By Calvin Biesecker
Northrop Grumman [NOC] yesterday said that it began exploring options for its advisory services business more than a year ago based on what it thought its customers would require of contractors to avoid organizational conflicts of interest (OCI), preparations that concluded on Sunday with an agreement to sell TASC, Inc., for nearly $1.7 billion in cash.
“Based on our knowledge of our customer’s likely direction, we have been preparing for the possibility of a sale for over a year,” James Palmer, Northrop Grumman’s chief financial officer, said during an analyst call yesterday. “That is why we chose to combine all of our advisory services business into one entity when we created the Information Systems sector at the beginning of the year.”
Northrop Grumman said the $1.1 billion in after-tax proceeds from the sale will be used to expand its existing share repurchase program, allowing it to purchase enough shares to offset the loss of earnings from TASC so that overall the transaction would be neutral to earnings per share in 2009 and 2010.
TASC is being sold to an investor group consisting of the private equity firms General Atlantic LLC (GA) and Kohlberg Kravis Roberts & Co. (KKR), in partnership with the management team of TASC. The transaction is expected to close before the end of this year. Neither GA nor KKR have portfolio companies that provide systems engineering and technical advisory services to the federal government.
The pending sale is the first by any of the major government contractors that have contracts to advise their customers on weapons and technology systems and also bid on contracts to build these systems. Other companies such as L-3 Communications [LLL] are taking a wait-and-see approach until they have more clarity on what the changing OCI regulations mean for them (Defense Daily, Oct. 28).
Palmer said that his company’s decision to sell TASC was based on “where we thought” its customers would go with the new rules. Congress in May approved new rules when it passed the Weapon Systems Acquisition Reform Act of 2009 to eliminate conflicts of interest within companies doing business with the Defense Department. Once the new law was paced, “We determined to respond quickly and proactively,” Palmer said.
Once the sale is complete TASC will be the “most recognized independent, non-conflicted provider of advanced systems engineering and technical assistance to the defense, intelligence, federal, state and local markets,” GA and KKR said in a joint statement on Sunday.
As an independent firm, TASC will “have more flexibility to invest in research and development as well as in retaining and attracting the finest talent in the nation,” Wood Parker, the company’s general manager and prospective president and CEO, said in a statement.
TASC, which is based in Northern Virginia, has about 5,000 employees and expects sales of around $1.6 billion this year.
Going forward, Northrop Grumman’s Information Systems sector will consist of three major businesses: Defense; Intelligence; and Civil Systems. Defense and Intelligence will account for 75 percent of revenues, Palmer said. Information Systems domain expertise will be in C4ISR, cyber security and federal information technology services, he added.
Northrop Grumman’s financial advisers on the deal were Goldman Sachs and Credit Suisse. For GA and KKR the financial advisers were Barclays Capital, Deutsche Bank Securities, and RBC Capital Markets.