and 45% of revenue from cost-plus contracts. The combination of Leidos and IS&GS will create the largest pure-play government service provider with over $10 billion in annual revenue, approximately 33,000 employees and a well-diversified customer base. In addition, Leidos expects annualized net cost synergies of approximately $120 million by late 2018. Pro forma adjusted EBITDA margin of the combined company is expected to be 9.5% – 10%.

Subject to customary closing conditions including regulatory and Leidos shareholders approvals, the deal is expected to close in the third or fourth quarter of 2016. The estimated enterprise value of $5 billion represents approximately 1.06x revenue multiple and approximately 10.0x adjusted EBITDA multiple. We view this as positive sign for the market and do not expect to see any regulatory challenges that could delay this transaction.

Recent larger transactions are redefining the Mid-tier as these contractors continue to scale and grow in size through acquisitions. Examples of recent comparable large Mid-tier transactions include:

  • CACI acquisition of L3’s national security solutions (NSS) unit
  • Computer Sciences Government Services Inc. (CSC GS and SRA merger)
  • Harris Corporation’s acquisition of Exelis
  • SAIC acquisition of Scitor Corporation
  • Engility’s acquisition of TASC