General Dynamics buys two-year old CSRA in $9.6 bn deal

General Dynamics IT services
General Dynamics is set to buy CSRA, a two-year old IT services company, in a transaction valued at $9.6 billion, including $2.8 billion in debt.

The strategy of General Dynamics is to provide cost-effective IT solutions and services to the Department of Defense, the intelligence community and federal civilian agencies.

“The acquisition of CSRA represents a significant strategic step in expanding the capabilities and customer base of GDIT,” said Phebe Novakovic, chairman and chief executive officer of General Dynamics.

The combined General Dynamics IT and CSRA, which will have approximately $9.9 billion in revenue and double-digit EBITDA margins, indicates consolidation in the US government technology services sector.

General Dynamics expects to generate annual pre-tax cost savings of approximately 2 percent of the combined company’s revenue by 2020.

Stone Key Group served as financial advisor to General Dynamics and Jenner & Block served as legal counsel. Evercore and Macquarie Capital served as financial advisors to CSRA and Paul, Weiss, Rifkind, Wharton & Garrison served as legal counsel.

TBR analyst Joey Cresta, in an analysis report, said General Dynamics’ intent to acquire CSRA demonstrates interest in rejuvenating its IT services business to follow the money toward modernization.

CSRA is a two-year-old company that markets services that help federal agencies make better use of commercially available technologies to execute their missions.

“More nimble competitors — such as CSRA — are building platforms for delivering cloud-based managed services, eroding legacy IT revenues and posing an existential threat to the old guard, including General Dynamics IT (GDIT),” Joey Cresta said.

TBR said the deal presents opportunities to refresh GDIT’s image, align with next-generation IT trends, diversify its customer mix and capitalize on CSRA’s investments in developing a premier technology partner network.
However, the deal carries significant risk, as integrating two companies of this size will be a challenge, exacerbated by overcoming cultural hurdles as an innovation-minded company joins with a legacy market leader.

Joey Cresta, analyst at Technology Business Review, earlier said that CSRA’s IT services value proposition is gathering momentum as the federal government gets serious about technology modernization.

The US-based IT services company has a fast-mover advantage via the build-out of its low-cost delivery capabilities in a shared services model, enabling it to win deals with clients such as the U.S. Department of Veterans Affairs as it explores handing off more responsibility to managed services providers.

CSRA will couple data analytics and artificial intelligence (AI) with “as a Service” delivery to reduce costs for clients while maintaining profitability. CSRA is expected to capitalize on Google’s investments in its AI platform and integrate AI in solutions that deliver mission outcomes for federal clients.

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