The Mantech-SRS Technologies Deal
ManTech International Corp. (NASDAQ: MANT)
completed its acquisition of privately held
SRS Technologies, Inc. (SRS).
Newport Beach, California-based SRS is a
provider of high-end, mission-critical,
advanced technology systems engineering and
Command, Control, Communications, Computers,
Intelligence, Surveillance and Reconnaissance
(C4ISR) services and solutions. Founded in
1970, SRS offers specialized domain knowledge
in the areas of space-based radar and
communications; chemical, biological,
conventional and nuclear weapons detection
and defeat programs; imagery intelligence;
and aeronautic, space and information systems
development. More than 85 percent of its
revenue is derived from the Department of
Defense, intelligence community and the
Department of Homeland Security (DHS). The
company's largest customers include DHS, the
U.S. Air Force, the National Reconnaissance
Office (NRO), the National
Geospatial-Intelligence Agency (NGA), the
Missile Defense Agency (MDA) and the Defense
Advanced Research Projects Agency (DARPA).
SRS has a highly-cleared and highly-educated
workforce of over 800 employees — 75%
with security clearances and more than 40% at
Top Secret or higher levels. Over 45% have
Master's Degree and above.
The acquisition extends ManTech's presence in
the high-end National Security marketplace by
providing enhanced capabilities in C4ISR,
systems engineering, modeling and simulation,
and other advanced technology services and
solutions.
ManTech chairman and CEO George J. Pedersen
stated: "This acquisition is consistent with
ManTech's growth strategy to broaden our
footprint in the high-end intelligence,
homeland security and defense markets. SRS is
an outstanding company with a proven track
record of strong growth, profitability and
excellence in supporting their customers.
Their long-term relationships with the DoD,
the intelligence community and special
agencies such as DARPA, MDA, DIA and other
classified customers provides new
opportunities for ManTech."
ManTech president and COO Robert A. Coleman
stated: "The SRS acquisition deepens our
position as a leading player in the national
security marketplace. This is the largest
acquisition we have made since going public
in 2002 and it continues our trend of
purchasing excellent companies in the
mission-critical, advanced-technology, DOD,
Intelligence Community and homeland security
arena. SRS provides us access to new markets
in national defense agencies which we believe
will continue to play a leading role in
counter-terrorism and homeland security
initiatives. Lastly, SRS' customers will now
have the ability to obtain support in over 40
countries around the world."
Terms
On May 8, 2007, ManTech International Corp.
announced it had completed its acquisition of
SRS Technologies, Inc. Under the terms of the
Merger Agreement announced April 9, 2007,
ManTech acquired all of the outstanding
equity interests in SRS for a Purchase Price
of $195 million in cash.
ManTech used cash available and $170 million
in borrowings from its new senior secured
$300 million credit facility to finance the
acquisition.
ManTech expects SRS to deliver $120 million
in revenue for the remainder of 2007 and will
be neutral to earnings per share for the
remainder of 2007. The Company expects SRS to
contribute $27 million in revenue for the
remainder of the second quarter. SRS is well
positioned in its markets with over $750
million in backlog as of March 2, 2007.
SRS expects to deliver over $175 million in
revenue in FY 2007, which ends in August
2007. At the time of the acquisition, SRS had
over 800 employees.
Analysis
IN SEARCH OF: Billion-dollar
government systems integrator desires
profitable mid-tier systems engineering firm
with established "national security" customer
base and strong ties to the intel community.
Must have annual revenues between $100M and
$200M, a high percentage of employees with
security clearances, and be willing to
integrate into publicly held company and culture.
If SRS Technologies responded to this
imaginary personal advertisement, we're
certain ManTech International felt it was a
match made in heaven. After all, the
California company with a C4ISR focus has
everything ManTech needs to make a big splash
on Wall Street and live happily ever after
(or at least until the stock price begins to
fade).
Though ManTech had courted businesses in this
space before (Gray Hawk Systems in May 2005,
CTX in December 2002, and Aegis Research
Corp. in August 2002), the size of those
deals barely moved the needle. At nearly
twice the size of any previous ManTech
acquisition, however, the SRS deal makes Wall
Street stand up and take notice.
Five years ago, the addition of more than 800
employees might have choked ManTech's
acquisition machine, but today the company
stands at $1.1B in annual revenues, is 5,600
employees strong, and has integrated a total
of 16 acquisitions since 1993. To ManTech,
the SRS buy is big, yes, but not too big for
the Fairfax company to handle at this time.
And look at SRS's client list: the U.S. Dept.
of Homeland Security (DHS), the U.S. Air
Force, the National Reconnaissance Office
(NRO), the National Geospatial-Intelligence
Agency (NGA), the Missile Defense Agency
(MDA) and the Defense Advanced Research
Projects Agency (DARPA). There simply
couldn't be a better fit to the ManTech mold.
ManTech's stockholders must be especially
smitten with SRS's curvy figure: $195
million! This for a privately held company
with $175 million in annual revenues and an
amazing $750 million in backlog? What's not
to like?
The acquisition has an attractive 111%
price-to-revenues ratio at a time when intel
businesses like SRS routinely fetch much
greater P/R multiples. In fact, we count
exactly 29 deals since 9/11/01 that yielded a
price-to-revenues ratio of 1.5 or greater.
These include BAE/Alphatech (11/04)
Nortel/PEC Solutions (6/05), BAE/DigitalNet
(10/04), CACI/AMS DIG (5/04), DRS/Integrated
Defense (11/03), and General
Dynamics/Veridian (8/03). On the surface, it
appears that ManTech paid below-market value.
All this seems too good to be true for a
profitable company, and therein — we
suspect — lies the rub.
ManTech has not revealed SRS' EBITDA (though
it may in its next SEC filing after the deal
is completed). The only reference to
profitability in the announcement of the
merger is an opaque reference to SRS' "solid
operating margins." We don't know about you,
but whenever we see the word "solid" in this
context, we itch to add the qualifier "but
unexciting" — and in this case, "solid,
but unexciting" would go a long way toward
explaining why a company in a hot marketplace
with a long roster of "A list" customers and
a four-year backlog is selling for only 111%
of revenues. We suspect that SRS'
$750-million backlog contains more than a
little low-margin work.
And that is probably just fine with ManTech,
a company which has itself demonstrated a
year-in, year-out ability to prosper in the
"solid but unexciting" world. In 2006 the
company derived more than 64 percent of its
revenues from cost-plus contracts and nearly
25 percent from cost-plus work. This is the
kind of grind-it-out, arms-and-legs work
which led Wall Street to all but ignore the
sector before 9/11. And even after 9/11,
ManTech is hardly a household name: 98
percent of the company's shares are held by
institutions.
Only once in the past five years have
ManTech's net margins reached the five
percent threshold. But likewise, only once
have they slipped below three percent. When
your margins are that steady… and you
can keep your top line rising… and you
can limit growth in your pool of
shares… well, then good things can
happen to earnings per share. In ManTech's
case, the number of shares of common stock
rose from 26.2 million in 2001 to 33.8
million in 2006 — an increase of 29
percent. But net income rose from $19 million
to $51 million during the same period —
an increase of 164 percent. Crunch the
numbers, and out drops a figure which may
raise at least one eyebrow: ManTech's
earnings per share climbed from 88 cents in
2001 to $1.64 five years later.
That near-doubling of earnings per share may
be as close to "exciting" as ManTech gets. We
suspect that suits the company just fine-and
believe that's why it was happy to plunk down
$195 million to buy $175 million worth of
"more of the same" in the form of SRS
Technologies.
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