IT & Networks

Leidos-Lockheed merger changes the face of federal IT

The recently announced merger between Leidos and Lockheed Martin's Information Systems and Global Solutions has those in the federal IT community, particularly defense IT, maintaining a close eye on what happens next. Those watching got a better idea after Leidos CEO Roger Krone spoke about the deal at a New York investors conference Feb. 4.

The deal swells Leidos into a $10 billion leader in government IT, and shifts its traditionally military-heavy portfolio to one with a large footprint in civil and commercial business. The newly diversified company "reaches critical mass in essentially four new markets" in the merger, including transportation, infrastructure and logistics, health IT and mission IT, Krone said.

It also better positions the company, which spun off from SAIC in 2013, for the future, he noted.

The merger "fits well in the direction we established for Leidos going forward. This was about developing a company that uses information to solve really important societal problems in three market areas: defense, critical infrastructure and engineering, and healthcare," Krone said.

The $5 billion deal came as Lockheed Martin sought to rebalance after buying Sikorsky Aircraft for $9 billion last summer. After a series of strategic reviews, the company determined it would sell off IS&GS, which handles a significant amount of federal IT services.

The merger makes Leidos one of the biggest federal IT service providers in the market, and also makes it the seventh-largest contract by fiscal 2015 unclassified obligations, according to Jesse Holler, quantitative analyst with Bloomberg Government.

"They're a huge player in the market," Holler said, pointing to Leidos' contract award of the $4.3 billion Defense Healthcare Management Systems Modernization contract last year, as well as IS&GS's $4.6 billion contract with the Defense Department to secure its Global Information Grid under the GSM-O contract awarded in 2012. That contract is Lockheed's second-largest, worth more than $300 million in fiscal 2015 alone. The merger additionally brings Leidos back onto the General Services Administration's Alliant contract vehicle, which went to SAIC when the company split.

With Leidos cutting such a large swath into the federal IT market, expect to see industry-wide impact, Holler said.

"For service competitors, the IT services arena will have to consolidate more…you will see the mid-tier companies consolidating more. That's really a play for scale," Holler said, noting that the mid-tier companies likely either will merge on their own or get bought up and merged by private equity firms.

As for the financial details of the merger, Lockheed shareholders get 50.5 percent, while Leidos gets the remaining 49.5 percent. In addition to the shares, the deal involved a $1.8 billion cash dividend. The deal doubles the size of Leidos, which despite the arrangement of shares largely will be in charge and continue to operate under the Leidos name and likely in the existing Leidos headquarters.

"I feel confident that we have a platform now in Leidos – a team, a strategy, a business model, an asset-deployment philosophy, a capital-redeployment philosophy – that fits in what we call the solutions and services businesses, and it couldn't be a better match for the type of company we are and the type of company we want to be in the future," Krone said.

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