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3
First Quarter 2016
Industry Trends
(Defense and Gov. Services)
Acquisition Spotlight
In January,
Lockheed Martin
announced that it will merge its
Information Systems and Global Solutions (“IS&GS”) segment with
Leidos Holdings Inc.
in a deal valued at approximately $5 billion.
As a result of the transaction, Lockheed shareholders will receive a
one-time payment of $1.8 billion and shares in Leidos valued at
approximately $3.2 billion. The deal allows Lockheed to focus on
its aerospace and defense business. Upon the transactions’
completion, Leidos will be a $10 billion leader in enterprise focused
high-end technical services. Over the last several years the
commercial IT market has become increasingly competitive, and
Leidos hopes to achieve some economies of scale through this
transaction. We expect this consolidation trend to continue as
small and medium size companies try to remain competitive in this
increasingly cut-throat industry. Since being spun-off from SAIC in
September 2013, Leidos has been relatively quiet in the M&A
landscape, while Lockheed has made focused acquisitions in its
IS&GS business segment.
As part of the merger several of Lockheed’s largest contracts will
transition to Leidos:
• IS&GS’s $4.6 billion contract to secure the Global Information Grid
of the Defense Department. This contract is Lockheed’s second-
largest contract, with revenue north of $300 million in fiscal 2015
• IS&GS’s FAA contracts. Lockheed has been one of the FAA’s
largest contractors and has played a critical role in creating the
basis for the Next Generation Air Transportation System
• As a result of the merger, Leidos will regain the General Services
Administration’s Alliant contract vehicle, retained by SAIC in their
divestiture
Sources:
1
OMB Summary of Receipts, Outlays, and Surpluses or Deficits;
2
Associated Press; Industry Newswires; S&P Capital IQ;
ARMY.MILThe ongoing drawdown of U.S. military operations in Iraq and
Afghanistan, as well as recent escalation of tensions with North
Korea and in the South China Sea, continues to shift the deployment
of active duty military personnel to regions outside of the Middle East.
This regional shift, as well as further decrease in total active duty
headcount, supports further reliance on contractors globally, and in
the Middle East in particular. In a recent report, the Pentagon
disclosed that the number of private contractors in Iraq grew by
approximately eight times in 2015, in addition to a steady contractor
presence in Afghanistan and the CENTCOM AOR.
23%
11%
43%
40%
33%
48%
2%
1%
0%
20%
40%
60%
80%
100%
2014
2015
Middle East and South Asia Europe East Asia And Pacific Other
1.31 M
1.34 M
1.37 M
1.40 M
1.43 M
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Active Duty Military Personnel By Location and Total Headcount